GDP or GPI – Genuine Progress Indicator

HT to former colleague Kanchan Bandyopadhyay for this piece on the Genuine Progress Indicator. Most economics courses will include the topic of limitations of Gross Domestic Product as an indicator of standard of living. US senator Robert F Kennedy pointed out 50 years ago that GDP traditionally measures everything except those things that make life worthwhile.

Genuine Progress Indicator (GPI) is designed to include the well-being of a nation and it incorporates environmental and social factors which are not included in GDP. The GPI indicator takes everything the GDP uses into account, but adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others). The GPI nets the positive and negative results of economic growth to examine whether or not it has benefited people overall. The figure below shows the aspects of Social, Economic and Environmental variables.

US senator Robert F Kennedy pointed out 50 years ago that GDP traditionally measures everything except those things that make life worthwhile.

The introduction of the living standards framework in New Zealand takes into account environmental resources, individual and community assets, ‘social capital’ – which includes cultural norms and how people interact – and human capital, such as people’s health, and their skills and qualifications.

By living standards, the NZ Treasury means more than income; it’s people having greater opportunities, capabilities and incentives to live a life that they value, and that they face fewer obstacles to achieving their goals.

Limitations of GDP as a measure of standard of living – see list below.

  1. Regional Variations in income and spending
  2. Inequalities of income and wealth
  3. Leisure and working hours
  4. The balance between consumption and investment
  5. The shadow economy and non-monetised sectors
  6. Changes in life expectancy
  7. Innovation and the development of new products
  8. Defensive expenditures

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