Explain why governments may need to be wary about economic setting policy aimed solely at growth of GDP

Some GDP-measured expenditures do not contribute to economic welfare. In some cases, looking at rises and falls in GDP does not provide an accurate, or complete, picture of overall welfare.  If one were to use GDP alone as a normative indicator, then externalities, i.e., such as war, natural disasters and disease, and which lead to increased spending would be considered to be unambiguously positive inasmuch they increase economic activity.  However, the GDP does not account for any welfare loss that results from an event such as a natural disaster or a toxic-waste spill, even though an environmental clean-up or reconstruction effort contributes both to welfare and the GDP. Relying solely on GDP as a normative indicator under such conditions will result in a ‘mismeasurement’ of changes to social welfare because it does not take into account the negative events that triggered the economic activity. Crime is great for GDP as it necessitates monetary transactions such as hiring guards, buying security systems, purchasing insurance, paying lawyers, building prisons, etc. However, a society’s well-being depends upon a number of non-economic factors, such as the crime-rate, a sense of security, the degree of political freedom, etc. GDP cannot account for any of these quality of life factors.

GDP does not take into account the sustainability of future GDP. For example, if I clear-cut a forest and sell the timber it adds to GDP in the current year but significantly reduces the chance the economy can have the same performance the future years. GDP does not differentiate between depleting assets and generating incremental wealth. Policies aimed solely at growth of GDP, and ignores the effects on the environment, leads to environmental unsustainability, but unsustainability leads to lower economic growth due to destruction of common access resources. On the other hand, economic growth based on the principle of sustainable development leads to environmental preservation, which in turn can be expected to lead to higher economic growth in the future.  

Moreover, GDP ignores distribution of income and consumption. The degree to which individuals and different groups share in a country’s prosperity is another indicator of economic and social well-being.   GDP per capita, which divides the GDP by the country’s population, provides a rough estimate of each person’s “share” of the market economy.  However, in reality, some people’s share of the economy is greater than others.  This level and changes in inequality in the distribution of incomes and consumption, and the incidence of poverty, cannot be determined by tracking the GDP.