green and sustainable business

Beyond GDP

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Gross domestic product (GDP) has been the standard, go-to measure of a country’s economic health for decades. But that approach is under pressure according to a recent New York Times magazine piece.

The long article last month by Jon Gertner, “The Rise and Fall of the G.D.P.,” notes that while “academics and gadflies” for some time have been critical of GDP as an inaccurate and misleading global gauge of prosperity, the general attitude towards it recently has been challenged by world leaders and by international groups such as the Organization for Economic Cooperation and Development (OECD). OECD is the Paris-based group of 31 member countries that are “committed to democracy and the market economy from around the world to: support sustainable economic growth, boost employment, raise living standards, maintain financial stability, assist other countries’ economic development, contribute to growth in world trade.”

GDP is an index that tracks a country’s entire economic output. It’s a handy and somewhat useful snapshot that’s heavily stressed and scrutinized by economists and stat freaks. But there is an increasing realization that it shortchanges human elements and societal factors in calculating or understanding sustainable economic activity.

“The G.D.P., according to arguments I heard from economists as far afield as Italy, France and Canada,” writes Gertner, “has not only failed to capture the well-being of a 21st-century society but has also skewed global political objectives toward the single-minded pursuit of economic growth.”

There are many ifs and buts about GDP. For instance when Boeing sells hundreds of aircraft to airlines, foreign and domestic, that has a nice impact on the local economy where the planes are built here in my state of  Washington and on overall GDP, but it says virtually nothing about the economic condition of a retailer in Mississippi or unemployment in Missouri.

And what about staying home to raise children? GDP does not take that activity into account.

Other measures are needed and coming into play, Gertner says. The Canadian Index of Well-Being is debuting this year “as a counterweight to the monolithic gross domestic product numbers,” the Times magazine article states.

It could be that dozens or even hundreds of indices and indicators are needed to track economic growth and prosperity in a meaningful and more human way. The article cites a non-profit organization in Washington D.C., State of the USA, which could become a national clearinghouse for a ‘key national indicators system,’ something that the recently enacted health care bill calls on Congress to help finance.

“Think of it as a report card meant to show a country’s citizens the exact areas — in health, education, the environment and so forth — where improvement is called for; such indicators would also record how we improve, or fail to improve, over time. The State of the USA intends to ultimately post around 300 indicators on issues like crime, energy, infrastructure, housing, health, education, environment and the economy,” says Gertner.

A major problem with GDP as the main go-to measure is that it doesn’t place economic value or account for work done in the home, such as housework or child care or preparing dinner at home. And the economic activity measured by GDP is too-often mistakenly interpreted as citizens’ well-being.

Monthly tracking of GDP won’t go away however; indexing human happiness and well-being seems a tad too airy and out there, but it would help if other economic, societal and environmental indicators gained similar attention and stature.

Many economists acknowledge that unemployment claims, consumer spending, retail sales and inventories tell us more how the economy is really doing. For instance the Purchasing Managers Index, maintained by the Institute for Supply Management, is cited as excellent indicator of manufacturing strength that is better than GDP. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.


Written by William DiBenedetto

11 June, 2010 at 2:00 am

Posted in economy

Tagged with , , ,

One Response

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  1. […] So the development in Europe adds a spicy dimension to what GDP should encompass in the U.S. Many view it as an inadequate measure of the nation’s wealth and well-being, noting it should be updated to include more of the human element. […]

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