[2610] GDP measures output, not welfare

It may seem strange that GDP rises if there are more road accidents. This is partly because  of greater activity by emergency services. On the contrary, one would intuitively like to see GDP diminishing in such circumstances. But this would be to confuse a measure of output (GDP) with a measure of welfare, which GDP is not. At most, GDP is a measure of the contribution of production to welfare. There are a great number of other dimensions to welfare that GDP does not claim to measure.

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While the national accounts system has the above major limitations, it should not be criticised out of misunderstanding about its objectives and definitions. For example, many people fail to understand why GDP does not fall following major natural catastrophes (or terrorist attacks). This is because they misunderstand the definition of GDP, which, as we have seen, measures output during a given period. People tend to confuse GDP with the country’s economic wealth. Undoubtedly, major calamities destroy part of the economic wealth (buildings, houses, roads and infrastructure), but they do not, per se, constitute negative production and so do not directly contribute to a decline in GDP. Destruction can indirectly affect production in a negative or positive way. When a factory is destroyed it ceases production, but it also has to be rebuilt and this constitutes production. For this reason, paradoxically, it is possible for a natural catastrophe to have a positive impact (in the purely mathematical sense of the word “positive”) on GDP. [Page 37. François Lequiller. Derek Blades. Understanding National Accounts. OECD Publishing. 2006]