Rethinking Gross Domestic Product (GDP) as a Measure of Well-Being

For the past 70 years Gross Domestic Product (GDP) has been the benchmark by which countries measure themselves economically--with the idea that more is always better. In Chapter 11, I discuss some of the problems with this measure, especially its inability to take income inequality (surely a measure of a country's well-being) into account. A recent report by Robert Costanza and his colleagues revisits these issues, but with the emphasis on doing something about it by creating new measures of economic activity that more genuinely reflect what is happening in people's lives. They are, in particular, endorsing a measure of sustainable progress instead of raw economic growth.

Here's the problem:

GDP measures mainly market transactions. It ignores social costs, environmental impacts and income inequality. If a business used GDP-style accounting, it would aim to maximize gross revenue — even at the expense of profitability, efficiency, sustainability or flexibility. That is hardly smart or sustainable (think Enron). Yet since the end of the Second World War, promoting GDP growth has remained the primary national policy goal in almost every country.

Here's one alternative that makes sense to a lot of people:

Adjusted economic measures. These are expressed in monetary units, making them more readily comparable to GDP. Such indices consider annual income, net savings and wealth. Environmental costs and benefits (such as destroying wetlands or replenishing water resources) can also be factored in. One example is the genuine progress indicator (GPI). This metric is calculated by starting with personal consumption expenditures, a measure of all spending by individuals and a major component of GDP, and making more than 20 additions and subtractions to account for factors such as the value of volunteer work and the costs of divorce, crime and pollution.

And here's the hope for a widely agreed upon set of measures:

The chance to dethrone GDP is now in sight. By 2015, the UN is scheduled to announce the Sustainable Development Goals, a set of international objectives to improve global well-being. Developing integrated measures of progress attached to these goals offers the global community the opportunity to define what sustainable well-being means, how to measure it and how to achieve it. Missing this opportunity would condone growing inequality and the continued destruction of the natural capital on which all life on the planet depends.

The Sustainable Development Goals will replace the Millennium Development Goals which were targets more than measures, whereas the Sustainable Development Goals will presumably be sufficiently sophisticated to serve as a genuine replacement for the GDP.