Sustainable Business GPI vs. GDP

Published on October 16th, 2008 | by Chris Milton

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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.

 

GPI vs. GDP

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?

A few months ago, Clark Williams-Derry, the research director for the Sightline Institute in Seattle, called for journalists to stop using GDP as a primary measure for economic performance.

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!

ALSO SEE: Bhutan’s Gross National Happiness: a Model for Other Countries?
Bhutan Gross National Happiness: a model for others?

 

Picture Credit: “Gpigraph” by Miss Rogue from flickr under Creative Commons Share Alike 2.0





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About the Author

is a seasoned sustainability journalist focusing on business, finance and clean technology. His writing's been carried by a number of highly respected publishers, including The Guardian, The Washington Post and Scientific American. You can follow him on twitter as @britesprite, where he's one of Mashable's top green tweeters and Fast Company's CSR thought leaders. Alternatively you can follow him to the shops... but that would be boring.



  • http://www.squidoo.com/educate-yourself cchiovitti

    Wouldn’t the average of both GDP and GDI give a better overall indicator?

  • http://www.squidoo.com/educate-yourself cchiovitti

    Wouldn’t the average of both GDP and GDI give a better overall indicator?

  • http://www.britesprite.co.uk Chris Milton

    Nice idea. If they measured different things, then perhaps. Unfortunately though, they measure alot of the same things, the difference being whether you view it as a positive (education) or a negative (crime) to the overall economy.

  • http://www.britesprite.co.uk Chris Milton

    Nice idea. If they measured different things, then perhaps. Unfortunately though, they measure alot of the same things, the difference being whether you view it as a positive (education) or a negative (crime) to the overall economy.

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  • http://barrier-busting.com Nils Davis

    I think GDP should be broken down into (and reported as) the sum of GPI + [the bad stuff]. (I don’t know what the opposite of GPI is.) GDP is not going to go away – it’s too entrenched. But if the GPI portion of the GDP were surfaced at the same time, we’d have a much better understanding of where our economy was (or whatever economy we’re observing).

    • Anthony

      That's interesting. There is a common understanding in drug policy that you can separate the harms of drug prohibition from the harms of drug use. Showing the GDP as GPI + the delta (GDP – GPI) would demonstrate the harms of GDP-based policy.

  • http://barrier-busting.com Nils Davis

    I think GDP should be broken down into (and reported as) the sum of GPI + [the bad stuff]. (I don’t know what the opposite of GPI is.) GDP is not going to go away – it’s too entrenched. But if the GPI portion of the GDP were surfaced at the same time, we’d have a much better understanding of where our economy was (or whatever economy we’re observing).

    • Anthony

      That's interesting. There is a common understanding in drug policy that you can separate the harms of drug prohibition from the harms of drug use. Showing the GDP as GPI + the delta (GDP – GPI) would demonstrate the harms of GDP-based policy.

  • Ed

    GPI is a better index. It is helpful to remember that not everything is represented in economic statistics.

  • Ed

    GPI is a better index. It is helpful to remember that not everything is represented in economic statistics.

  • Claudia

    I think that using GPI is a good start. I agree with the above post that using both GDP and GPI. Together these indexes would probably a much more accurate accounting of the economic health of a country. Not everything can be measured with GDP alone. GDP only accounts for things that can be bought or sold. Trees, therefore, only have value when the land is cleared and the lumber sold. That trees produce oxygen and absorb C02 (which is essential for life I find myself reminding extremely business oriented people)is not “marketable”. Therefore, GDP alone, is not a true measure of wealth, but how many widgets are bought and sold. Use both.

  • Claudia

    I think that using GPI is a good start. I agree with the above post that using both GDP and GPI. Together these indexes would probably a much more accurate accounting of the economic health of a country. Not everything can be measured with GDP alone. GDP only accounts for things that can be bought or sold. Trees, therefore, only have value when the land is cleared and the lumber sold. That trees produce oxygen and absorb C02 (which is essential for life I find myself reminding extremely business oriented people)is not “marketable”. Therefore, GDP alone, is not a true measure of wealth, but how many widgets are bought and sold. Use both.

