Answer to Question #227393 in Macroeconomics for Faiz

Question

Increases in real GDP are often interpreted as increases in welfare. What are some problems with this interpretation? Which do you think is the biggest problem with it, and why?

Answer 1

GDP does not include items such work done at home or the underground economy. GDP does not take into account how much time we spend working versus how much time we get to spend at leisure.

GDP does not take into account improvements in the quality of goods.

GDP does not take into account the impact on the environment, such as pollution or global warming.

Probably the biggest problem is that GDP does not take into account the distribution of income. So, if a very small portion of the population is getting fabulously wealthy and the rest is struggling, GDP could still show a significant improvement, although by most definitions of welfare things would not be getting better.