Are estimates of GDP accurate measures of our well-being?
GDP fails to account for many forms of production that improve a person's well-being. For example, if you make a meal at home, the labor is not included. However, if you were to go out to a restaurant and consume that same meal, the labor is included in GDP. Unpaid work at home or for a friend and volunteer work is not included and thus GDP does not reflect production of all we produce.
External effects of production, such as pollution, are not subtracted from the value of GDP. Although two countries may have similar GDP growth rates, one country may have significantly cleaner water and air, and therefore is truly better off than the other country. If as economic growth accelerates, producers begin to employ production techniques that create more pollution, the effects of the growth are overstated.
GDP includes police protection, new prisons, and national defense as goods and services. It is not always clear that if we have to devote increased resources for such purposes that we are better off as a result.
GDP includes the effects of price changes. An increase in GDP due solely to inflation does not signal an improvement in living standards. Real GDP is a better measure. Nor does GDP reflect population growth. Changes in the income distribution are not measured. It is also difficult to compare rates of growth for different countries, as countries use different means of estimating income and price levels in their economy.
There are a variety of other weaknesses and inaccuracies, but GDP accounting is the best that we have. Real GDP does provide sound signals as to the direction of change of a selected large part of what we produce each year. Government statisticians and academics are constantly working to improve its accuracy and its ability to reflect our well-being.