Correct Option
The correct option is 2 only.
Explanation
Gross Domestic Product (GDP) represents the total monetary value of all final goods and services produced within a country's borders in a specific time period. While it serves as a key indicator of economic activity, it is not a comprehensive measure of economic welfare or well-being due to its exclusion of qualitative aspects of life.
Statement-wise Analysis
- Statement 1 is Incorrect: An increase in GDP does not guarantee a proportional increase in welfare. If the rise in GDP is driven by the production of goods that do not directly improve living standards (e.g., war equipment) or if the population growth rate exceeds the GDP growth rate (leading to lower per capita income), overall welfare may not improve.
- Statement 2 is Correct: GDP is an aggregate measure and does not account for the distribution of income. It is possible for a country to have a rapidly growing GDP while income inequality widens, meaning the benefits of growth are concentrated in the hands of a few, leaving the welfare of the majority unchanged or worse.
- Statement 3 is Incorrect: GDP does not account for externalities, which are the positive or negative consequences of economic activities on third parties. For instance, environmental pollution caused by manufacturing is a negative externality that reduces welfare, yet it is not subtracted from GDP. Similarly, positive externalities like the aesthetic value of a private garden are not added to GDP.
Key Takeaway: GDP measures the volume of economic transactions but fails to capture the quality of life, income inequality, non-monetary exchanges (such as household labor), and the environmental costs of production (externalities).