Question

GDP and Welfare
GDP is the sum total of the value of goods and services created within the geographical boundary of a country in a particular year. In order to compare the GDP figures and other macroeconomic variables of different countries or to compare the GDP figures of the same country at different points of time, we take the help of real GDP instead of relying on current market prices. The ratio of nominal GDP to real GDP gives us an idea of how prices have moved from the base year to the current year. The Consumer Price Index (CPI) and Wholesale Price Index (WPI) are the other important ways to measure change of prices in an economy.

GDP gets distributed among the people as incomes and may treat higher level of GDP of a country as an index of greater well-being of the people of that country. But it may be incorrect to treat GDP as an index of the welfare of the country based on three reasons. Firstly, the distribution of GDP is not uniform, secondly, non-monetary exchanges are not accounted as part of economic activity and lastly, GDP does not take into account externalities.

The aggregate value of goods and services produced in an economy can be calculated by three methods.

• A. Product, Investment, Value Added
• B. Product, Expenditure, Value Added
• C. Product, Income, Expenditure
• D. Product, Expenditure, Disposable Income

Hint:

GDP is measured by the product (value added), income and expenditure methods.

Answer 1

The Correct Option is C

Step 1: Think of the circular flow
In a simple economy, firms produce goods, pay incomes to households, and households spend on those goods. So the same total can be counted at three points: when it is produced, when it is earned, and when it is spent.

Step 2: Name the three counting points
Counting at production gives the product (value added) method. Counting at earning gives the income method. Counting at spending gives the expenditure method.

Step 3: Test the options against this idea
Option 1 has investment, which is only a spending item. Option 2 repeats the production side twice and misses income. Option 4 has disposable income, which is a household concept after tax. Only option 3 has one method from each point.

Step 4: Pick the answer
Option 3 is the only one with all three, so it is the answer.

Step 5: Why the wrong sets fail
A valid set must have exactly one method from each of the three counting points: production, earning and spending. Option 1 and option 4 each include a side item (investment, disposable income) that is not a method. Option 2 counts the production side twice. This leaves option 3 as the only complete set.

Final Answer:
The correct set of methods is product, income and expenditure, which is option 3. \[ \boxed{\text{Option 3}} \]