| A natural disaster destroys existing wealth, such as
houses, factories, etc. Because the value of existing assets is not a part
of GDP, their destruction is not recorded as a loss of GDP. |
| After the disaster, there will be two effects on GDP.
First, there may be a loss of economic activity because factories have
closed down and people have lost their jobs. This will appear as a decline
in GDP. Second, their will be an increase in investment, as firms and housholds
undertake repairs. This will appear as an increase in GDP. |
| If the second effect is sufficiently large, a natural
disaster will induce an increase in GDP. Clearly, this is not an increase
in the standard of living, which serves to show how GDP can in many circumstances
be a pretty poor measure of the standard of living. |