Which of the following is a reason why GDP might be understated as a measure of economic activity?

• A. GDP accounts for environmental degradation.
• B. GDP includes the value of illegal activities.
• C. GDP measures income distribution within a country.
• D. GDP does not include the value of non-market activities such as household labor.

Answer: (D)

Verified step by step guidance

1. Understand that GDP (Gross Domestic Product) measures the total market value of all final goods and services produced within a country during a specific period.
2. Recognize that GDP typically includes only market transactions where money changes hands, meaning it excludes non-market activities such as household labor or volunteer work.
3. Note that because non-market activities are not priced and do not involve formal transactions, their economic value is not captured in GDP calculations, leading to an understatement of actual economic activity.
4. Consider that other options like environmental degradation or illegal activities either are not fully accounted for or are excluded, but the key reason for understatement here is the exclusion of non-market activities.
5. Conclude that the main reason GDP might be understated is because it does not include the value of non-market activities such as household labor, which contributes to economic well-being but is not reflected in GDP figures.