MU Environmental Network News
April 2004
Vol. 10 No. 4

Editor - Jan Weaver
211 Lowry Hall, MU / Columbia MO 65211

How are we doing? GDP, GPI, HDI and ISEW

By Jan Weaver

How do you know how you are doing? If you are a country, you look at your GDP* or Gross Domestic Product. This number sums the output of goods and services produced by labor and property within a country's borders. The easiest way to do this is to sum up expenditures, or the amount of money that is spent by individuals (C), businesses (I), government (G) and the net gain on exports (exports - imports or X-M).

GDP is widely used mainly because it is relatively easy to calculate. In 1970 our GDP was around $ 3.7 trillion (in 2003 $). Since then it has tripled so that today it is around $11.3 trillion. Taking population growth into account, it means that each of us is spending about twice as we did in 1970. So, if the amount of money we spend is all it takes to measure how we are doing, we are twice as well off as we were in 1970.

But even Simon Kuznets, who came up with the idea of a GNP in the 1930's, warned against using it and similar measures (like GDP) to estimate a country's welfare. For example, pollution costs us $54.9 billion in health care for lead poisoning, asthma, cancer and developmental disabilities in infants and children. This adds about 0.4% to our GDP, but most of us would probably be reluctant to count the expenditures due to kids getting cancer and developmental disabilities from pollution as an increase in our nation's welfare.

To address this and other problems with GDP, some alternative measures of welfare have been proposed. The World Bank is developing criteria for measuring a country's natural, human and produced capital as an assessment of its wealth. Using this approach, produced capital - buildings, roads, and other property - only accounts for 16% of global wealth. Natural capital accounts for 20% and human capital makes up the remainder. Along with the measure of wealth, the World Bank is working on a way to evaluate savings, or the extent to which a country adds not just to its produced capital (which shows up in the GDP), but also to its natural and human capital by preserving or restoring ecosystems and by providing education (which may or may not show up in the GDP). The U.S. and other developed countries have a savings rate of 13% of Gross National Income, behind the East Asian Pacific countries, but ahead of South Asia and Latin America. Africa and the Middle East actually have negative savings rates, which bodes ill for their future.

The Genuine Progress Indicator or GPI, proposed by the public policy group Redefining Progress, takes into account the quality of expenditures and the distribution of wealth. In other words, it doesn't add expenditures associated with crime, pollution abatement, or automobile accidents, it accounts for the loss of natural areas, and it incorporates a measure of how wealth is distributed. With those criteria, instead of a GDP of $11.3 trillion, we have a GPI of $4.3 trillion. In effect, the $180 increase in per capita income since 2000 shown by GDP becomes a $212 decrease, due mainly to degradation of natural resources and the increase in federal debt.

The United Nations created a Human Development Index (HDI) that uses GDP and other economic measures, but it also evaluates health and literacy. In 1999, the U.S. came in 6th with a score of .934 after Norway, Australia, Canada, Sweden and Belgium. Sierra Leone, with a score of 0.258, came in last.

The Index of Sustainable Economic Welfare (ISEW) incorporates set asides to compensate future generations for loss of nonrenewable energy resources and pollution, deductions for income inequality, and it excludes "defensive"expenditures and expenses for national advertising - which is seen as only persuading people to switch or to buy stuff they don't need. On the plus side it adds in unpaid household production. Using the ISEW, increases in our national welfare pretty much leveled off in the 1970's.

None of the indices that attempt to account for environmental and human welfare is as easy to calculate as GDP. But just because something is easy to measure doesn't mean it is the right measure. The next time the government reports on our GDP, keep in mind the things it is missing.

* The Bureau of Economic Analysis switched from GNP to GDP in 1991 because most or all other countries calculate their economic well being using GDP. GDP counts everything within borders regardless of who owns it. GNP counts everything done by citizens of a country regardless of where it is done. For industrialized countries, the difference between the two measures is about 0.05%. For developing countries, however, switching to GDP can mask the impact of the transfer of natural resources to industrialized countries.

GNP - http://en.wikipedia.org/wiki/Gross_National_Product

World Bank - http://lnweb18.worldbank.org/ESSD/envext.nsf/44ByDocName/EnvironmentalEconomicsandIndicators

Genuine Progress Indicator - http://www.rprogress.org/media/releases/040311_gpi.html

Human Development Index - http://www.undp.org/hdr2001/indicator/index.html

ISEW - http://www.oecd.org/dataoecd/54/33/2682198.pdf