Revenues matter, but costs are equally important in figuring the true health of a business or a country. In a company, materials must be bought, machines lose their usefulness over time, and buildings require repair. Similarly, the economy of a country includes depreciation and the costs of doing business. National accountants adjust GDP to arrive at a net figure that accounts for worn-down roads and bridges, but there is more to a country than its physical infrastructure.

We are aware that trees are important to the environment, for example, but a tree doesn’t factor into GDP unless it is part of a commercial transaction. The sale of a Christmas tree appears in the GDP. An identical tree in the forest does not—at least not until it becomes plywood—and its contribution to a healthy environment does not appear on the country’s balance sheet.

GDP growth and overall welfare might no longer go hand in hand.

If these factors were included, the adjustments to nearly every country’s GDP could be enormous. The cost of environmental degradation and pollution in China is equal to about 8 to 12 percent of the country’s GDP per year. That wipes out most of China’s impressive annual GDP growth, lately in excess of 10 percent.

China announced earlier this decade that it would start to calculate its green GDP, only to backtrack once the first numbers revealed some bad news. That turn of events is not new. The United States followed a similar path in the 1990s. It first started to measure subsoil assets, such as coal still in the ground. The coal industry did not like the results, and Congress soon bowed to lobbyists and included a line in the appropriations bill barring any such future activity. That ban has since disappeared, but national income accountants are still wary of doing anything too public.

Simon Kuznets—the father of U.S. income accounting who won the 1971 Nobel Prize in economics for his work—was the first to point to the limitations of calculating GDP without factoring in costs. On one hand, it is innocuous if the GDP feeds on a deteriorating environment: Companies produce, which adds to the gross domestic product, and other companies clean up their pollution, which again increases the GDP.

A large problem arises, however, with the way that GDP figures are used. The press, the public and even some economists equate them with statements about a nation’s overall well-being. And, up to a point, material wealth does mean better living conditions. China in the last two decades pulled more people out of poverty faster than any other country in history. Yet the enormous deterioration of its environment is equally unprecedented.