There are a number of aspects of economic activity that are not included in the measures of nominal and real GDP. In order to be counted, goods and services must be sold in a market. This excludes much activity for many economies.

GDP and Social Welfare

If crime levels went down, society would be better off, but a decrease in crime is not an increase in output and is not reflected in GDP. Neither is an increase in leisure time. Most nonmarket and domestic activities are not counted in GDP, even though they represent real production. Household production, for example, is not counted. Although the value of a loaf of bread that is bought in a store is counted, the value of a similar loaf baked at home is not. In this instance, only the value of the flour, yeast, and other ingredients bought in the store will be counted. Similarly, if you spend the day cleaning your house or apartment, only the cleaning products you used will be counted in GDP. However, if you hire a cleaning service to do the job, the price you pay will be counted. One result of this is that the GDPs of less developed countries, in which household production plays an important role, can be biased downward in comparison to those of GDPs of more industrialized countries.

Other aspects that affect the standard of living for the participants in an economy are not included in GDP. Some destructive events can actually add to GDP. For example, if a hurricane rips through an area and billions of dollars are spent rebuilding homes, businesses, and other structures, those expenditures will add to GDP. In addition, some destructive aspects of economic activity are not subtracted from GDP. For example, although the value of electricity sold is counted, the negative effects of the air pollution that is created during the generation process are not deducted.

• The Underground Economy: Per Capita GDP/GNP