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May 8, 2008

Retiring the GDP (Gross Domestic Product)

by Ron Robins*

The GDP statistic has to be retired. It is like an old shoe that no longer fits. GDP is fatally flawed as a measure of economic and societal well-being and economists know it. Yet it is universally used to compare living standards and economic growth like one compares sports scores. Furthermore, as each nation compiles it a little differently, especially regarding the inflation ‘deflator′ component, such comparisons are nonsensical. What is exciting is that there are some old and new indices getting attention that could replace the GDP. This is most welcome.

Alternatives to the GDP

Technically, GDP is the total market value of all final goods and services sold in an economy in any particular time period. As we progress in an era of Enlightened Economics, it is destined to be superseded by new indices geared to more accurately measure affluence, sustainability and quality of life, generally. Such indices include the Index of Sustainable Economic Welfare (ISEW), the Genuine Progress Indicator (GPI), and variants of them. Other intriguing indices include the Calvert-Henderson Quality of Life Indicators, the UN′s Human Development Index, and the Invincibility Index. The common thread in these indices is that as well as including economic activity, they also account for societal and environmental factors related to real human development – which the GDP does not.

The GDP statistic should be retired because…

  • According to economist Clifford Cobb and colleagues, “Much of what we now call the growth of GDP is really just one of three things in disguise: (1) fixing blunders and social decay from the past [paying for pollution, costs of crime, etc.]; (2) borrowing resources from the future [GDP excludes the costs related to farmland depletion, water, other resources]; or (3) shifting functions from the traditional realm of household and community to the realm of the monetised economy [i.e. eating out, rather than at home].” (Text in parenthesis has been added for additional clarity.) For a fuller explanation, see “What′s wrong with the GDP.”
  • Losses associated with natural and man-made disasters are not deducted from the GDP. For instance, Hurricane Katrina brought mass devastation. Yet the enormous economic losses were not deducted from GDP. But the clean-up costs were added though!
  • GDP does not account for the value of non-monetary, economic, transactions. Such activities would include elder care by family members, and volounteer activities. In 2002, the International Monetary Fund (IMF) found that such activities represented the following shares of economic output: up to 44% of GDP in developing nations, 30% in transition economies, and 16% in Organization for Economic Cooperation and Development (OECD) economies (Schneider and Enste, 2002). See The Genuine Progress Indicator 2006.
  • GDP was initially created to measure WW11 wartime production. Its principal creator Simon Kuznets cautioned that “[t]he welfare of a nation can scarcely be inferred from a measurement of national income” (Kuznets, 1934).
  • There is even evidence that a focus on GDP at the expense of other quality of life indicators can lead a society to a false sense of worth and even create unhappiness. In The Loss of Happiness in Market Democracies published in 2000, Emeritus Professor Robert Lane of Yale University compiled exhaustive research data showing the relationship of GDP to increasing unhappiness. He states, “Amidst the satisfaction people feel with their material progress, there is a spirit of unhappiness and depression haunting advanced market democracies throughout the world…” From his perspective, the rigors of modern market economies increasingly create family and relationship break-ups with subsequent loss of companionship and happiness.
  • Acknowledging this trend, the World Health Organization recently predicted that by 2020, depression will be the 2nd leading cause of disability, just behind cardiovascular disease. (However, with rising consciousness, I believe this trend will be reversed.)
  • GDP is short-sighted accounting. Things that bump-up GDP in the short-term often have harmful long-term human and financial consequences and costs.

From the foregoing it is clear that the GDP statistic has little relevance as a measure of our present day material and social well-being.

GDP provides a false sense of progress

Comparing the GDP to GPI (Genuine Progress Indicator) numbers illustrates how false is the sense of gain with the GDP in regard to our human condition. Look at this chart comparing the real (inflation adjusted) US per capita GDP and GPI growth between 1950 and 2004. Note how the GPI figure significantly lags GDP. It suggests that when items such as resource depletion, crime costs, and volounteer sector costs,′ etc., are accounted for, the per capita net benefit of a rising GDP is fully negated.

Source: (c) 2007 Redefining Progress

Retire the GDP now

Some of the ways social and non-market costs are included in the ISEW, GPI, etc., are definitely controversial. Perhaps for these reasons, such indices have not as yet achieved common usage. But the GDP, created for the very reason of measuring WW11 wartime production, has been badly and wrongly used as a measure of our quality of life. Enlightened Economics demands the GDP be retired and replaced with more enlightened indices! 

* Ron Robins, MBA, is founder, Investing for the Soul (http://investingforthesoul.com/), Huntsville, Ontario, Canada. He advocates, teaches, and writes on the subject of ethical investing. To contact him, e-mail to Ron Robins or call 705-635-3034.

© Ron Robins, 2008. 

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Disclaimer: This website does not make investment recommendations. Nothing in this site should be interpreted as a recommendation or solicitation to buy/sell any securities or investments. Investing for the Soul is a source of general information and resources for ethical investing and socially responsible investing (SRI). Investors should consider their actions thoroughly and consult their financial advisers and other professionals, prior to taking any investment action. This website does not necessarily agree with the opinions expressed in articles on its pages or offered on the web pages to which it might be linked. Such opinions are the responsibility of the writers themselves. Furthermore, this site does not offer or provide any warranties, representations, guarantees, implied or otherwise, as to the accuracy, legality, copyright compliance, timeliness or usefulness of the information, materials or services on this, or other sites, to which it is linked. Also, Mr. Ron Robins is not an investment advisor, nor is he licensed with any professional investment related body, and thus is not able to, nor does he make, any investment recommendations.


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