10.5 Is GDP a Good Measure of Economic Well-Being?

Using GDP as a measure of welfare has well-known problems. The five general problems with using GDP as a measure of well-being are ^[13]:

• GDP counts “bads” as well as “goods.” When an earthquake hits and requires rebuilding, GDP increases. When someone gets sick and money is spent on their care, it’s counted as part of GDP. But nobody would argue that we’re better off because of a destructive earthquake or people getting sick.
• GDP makes no adjustment for leisure time. Imagine two economies with identical standards of living, but in one economy the workday averages 12 hours, while in the other it’s only eight. Which country would you rather live in?
• GDP only counts goods that pass through official, organized markets, so it misses home production and black market activity. This is a big omission, particularly in developing countries where much of what’s consumed is produced at home (or obtained through barter). This also means if people begin hiring others to clean their homes instead of doing it themselves, or if they go out to dinner instead of cooking at home, GDP will appear to grow even though the total amount produced hasn’t changed.
• GDP doesn’t adjust for the distribution of goods. Again, imagine two economies, but this time one has a ruler who gets 90 percent of what’s produced, and everyone else subsists — barely — on what’s left over. In the second, the distribution is considerably more equitable. In both cases, GDP per capita will be the same, but it’s clear which economy I’d rather live in.
• GDP isn’t adjusted for pollution costs. If two economies have the same GDP per capita, but one has polluted air and water while the other doesn’t, well-being will be different but GDP per capita won’t capture it.

^{Why GDP is not a good measure of wellbeing [14]}