The correct option is 2 only.
Explanation
Gross Domestic Product (GDP) is the sum total of the value of all final goods and services produced within the domestic territory of a country in a particular year. While it indicates economic activity, it is often criticized as an inadequate measure of social welfare because it focuses on aggregate monetary value rather than the quality of life or distribution of resources.
Statement-wise Analysis:
- Statement 1 is Incorrect. A rise in GDP does not guarantee an equitable distribution of income. It is possible for the GDP to grow while the gap between the rich and the poor increases. If the rise in GDP is concentrated in the hands of a few, the welfare of the majority may not improve, or may even decline.
- Statement 2 is Correct. GDP calculations rely on market transactions. Non-monetary exchanges, such as services performed by family members at home (care economy) or barter exchanges in rural areas, are not recorded because they do not have a monetary price tag. This exclusion leads to an underestimation of the actual economic welfare.
- Statement 3 is Incorrect. GDP does not account for externalities, whether positive or negative. Negative externalities, such as pollution or environmental degradation caused by industrial production, reduce social welfare. However, GDP calculations only consider the value of the output produced, ignoring the associated environmental costs.
Key Takeaway:
GDP is limited as a welfare index because it ignores income inequality, excludes non-monetary exchanges (like household work), and fails to account for externalities (like pollution and resource depletion).