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Guide to Social Cost Benefit Analysis

Relationship to Gross Domestic Product (GDP)

200.Effects on gross domestic product (GDP) are often equated with effects on national welfare. However, GDP doesn’t measure welfare. While GDP is often a useful proxy for national welfare, this is not always so. For example, GDP measures domestic production, irrespective of whether the benefits accrue to locals or foreigners. A macro-economic measure that better corresponds to national welfare is ‘Gross National Disposable Income’ (GNDI).

201.Another important difference between a welfare measure and what GDP measures is the treatment of non-market effects, such as externalities. These are not measured by GDP and can be considerable in some cases. An example of a negative externality is the increase in accidents that might be brought about by a new road.

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