  • Bill

    I don’t think there’s much disagreement that GDP is not an indicator of the health of the economy. As far as I know it is only used as an indicator of the amount of production. I agree that if it is used as a proxy for welfare or human development then there are some big caveats, but I don’t know any economists who don’t state those caveats.

    What do you meen when you say “should we measure” the strength of an economy with something else? Who is the “we”. Presumably you mean governments should use better measures than GDP to evaluate progress and design policies to improve the new measure, not just GDP.

    When you look at policies that governments propose how many have purely GDP as the goal? I think policy analysis uses many other indicators, depending on the nature of the policy in question. E.g. crime rates for crime policies, health metrics for health policies, … etc.

    So I’m not sure how a rolled-up indicator of “overall progress in human welfare” would be used? It might be useful every 4 years at election time to see if on party achieved a net improvement during their term in office.

  • Bill

    I don’t think there’s much disagreement that GDP is not an indicator of the health of the economy. As far as I know it is only used as an indicator of the amount of production. I agree that if it is used as a proxy for welfare or human development then there are some big caveats, but I don’t know any economists who don’t state those caveats.

    What do you meen when you say “should we measure” the strength of an economy with something else? Who is the “we”. Presumably you mean governments should use better measures than GDP to evaluate progress and design policies to improve the new measure, not just GDP.

    When you look at policies that governments propose how many have purely GDP as the goal? I think policy analysis uses many other indicators, depending on the nature of the policy in question. E.g. crime rates for crime policies, health metrics for health policies, … etc.

    So I’m not sure how a rolled-up indicator of “overall progress in human welfare” would be used? It might be useful every 4 years at election time to see if on party achieved a net improvement during their term in office.

  • Steve

    The capabilities in all forms of technology is now making it possihle to effect the whole economy, the environment and social structures much faster, wider and deeper than ever before. We therefore cant sustain the GDP approach as it is only a measure of money.

    We have to measure the environment and the social impacts too as we need these to survive and these are not quantified in monetary terms. The environment is measured in monetoary terms by how we use/destroy it, not how we prtoect it – economics is about business and nothing else. We cant keep valuing money over and above human relationships and our environment – its just not sustainable and this creates social division and violence.

    If China and India follow the narrow GDP measures, the consumerism and resource consumption by those countries in comparison with the US will be like comparing the size of our sun with the planet earth.

    So bottom line is we need to use GPI as a measure if we are to sustain ourselves past the 21st century. Our planet can survive and go on and prosper very well without humans, but humans cannot prosper without the planet and without collective positive human relationships.

    With all our new technology we just cant seem to learn from past major mistakes that matter most.

    Technology has potential to cause sudden irreversable change to humanity and the planet this century and climate change is only one aspect to this – we cannot afford to keep taking a reactive approach to our refusal to learn from past major destructive mistakes, as next time, to react, will will be too late – permanently.

  • Steve

    The capabilities in all forms of technology is now making it possihle to effect the whole economy, the environment and social structures much faster, wider and deeper than ever before. We therefore cant sustain the GDP approach as it is only a measure of money.

    We have to measure the environment and the social impacts too as we need these to survive and these are not quantified in monetary terms. The environment is measured in monetoary terms by how we use/destroy it, not how we prtoect it – economics is about business and nothing else. We cant keep valuing money over and above human relationships and our environment – its just not sustainable and this creates social division and violence.

    If China and India follow the narrow GDP measures, the consumerism and resource consumption by those countries in comparison with the US will be like comparing the size of our sun with the planet earth.

    So bottom line is we need to use GPI as a measure if we are to sustain ourselves past the 21st century. Our planet can survive and go on and prosper very well without humans, but humans cannot prosper without the planet and without collective positive human relationships.

    With all our new technology we just cant seem to learn from past major mistakes that matter most.

    Technology has potential to cause sudden irreversable change to humanity and the planet this century and climate change is only one aspect to this – we cannot afford to keep taking a reactive approach to our refusal to learn from past major destructive mistakes, as next time, to react, will will be too late – permanently.

  • Anne

    You used “it’s” wrong in the subheading.

  • Anne

    You used “it’s” wrong in the subheading.

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  • http://www.investingoldblog.info invest in gold

    GDP hands down. I have always used it to globally measure the ecnomy for my own interests and company. It’s far more precise.

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