GDP and welfare

Higher GDP usually means more goods and services, so it is often used as a measure of welfare (well-being). But it is not a perfect one.

• Distribution of GDP: GDP can rise while most people become poorer, if the gains go to a few. Imagine GDP rising slightly while the income of 90% of the people falls.
• Non-monetary exchanges: much useful work is never paid for in money, such as domestic work done at home, or barter. It is not counted, so GDP underestimates welfare.
• Negative externalities: harm one party causes to others without paying for it, like a factory polluting a river that fishermen depend on. The harm is not subtracted, so GDP overestimates welfare.
• Positive externalities: benefits given to others without being paid, like a beautiful public garden that makes a whole street happier. They are not added, so GDP underestimates welfare.

So more GDP is not always more welfare.