Critical Analysis of Gdp as an Indicator of Growth

Abstract - There is a rising criticism of the widespread use of GDP as an indicator of the health of an economy. In fact, some experts are of the opinion that GDP growth is making the society poorer. This paper critically analyzes this opinion in view of the concept of sustainability and also discusses some alternate measures being suggested. This paper also discusses the implications to businesses of these alternate measures.

Gross domestic product (GDP) is the sum total of the market value of all final goods and services produced in a country over a year. The real GDP per capita is generally used as the main indicator in evaluating the position of the economy of a country over time or relative to that of other countries. It has become synonymous with social welfare and is often viewed as an indicator of the standard of living. For over half a century now, GDP has been severely criticized as not adequately capturing human welfare and progress. But the irony is that despite severe criticism, the GDP has maintained a firm position as a dominant economic indicator. It is quite astonishing that most economists in business and government, teachers of economics, media, policy makers and politicians still continue to give much importance to GDP and calling for unconditional GDP growth.

Is GDP making the society poorer?

GDP measures the level of production and production is closely linked to destruction. Someone has rightly said, "Burn Paris and you would make GDP grow!" Production as measured by GDP is often just compensation for a previous destruction: destruction of human and natural capital. If lawyers prosper because there are more crimes and more offences, does that mean the country is richer? Countries achieve a level of standard GDP through the exhaustion of their natural and human resources, but GDP does not take into account these costs. It is similar to those companies who report profits only by under-reporting depreciation of assets. Natural and man-made disasters, crime and accidents all contribute to GDP in a positive way since these activities generate production. It is as if a business kept a balance sheet by merely adding up all transactions, without distinguishing between income and expenses, or between assets and liabilities.

In addition to the above concerns there are many other shortcomings of the GDP indicator. It does not measure happiness, health, infant mortality, crime, suicide rates, poverty, environmental costs, social costs, inequality of income distribution, loss of leisure time, civility in communities, concern for future generations, etc. For instance, the World Health Organization's report in the year 2000 ranked the US health system as 37th in the world, while France ranked 1st and Portugal 12th, two countries with a much lower GDP per capita. Does that not raise doubts on GDP as an indicator of economic welfare?

Does GDP take sustainability into account?

What one needs to understand is that the GDP is a measure of economic quantity, not economic welfare or quality, let alone social or environmental well-being. It does not measure several factors which are necessary for "sustainable economic welfare". Sustainable development is economic growth in which resource use aims to meet human needs while preserving the environment so that these needs can be met not only in the present, but also for generations to come. The economy draws benefits from natural, social, and human capital and that the quantity and quality of such capital, in turn, is affected by net investment from the economy. By measuring only marketed economic activity, GDP ignores changes in the natural, social, and human components of community capital on which the community relies for continued existence and well-being. As a result, GDP not only fails to measure key aspects of quality of life; in many ways, it encourages activities that are counter to long-term community well-being. One of the major concerns is that GDP measurement encourages the depletion of natural resources faster than they can renew themselves. Another concern is that current economic activity is degrading ecosystems, thereby reducing the services that, until now, have been provided to humans virtually for free. GDP encourages depletion because clear-cutting a forest for wood is valued more in GDP terms than the ecosystem services that forest provides if left uncut.

Alternative measures to GDP

There have been several efforts to capture both the social aspects and the environmental sustainability aspects. Some of these alternative measures being suggested are listed below:

1. Fordham Index of Social Health (FISH)

This index measures 16 socio-economic indicators which include infant mortality, child abuse, child poverty, teen suicide, drug abuse, high school drop-outs , average weekly earnings, unemployment , health insurance coverage, poverty among elderly, health insurance for elderly, highway deaths due to alcohol, homicides, food stamp distribution, housing and income inequality.

2. Genuine Progress Indicator (GPI)

It is a measure that uses GDP as a foundation. While GDP is a measure of current income, GPI is designed to measure the sustainability of that income. It uses the same personal consumption data as GDP but makes deductions to account for income inequality and costs of crime, environmental degradation, and loss of leisure and additions to account for the services from consumer durables and public infrastructure as well as the benefits of volunteering and housework. By differentiating between economic activity that diminishes both natural and social capital and activity that enhances such capital,