Published on October 16th, 2008 | by Chris Milton21
GDP vs GPI : Which Measures The Economy Best?
With a New Economy starting to emerge, how should we measure its strength? Using the old fashioned Gross Domestic Product, or the more holistic Genuine Progress Indicator? In other words, GPD vs GPI.
Stop me if you’ve heard this one before:
A businessman is showing a potential investor around his factory. The investor is very impressed and likes the businessman’s figures. These show that the factory produces $5.2m worth of goods.
“And what about your expenditure?” he asks the businessman. The businessman looks back at him blankly. “You know: raw materials; transport costs; staff wages; loan repayments…..”
The business man starts to dribble from the corner of his mouth. In the end the investor storms off muttering darkly about how the gene pool needs to be reduced.
// This is precisely how GDP – Gross Domestic Product – works. It measures what is produced, but ignores what is required to create that production. So long as the factory keeps churning stuff out to be flogged to consumers, nothing else matters.
GPI — An Alternative to GDP
In 1995 Redefining Progress introduced a new way of measuring economic strength: the Genuine Progress Indicator (GPI).
This looks at economic activity from the point of view of the impact it has on the individual and society, not the impact it has on a bank balance.
The biggest difference between it and GDP is what they class as costs and what they class as benefits. For instance:
- Crime: GDP counts this as a benefit because it gives rise to property repairs, legal and medical fees etc; GPI counts it as a cost because it damages to people’s lives and leads to stress.
- Volunteer Work and Education: GDP totally ignores these because no money changes hands; GPI values of both as a benefit for a growing economy.
- Resources and Pollution: GDP counts both of these as an income, pollution twice over (once for creation and once for cleanup!); GPI counts both as costs.
So under GDP high crime rates, spending all hours at your desk and environmental damage are all good for the economy.
Conversely, under GPI low crime rates, pursuing amateur interests and education and careful stewardship of the environment are all good for the economy.
Which Do You Favour — GDP or GPI?
But what do you think? Does it make better sense to take into account the softer things in life when measuring an economy’s strength, or is the amount of money which changes hand all that matters?
Leave a comment below: share your opinion and join the discussion!