Here’s Russell Roberts with a good, brief explanation of why GDP accounting does not good economics make. GDP, or Consumption + gross Investment + Government spending + eXports – iMports, is just an “ex post” way of describing what happened, or what the component parts of past output were. The perennial line that “70% of GDP is consumption” is one of the most misleading slogans in all of economics. GDP is, after all, gross domestic product. Consumption, which is fairly easy to measure, is just a way at deriving production, or output, or supply.

Usually, GDP is a reasonable proxy for economic well-being, so more is better, but that is not true in this example. Part of the problem here is that GDP includes government purchases at cost. If the government hires people to produce stuff that is worthless, that stuff is included in GDP just as much as if the government buys something valuable. When calculating GDP, the national income accountants do not pass judgment on the social utility of government spending. Anyone concerned with economic well-being has to go beyond thinking about GDP.