Question

I just heard on the news that GDP is higher this year than it was last year. This means that we're better off this year than last year." Comment.

Answer 1

GDP is summation of  monetary value of all goods and services produced in an economy in a fiscal year. If the GDP is higher this year, it means that monetary values of goods and services have increased.

Monetary value is calculated by Price * Quantity of that good. Thus monetary value could change if quantity is same while Price of goods have increased (Inflation) or it could change if Price is same and quantity produced increased or Price as well as quantity produced increased. Assume a case when there was flood in east part of the country. This destroyed 5000 cars in that area. After situation become normal, 4000 cars were being bought from different part of the country as they need car for their routine activities. This raised the monetary value of goods produced in an economy which will raise the GDP but in fact this had a bad impact on the economy.

Assume another case when we build a car manufacturing plant in our country. For that we needs to cut 2000 trees and relocate 50 poor families who lived there. Manufacturing cars may raise the overall GDP but the negative externality caused to the environment by cutting trees in not counted in GDP.

Thus we cannot clearly say that with increase in GDP we are better off than the last year.