How Well GDP Measures the Well-Being of Society

Self-Check Question

Explain briefly whether each of the following would cause GDP to overstate or understate the degree of change in the broad standard of living.

  1. The environment becomes dirtier
  2. The crime rate declines
  3. A greater variety of goods become available to consumers
  4. Infant mortality declines

Hint:

  1. A dirtier environment would reduce the broad standard of living, but not be counted in GDP, so a rise in GDP would overstate the standard of living.
  2. A lower crime rate would raise the broad standard of living, but not be counted directly in GDP, and so a rise in GDP would understate the standard of living.
  3. A greater variety of goods would raise the broad standard of living, but not be counted directly in GDP, and so a rise in GDP would understate the rise in the standard of living.
  4. A decline in infant mortality would raise the broad standard of living, but not be counted directly in GDP, and so a rise in GDP would understate the rise in the standard of living.