Gross Domestic Product

Why GDP is an Inappropriate Measure of Economic Health

The Gross Domestic Product (GDP) is perhaps the most widely used indicator of economic growth and well-being. The World Bank has called it "the main criterion for classifying economies." According to conventional wisdom, what is good for the GDP is good for the nation; as the GDP rises, so do our fortunes. But what does it actually measure?

Simply put, the GDP is the total value of all products and services bought and sold, a measure of money changing hands. It is a misleading yardstick of true progress for many reasons, most of which fall under three major categories:

  • The GDP makes no distinction between productive and destructive activities. While a realistic measure of progress would separate costs and benefits, the GDP places a positive value on all transactions and adds them to the total. Illness, crime, and natural disasters all cause the GDP to increase, as money is spent to treat the sick, jail prisoners, and repair the damage. In this way the GDP rises even as the quality of life declines.
  • The GDP has no way of assessing the value of natural resources until they enter the monetary economy, or in other words, are consumed. The trees in an old-growth forest that provide numerous services to humans and animals alike are worth nothing to the GDP until they are cut down for timber, at which point the GDP has no way of accounting for the loss of their services. By celebrating consumption rather than conservation, the GDP encourages the unsustainable depletion of finite resources.
  • The GDP completely ignores all activities and services that have no price attached to them. Essential functions performed by the family, community, and volunteers, such as housework and child care, don't count in the GDP. When these services have to be paid for because people no longer have time for them, the GDP goes up -- putting a positive value on the erosion of the social fabric.

 

In short, the GDP values growth at all costs over the things that really matter to people, such as clean air and water, a healthy and safe community, and the free time to enjoy them. The continued rise of the GDP is no longer something to cheer about, and it is past time to establish a new way to measure our progress.

 

If the GDP is up, why is America down? (requires subscription to The Atlantic)
If you read only one thing about the failures of the GDP, read this. A pointed and well-written article by the staff of Redefining Progress, a San Francisco-based organization that concentrates on issues of growth and sustainability.

Redefining Progress
More information than you can shake a stick at, including in-depth analysis of the GDP and the details on RP's own Genuine Progress Indicator, which attempts to correct the flaws in the GDP and present an alternative assessment of the economy.

Friends of the Earth
This UK site has more information on GDP alternatives, including a program to help you design your own method of measuring progress.