GDP is an indicator of a society’s standard of living, but it is only a rough indicator because it does not

directly account for leisure, environmental quality, levels of health and education, activities conducted
outside the market, changes in inequality of income, increases in variety, increases in technology, or the
—positive or negative—value that society may place on certain types of output.

To understand the limitations of using GDP to measure the standard of living, it is useful to spell out
some things that GDP does not cover that are relevant to the standard of living. The main reasons or
factors are elaborated.

1. GDP includes production that is exchanged in the official, organized markets, but it does not cover
production that is not exchanged in the market e.g home production and black market activity. This is a
significant omission especially in developing countries where much of what is produced is consumed at
home or through barter. For instance, hiring someone to mow your lawn or clean your house is part of
GDP, but doing these tasks yourself is not part of GDP. This also means that e.g if people go out to
dinner instead of cooking it at home, GDP will appear to grow even though the total amount produced
hasn't changed.

2. GDP includes what is spent on environmental protection, healthcare, and education, but it does not
include actual levels of environmental cleanliness, health, and learning. GDP includes the cost of buying
pollution-control equipment, but it does not address whether the air and water are actually cleaner or
dirtier. GDP includes spending on medical care, but it does not address whether life expectancy or infant
mortality have risen or fallen. Similarly, GDP counts spending on education, but it does not address
directly how much of the population can read, write, or do basic mathematics. Thus, we can say that
GDP per capita is not a good indicator of well-being.