The Problem with GDP

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The New Economics Foundation [NEF] (2006) introduced a new global measure of progress, the ‘Happy Planet Index’ [HPI] which reveals a very different picture of the wealth, and poverty, of nations in comparison with GDP.

GDP is the total value of a country’s annual output of goods and services. It is the standard measure of economic activity and is the key headline indicator for government policy in the vast majority of countries.

NEF states the problems with GDP, such as:

“GDP was never intended to function as an indicator of well-being. Simon Küznets, a central figure in the development of GDP, remarked that “The welfare of a nation can scarcely be inferred from a measurement of national income” (Cobb, et.al., 1995)

“GDP as a standard-of-living measure assumes that income is strongly correlated with well-being at the national level, such that —all else being equal — general well-being will increase as economy grows.”

“GDP is insensitive to the distribution of income within countries. A country with high rates of poverty, a small but affluent elite, and high exports could have a similar GDP per capita to one with comparably little inequality and a thriving domestic economy.”

“GDP fails to distinguish expenditure that is incurred in correcting or compensating for undesirable events. GDP counts resource consumption which could include huge amounts of public money spent in mitigating the resulting damage brought by natural disasters.”

Two approaches recognize the limitations of GDP: adjusting and supplementing.

US economist Herman Daly’s uneconomic growth suggests that some forms of economic growth are actually detrimental to well-being. Thus GDP is adjusted to take account of inequality, environmental costs and expenditure due to negative events, and the value of unpaid or voluntary work.

Daly and Cobb’s (1989) Index of Sustainable Economic Welfare [ISEW] includes estimations of the economic cost of may environmental externalities, such as pollution and environmental degradation.

Tim Jackson (1997) proposes a new Measure of Domestic Progress [MDP] which made adjustments to the methodologies used to account for climate change and resource depletion in previous indices.

The second approach uses GDP data as is, but supplements it with explicit welfare measures such as health, education and social inequality.

Based on the work of Nobel laureate Amartya Sen, a Pakistani economist, Mahbub ul Haq created the Human Development Index [HDI] consisting of three elements: standard of living (GDP per capita); Life expectancy at birth; and Knowledge: a composite measure of education, literacy and school enrollment.

Similarly, the Human Poverty Index uses indicators focused explicitly on poverty, whereby Longevity is replaced by the probability at birth of not reaching 40; Knowledge is replaced by the percentage of adults lacking functional literary skills, and Standard of living is replaced by a weighted measure that incorporates percentage of children under-weight and percentage of population without access to safe water sources. HPI is generally considered to be a better indicator of development than the HDI, when applied to poor countries.

The Happy Planet Index is an improvement of the Human Development Index. It consists of three indicators: Life Satisfaction, Life expectancy and happy life years, and Ecological footprint. Life Satisfaction is based on the World Database of Happiness, primarily the World Values Survey. Life Expectancy is based on the UN Human Development Report 2005. Ecological footprint measures how much land area is required to sustain a given population at present levels of consumption, technological development and resource efficiency. The Global Footprint Network provides Footprint data for 144 countries.

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Notes:

Cobb C, Halstead T, and Rowe J (1995). If the GDP is up,why is America down?. The Atlantic Monthly, October 1995. pp. 59-78. back to text

Daly H and Cobb JB (1989). For the common good: redirecting the economy toward community, the environment, and a sustainable future, Boston: Beacon Press, 1989.back to text

Jackson T, et.al. (1997). An index of sustainable economic welfare for the UK 1950-1996, Guildford, UK: University of Surrey Centre for Environmental Strategy, 1997.back to text

New Economics Foundation [NEF] (2006). The Happy Planet Index: An index of human well-being and environmental impact. London, UK: New Economics Foundation [NEF], 2006. pp. 9-10. back to text

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