Limitations of GDP Practice Test

In Country A, real GDP increased by 4% from 2024 to 2025 after several large factories expanded output. Over the same period, air and water pollution rose sharply, and the government reported a measurable increase in cleanup costs and pollution-related illness. Despite the change in GDP, which interpretation best explains why GDP may misrepresent changes in economic well-being in this scenario?

In Country E, a major hurricane destroys homes and roads. Over the next year, real GDP increases by 5% due to large increases in construction and insurance-related services. Many households, however, are replacing damaged property and have not increased consumption beyond pre-hurricane levels. Despite the change in GDP, which interpretation best explains why GDP may overstate improvements in well-being?