from GDP to GPI

What value is gross domestic product as truthful indicator of a nations progress, if it doesnt take into account the well-being of its inhabitants? Gross Domestic Product vs. Genuine Progress Indicator The genuine progress indicator (GPI) is an alternative metric system which is an addition to the national system of accounts that has been suggested to replace, or supplement, gross domestic product (GDP) as a metric of economic growth. The GPI is used in green economics, sustainability, ecological economics, and more inclusive types of economics commonly known as welfare economics. GPI measures whether a countrys growth, increased production of goods, and expanding services have actually resulted in the improvement of the welfare (or well-being) of the people in the country. GPI advocates claim that it can more reliably measure economic progress, as it distinguishes between worthwhile growth and uneconomic growth. The GDP vs the GPI is analogous to the difference between the gross profit of a company and the net profit; the Net Profit is the Gross Profit minus the costs acquired. Accordingly, the GPI will be zero if the financial costs of crime, pollution and other relevant factors equal the financial gains in production of goods and services, all other factors being constant.

A Paradigm Shift or Value Shift (from GDP to GPI)

Source: Adbusters

GPI, An Alternative to GDP

Since the GPI was first introduced, Redefining Progress has published regular audits of the US economy, and similar audits have been adopted in other countries. In 1995 Redefining Progress introduced a new way of measuring economic strength: the Genuine Progress Indicator (GPI). GPI 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 peoples 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.

Source: Redefining Progress

Motivation
...the welfare of a nation [can] scarcely be inferred from a measure of national income... Most economists assess the progress in welfare of the people by comparing the gross domestic product over time, that is, by adding up the annual dollar value of all goods and services produced within a country over successive years. However, GDP was never intended to be used for such purpose. It is prone to productivism or consumerism, over-valuing production and consumption of goods, and not reflecting improvement in human well-being. It also fails to distinguish between money spent for new production and money spent to repair negative outcomes from previous expenditure. For example, one million dollars spent to build new homes may be an indication of progress but one million dollars spent in aid relief to those whose homes have been destroyed is not the same kind of progress. This becomes important especially when considering the true costs of development that destroys wetlands and hence exacerbate flood damages. Simon Kuznets, the inventor of the concept of the GDP, notes in his very first report to the US Congress in 1934:

An adequate measure must also take into account ecological yield and the ability of nature to provide services. These things are part of a more inclusive ideal of progress, which transcends the traditional focus on raw industrial production.

Source: Redefining Progress

Theoretical Foundation
In the early 1990s there was a consensus in human development theory and ecological economics that growth in money supply was actually reflective of a loss of well-being. In the early 1990s there was a consensus in human development theory and ecological economics that growth in money supply was actually reflective of a loss of well-being: that lacks of essential natural and social services were being paid for in cash and that this was expanding the economy but degrading life. The matter remains controversial and is a main issue between advocates of green economics and neo-classical economics. Neoclassical economists understand the limitations of GDP for measuring human wellbeing but nevertheless regard GDP as an important, though imperfect measure of economic output. However GDP tends to be reported as synonymous with economic progress by journalists and politicians and the GPI seeks to correct this shorthand by providing a more encompassing measure. Some economists have asserted that a countrys growth, increased goods production, and expanding services have both costs and benefitsthat contribute to GDP. They assert that expanded production facilities damage the health, culture, and welfare of people. Growth that was in excess of sustainable norms (e.g. of ecological capacity) had to be considered to be uneconomic. According to the threshold hypothesis, developed by Manfred Max-Neef, the notion that when macroeconomic systems expand beyond a certain size, the additional benefits of growth are exceeded by the attendant costs. (Max-Neef 1995.) According to Lawns model, the costs of economic activity include the following potential harmful effects:[3] Cost of resource depletion Cost of crime Cost of ozone depletion Cost of family breakdown Cost of air, water, and noise pollution Loss of farmland Loss of wetlands

whether a countrys economic activity over a year has left the country with a better or worse future possibility

Analysis by Robert Costanza also around 1995 of natures services and their value showed that a great deal of degradation of natures ability to clear waste, prevent erosion, pollinate crops, etc., was being done in the name of monetary profit opportunity: this was adding to GDP but causing a great deal of long term risk in the form of mudslides, reduced yields, lost species, water pollution, etc. Such effects have been very marked in areas that suffered serious deforestation, notably Haiti, Indonesia, and some coastal mangrove regions of India and South America. Some of the worst land abuses for instance have been shrimp farming operations, evicted families, left coastal lands salted and useless for agriculture, but generated a significant cash profit for those who were able to control the export market in shrimp: this has become a signal example to those who contest the idea that GDP growth is necessarily desirable. GPI takes account of these problems by incorporating sustainability: whether a countrys economic activity over a year has left the country with a better or worse future possibility of repeating at least the same level of economic activity in the long run.