This article looks into economic growth. It looks into GDP, the main measure of economic progress and the assumptions that underpin this indicator.
Gross domestic product or as it is most commonly referred to GDP, measures the size of a country’s economy over a period of time.
The relevant national statistics authority collects data from thousands of companies. This is used as the basis for the GDP calculations.
The most frequently used method for calculating GDP is to base it on the total amount of spending in the country.
The GDP is then calculated by taking household spending, adding investment, adding government spending and then adding net exports.
As we can see, GDP is an accurate way to measure the health of an economy, but sustainability requires that we think about society and the environment as well. As it is currently calculated, GDP is unable to provide information on these important areas.
The way GDP is calculated includes all expenditures, regardless of whether society or the environment benefit from these transactions.
GDP therefore includes many things which most people would consider to be bad for society or which do not improve the general welfare of a country. It includes money spent to clean up after environmental disasters, money spent on lawyers during divorces, money spent on unnecessary military programs and on prisons. Overall, GDP includes many things, some of which detract from the general welfare of a society.
What is remarkable is how such an indicator, barring a few exceptions such as Bhutan has become the dominant marker of progress and the data point which all countries aspire to increase.
What is clear, is that GDP is simply a gross measure of activity within an economy. It does not make any distinction between spending which is desirable and that which is undesirable. It makes no distinction between spending which places a burden on a country and spending which benefits a country.
Another huge blind spot of GDP is that it is based solely on monetary transactions. Time spent caring for an elderly or disabled relative would not count towards GDP, even though it brings many benefits to that country. Time spent volunteering or helping a neighbour would not count towards GDP even though it helps to improve that society.
GDP then is a highly deceptive measure of national progress. It includes things which are bad and fails to include things which are good. What is more, with the way it is currently calculated and celebrated, it is entirely possible for an increase in things which are bad for a country to be portrayed as a gain.
There are other measures of national progress which diverge widely from GDP’s focus on economics. But perhaps a good start would simply be a more accurate version of GDP.
A more accurate version of GDP would subtract spending on things that harm society and the environment from the GDP figure to arrive at an improved picture. This would leave a more accurate indicator of whether the country is heading in the right direction or not.
What you need to know
This article looked into economic growth. It looked into GDP, which is the main measure of economic progress and the assumptions that underpin this indicator.
We looked into how GDP is calculated by national statistics authorities. We looked into how GDP is a gross figure and so includes undesirable spending which may be harmful to society and the environment.
I know that my prognosis and the prognosis of others is that the undesirable spending should be subtracted to arrive at the net positive figure. That would be a more reliable indicator. It would be interesting to see what the counter arguments to this proposal would be.
Taking into account everything that we have looked at in this short article, what is clear to me, is that there just isn’t the level of debate or criticism necessary in order to move to a more sensible indicator of national progress.
It seems that GDP has assumed an almost mythical status as the indicator of choice for national progress. More needs to be done to call out what is wrong with this indicator and to propose workable indicators that can guide decision makers in business and in government.
Even the staunchest defenders of GDP would have to admit that the indicator does not provide information on social or environmental progress in a country. It stands to reason therefore that people are being deceived by their GDP figures. They are being told that a rising number is always good and that a falling number is always bad. As with all indicators, it is important to look at the assumptions that underpin it and how that figure was calculated.
I believe that this is an issue which is highly relevant to sustainability. When you have most of the countries in the world obsessively focussed on an indicator which deviates so far from reality. That creates a system with a slow drift towards unsustainability when we need the exact opposite to be happening.
Thank you for reading,
By Barnaby Nash
Please share your thoughts in the comments section below, or reach out to me on social media. What do you think of GDP as an indicator and do you have a better way forward?