Economists traditionally use gross domestic product (GDP) to measure economic progress. If GDP rises, the economy is in good condition and the country is moving forward. On the other hand, if the GDP declines, the economy may be in trouble and the country is losing ground. Negative GDP for two consecutive quarters is usually defined as a recession.
What is GDP?
The gross domestic product is equal to the total monetary value of all final goods and services exchanged by a specific country (economy) in a certain period of time. For the United States, GDP usually refers to the annual dollar value of all purchased goods and services, including purchases from private for-profit, non-profit, and government agencies. For example, if you buy a roast chicken for $10, GDP will increase by $10.
- Gross domestic product is the dollar value of all goods and services that change hands in the entire economy.
- GDP growth is a sign of economic strength, and negative GDP indicates economic weakness.
- When GDP is caused by economic damage (such as car accidents or natural disasters) rather than real production activities, it may provide false information.
- The real progress indicator aims to improve GDP by including more variables in the calculation.
Wealth can measure happiness, which is a direct and logical meaning. All economic values are subjective-free market prices depend on the degree to which individuals believe that goods or services can make them better. Getting more wealth actually means getting more things that can improve daily life. On the other hand, those who create wealth in an honest way actually create the most value for others, at least in an economic sense.
Therefore, in a sense, higher GDP should equate to greater human progress, because it means the creation of more valuable goods and services. However, going deeper, GDP cannot even capture this traditional economic value well.
What is the difference between GDP and GPI?
How to meet GDP standards
GDP can increase after a car accident or a major flood. GDP can grow rapidly during a war or after a terrorist attack. If the entire Chicago catches fire again and burns down, reconstruction efforts may boost GDP. This is because GDP is susceptible to the fallacy of broken windows-false prosperity is on the rise when obvious damage occurs.
However, from the perspective of citizens living in the realities of daily life, GDP can be quite misleading, which is why the real progress indicator (GPI) is developed by a socially responsible think tank named Redefining Progress. Created in 1995. This indicator was developed as an alternative to the traditional GDP measurement standard for measuring a country’s economic and social health.
Although the GPI and GDP calculations are based on the same personal consumption data, the GPI provides adjustment factors that aim to apply monetary values to non-monetary variables of the economy. Variables are divided into the following general categories:
- Personal consumption -This number is the same as the data used to calculate GDP.
- Income Distribution -When a larger proportion of the country’s income is spent on the poor, the GPI will be adjusted upwards because the increase in income provides tangible benefits to the poor. When most of the increased income of a country goes to the rich, the GPI will adjust downward. GDP only cares about the sum of all exchanged goods and services, not their income distribution. If five people earn US$200,000 each, GDP treats it as if one person earns US$800,000 and four people earn US$50,000 each.
- Housework, volunteer service and higher education -GPI takes into account the labor value of housework and voluntary services. This is also a factor benefiting people with increasing education.
- Consumer durables and infrastructure services -Money spent on durable goods is considered a cost, while the value provided by the purchase is considered a benefit. Long-term products that can provide benefits without having to buy back frequently are considered positive. Goods that wear out quickly and deplete the consumer’s wallet when they must be replaced are considered negative. On the other hand, GDP sees all expenditures as good news. The government’s infrastructure spending has similar treatment: if the expenditure provides long-term benefits, the GPI considers it positive; if the expenditure exhausts the government’s treasury, the GPI considers it negative. Similarly, GDP considers all spending to be positive. If the U.S. government spends $2 billion to develop a new jet fighter that will never take off, GDP will treat it as a hospital that provides $2 billion in cheap medicine or a tech entrepreneur selling $2 billion in new software.
- crime -The increase in crime rate requires attorney fees, medical fees, replacement fees and other expenses. GDP considers this expenditure to be a positive development. GPI considers this to be negative.
- Resource depletion -When wetlands or forests are destroyed by economic activities, GDP sees these events as good news for the economy; GPI believes these events are bad news for future generations.
- Pollution -Pollution is good news for GDP. Industry gets paid once for the economic activities that cause pollution, and again when it spends money to reduce pollution. GPI considers pollution to be negative.
- Long-term environmental damage -Global warming, nuclear waste storage, and other long-term consequences of economic activity are included in the GPI as negative factors.
- Changes in leisure time -Prosperity should lead to an increase in leisure time. Most modern workers disagree with this theory. GPI believes that the increase in leisure is positive, while the decrease in leisure is negative.
- Defensive expenditure -Defensive expenditure refers to medical insurance, auto insurance, medical care expenses and other expenses needed to maintain the quality of life. GPI considers these to be negative. GDP has a positive attitude towards them.
- Dependence on foreign assets -When a country is forced to borrow from other countries to finance consumption, GPI takes it as a negative factor. If the borrowed money is used to invest and benefit the country, it is considered positive.
Real progress indicator calculations use economic statistics and mathematical formulas to assess the value of social, economic and environmental variables. Then add the final result to or delete from the GDP data. For example, subtract the cost of durable consumer goods from GDP.
The number of economic, social and environmental variables included in the calculation of the true progress indicator.
Subtract the amount of foreign investment in the United States from the amount of American investment abroad. The five-year rolling average is used to determine whether the United States is a lender or a debit. If the economy is healthy enough and we are a net lender, then add the resulting figure to GDP. If we borrow money to maintain our economy, we subtract the resulting figure.
Although GPI affects many variables that directly affect people’s quality of life, capitalist economies tend to focus solely on making money. As a result, GPI has not yet been widely adopted in these economies, although its proponents point out that it has been reviewed by the scientific community and recognized for its effectiveness. GPI-type measures are being used in Canada and some smaller and more advanced countries in Europe. Over time, as environmental issues enter the public’s consciousness, other countries may slowly adopt this concept.
GDP has its advantages and disadvantages. Although this figure is closely watched by economists and received extensive attention from the financial media, the calculation is sometimes flawed, because GDP can add some items that are actually destructive to the economy rather than productive. On the other hand, GPI includes a series of economic, social, and economic variables, and then these variables are subtracted or added to GDP to obtain a powerful indicator of economic strength.