Thursday, December 11, 2008

What Does GDP Really Measure?

Remember GNP (Gross National Product)? How is that different from GDP, and why is that important? I am curious to investigate the difference further as a classmate of mine planted the seed in my mind that GDP includes many of the intangible assets that contributed to our current state of economic affairs and that were not included in GNP. Which one is therefore a better measure of the real potential of an economy?

What does GDP really measure? One of my classmates phrased it quite well, I summarize here,
...GDP measures dependency. The more dependent we are on others for goods/services the more commerce and economy experience and the greater growth of GDP we will see. Independent, self-sufficient people participate in cultural & community commerce and not nearly as much in the financial world alienated from the barter system. Our culture as it stands depends on the story of dependency. In my experience, it is a crime to take and effective stand against it - yet it embodies the essence of what life is worth living for.

Maybe the Genuine Progress Indicator's time has come to be brought into the mainstream of economic and social thought? It makes sense to me that we weight things based upon their ability to increase or decrease the health of the human body & spirit:

The GPI starts with the same personal consumption data that the GDP is based on, but then makes some crucial distinctions. It adjusts for factors such as income distribution, adds factors such as the value of household and volunteer work, and subtracts factors such as the costs of crime and pollution.

Because the GDP and the GPI are both measured in monetary terms, they can be compared on the same scale. Measurements that make up the GPI include:

Income Distribution
Both economic theory and common sense tell us that the poor benefit more from a given increase in their income than do the rich. Accordingly, the GPI rises when the poor receive a larger percentage of national income, and falls when their share decreases.

Housework, Volunteering, and Higher Education
Much of the most important work in society is done in household and community settings: childcare, home repairs, volunteer work, and so on. The GDP ignores these contributions because no money changes hands. The GPI includes the value of this work figured at the approximate cost of hiring someone to do it. The GPI also takes into account the non-market benefits associated with a more educated population.

Crime imposes large economic costs on individuals and society in the form of legal fees, medical expenses, damage to property, and the like. The GDP treats such expenses as additions to well-being. By contrast, the GPI subtracts the costs arising from crime.

Resource Depletion
If today’s economic activity depletes the physical resource base available for tomorrow, then it is not creating well-being; rather, it is borrowing it from future generations. The GDP counts such borrowing as current income. The GPI, by contrast, counts the depletion or degradation of wetlands, forests, farmland, and nonrenewable minerals (including oil) as a current cost.

The GDP often counts pollution as a double gain: Once when it is created, and then again when it is cleaned up. By contrast, the GPI subtracts the costs of air and water pollution as measured by actual damage to human health and the environment.

Long-Term Environmental Damage
Climate change, ozone depletion, and nuclear waste management are long-term costs arising from the use of fossil fuels, chlorofluorocarbons, and atomic energy, respectively. These costs are unaccounted for in ordinary economic indicators. The GPI treats as costs the consumption of certain forms of energy and of ozone-depleting chemicals. It also assigns a cost to carbon emissions to account for the catastrophic economic, environmental, and social effects of global warming.

Changes in Leisure Time
As a nation becomes wealthier, people should have more latitude to choose between work and free time for family or other activities. In recent years, however, the opposite has occurred. The GDP ignores this loss of free time, but the GPI treats leisure as most Americans do—as something of value. When leisure time increases, the GPI goes up; when Americans have less of it, the GPI goes down.

Defensive Expenditures
The GDP counts as additions to well-being the money people spend to prevent erosion in their quality of life or to compensate for misfortunes of various kinds. Examples are the medical and repair bills from automobile accidents, commuting costs, and household expenditures on pollution control devices such as water filters. The GPI counts such "defensive" expenditures as most Americans do: as costs rather than as benefits.

Lifespan of Consumer Durables & Public Infrastructure
The GDP confuses the value provided by major consumer purchases (e.g., home appliances) with the amount Americans spend to buy them. This hides the loss in well-being that results when products wear out quickly. The GPI treats the money spent on capital items as a cost, and the value of the service they provide year after year as a benefit. This applies both to private capital items and to public infrastructure, such as highways.

Dependence on Foreign Assets
If a nation allows its capital stock to decline, or if it finances consumption out of borrowed capital, it is living beyond its means. The GPI counts net additions to the capital stock as contributions to well-being, and treats money borrowed from abroad as reductions. If the borrowed money is used for investment, the negative effects are canceled out. But if the borrowed money is used to finance consumption, the GPI declines.

With market reports that focus on things like this, I wonder what we really are measuring
The Cancer Market Outlook to 2013 (Business Insights): The global cancer market generated sales of $56.7bn in 2007, representing a 16.8% increase over 2006 sales, and is forecast to increase by a CAGR of 5.1% over the period 2007–13 to reach sales of $76.9bn.
So, cancer treatment increases GDP...


Unknown said...

I like the concept of the GPI, but I'm afraid of what it would take to quantify some of those measures. And even if they can be quantified, I'm sure there would be widespread differences of what thresholds should be chosen.

But the concept is great and very thought-provoking.

caris said...