GDP or GPI?

Gross Domestic Product (GDP) is probably the most well-known and widely-used economic concept in the world. Everyone knows that it is how we measure the size of an economy, be that a national or international one.

It represents the total value of goods and services produced over a specific time period, and is often used to compare different eras or sections of economic history. Obviously this is very important for economists and governments who use it to judge future policy and decide the fate of billions of people.

But is GDP really the best measure?

An alternative measure which is gathering wider support is the Genuine Progress Indicator (GPI). The issue with GDP is a fairly new one. The idea that annual economic growth is an endless and natural state of affairs has driven governmental thinking for at least 30 years. However, in the 21st century it has become clear that this can’t be sustained. The pressure on global resources such as water, food and fuel is set to put a hard limit on economic growth. In addition, GDP does not measure things like the effects of pollution on employee health or the reduction of child poverty across the globe, among many other similar things.

For this reason, the idea to measure our economy based on ‘genuine progress’ is becoming more and more popular; GPI is potentially fit for a world where economic growth is not the only thing that matters in our society. A good example of how the two measures are different is demonstrated by pollution. GDP is increased twice by pollution: once when it is created and once when it is cleaned up. GPI on the other hand counts the initial pollution as a loss equivalent to the cost of cleaning it up.

This example is particularly potent given that manmade climate change is the defining challenge of our lifetime. When measured in GDP, there is an incentive to pollute which essentially amounts to a built in subsidy. This is known as a negative externality, and it is largely accepted as the price of doing business. A negative externality removes any pressure to change, meaning that companies will continue to pollute the world as long as GDP remains the main measure of things. Measuring economic impact through GPI would instead remove this hidden subsidy

As mentioned previously, environmental pollution is just one example of the difference between GDP and GPI. Other examples where measuring success in GDP rewards people for playing both sides of the board include the worldwide drug trade, factory farming of animals, dumping plastic into the ocean and both creating and ‘solving’ global poverty.

Under GPI, legislators will have to establish regulation which actively incentivises things which are positive for society as a whole at the same time as penalising those that aren’t, rather than simply ignoring the negative externalities as a necessary evil as part of achieving ‘economic growth’.

Smart business should theoretically enjoy a world where GPI is the main economic measure as it encourages long term stability and sustainability – both part of the bedrock on which long-term, successful business are built. It will also encourage the real innovators and punish those who make money simply by being the largest. This will in turn lead to the creation of new markets and products which benefit all – including the business world.

The mantra of economic growth is repeated so often and so loudly that it can be hard to imagine anything else. However, a better world is within reach if we can change our outlook very slightly.