GDP is not a very good measure of economic prosperity, because: (i) It does not include non-monetized transactions. (ii) It is purely a monetary measure. (iii) It does not include environmental degradation. (iv) The expenditure and production method to GDP yield different results. Choose the correct option:

Question

Accepted Answer

The correct option is 1: (i) and (iii).

**Detailed explanation of why it is correct:**
The correct option states that GDP is not a very good measure of economic prosperity primarily because it does not account for two crucial elements: non-monetized transactions (i) and environmental degradation (iii). Economic prosperity refers to the overall well-being and standard of living of a nation, which goes beyond mere monetary output. First, non-monetized transactions, such as household production, subsistence farming, or volunteer work, create value and contribute to welfare but are not exchanged for money, thus being excluded from the calculation of GDP. This omission leads to an underestimation of true economic activity and welfare, particularly in developing economies. Second, GDP fails to account for environmental degradation (pollution, resource depletion) that occurs during the production process. For instance, a factory's output increases GDP, but the pollution it causes reduces the quality of life and future prosperity. Since GDP treats economic activity that harms the environment the same as benign activity, it does not provide an accurate picture of sustainable prosperity.

**Explanation of why other options are incorrect:**
The incorrect option is 2: (i) and (iv).
While (i) is correct, (iv) is incorrect. The expenditure method and the production (value added) method of calculating GDP are designed to yield the same result based on the fundamental principles of national income accounting. Any difference in practice is due to statistical error or time lags, not a fundamental structural failure of GDP that disqualifies it as a measure of prosperity.

The incorrect option is 3: (ii) and (iv).
(ii) states that GDP is purely a monetary measure, which is largely true, but this is less a reason for its *failure* to measure prosperity and more a description of its nature. GDP is criticized because its monetary focus leads to omissions like (i) and (iii). Furthermore, as explained above, (iv) is incorrect because different methods of calculating GDP, when properly executed, should yield identical results.

The incorrect option is 4: (iii) and (iv).
While (iii) is correct—environmental degradation is a significant flaw in GDP as a welfare measure—(iv) is incorrect. The three methods of GDP calculation (expenditure, income, and production) are based on the accounting identity that total output equals total expenditure equals total income, meaning they are structurally designed to be equal, provided all data is captured accurately.