GDP is simply not welfare, even for market based goods. ...
Suppose I have an economy with two sectors that each use half of the workforce. One sector produces fish and the other produces beaded jewelry. (An economists mind always goes to desert islands when constructing these examples.) Both fish and necklaces cost $1 and the economy produce 1000 of each per year. The two sectors are equal in size and equal in their contribution to GDP.
Does that mean that they each make people equally well off? Do necklaces add as much to quality of life as food? Probably not. More likely the supply and demand graphs for each sector look like this.
GDP is the same
Welfare or the total benefit to society each market is quite different.
A steeper demand curve or a shallower supply curve can produce huge welfare gains at relatively small GDP gains. Indeed, some of the goods like running down a hill or reading new material posted to the web have a supply curve so shallow that they are provided at nearly zero cost. This is why they show up with such a disparity between GDP and welfare. This isn’t limited to free goods, however, my classic example is water. How much better is your life because of clean water vs. how much of your income do you devote to water cleansing.
