GDP and Beyond - Measuring progress in a changing world

10 September 2009
by eub2 -- last modified 10 September 2009

Measuring progress in a changing world is the focus of a European Commission Communication launched at a high-level workshop on 9 September. The actions proposed in this Communication aim to improve the measurement of a nation's progress by complementing the current and best known measure of economic activity, Gross Domestic Product (GDP). As a part of efforts to make the shift towards a low carbon, resource-efficient economy the Commission will present a pilot version of a comprehensive environmental index in 2010. The European Statistical System will implement Environmental Accounting as a standard in Macro-economic statistics.

 1) What is GDP?

Gross Domestic Product (GDP) measures the total final market value of all goods and services produced within a country during a given period. GDP is the most frequently used indicator of economic activity and is most often measured on an annual or quarterly basis to gauge the growth of a country's economy between one period and another. GDP is also a measure of total consumer, investment and government spending plus the value of exports minus imports.

GDP is the most widely used indicator from the System of National Accounts (SNA). Its methodology is standardised internationally thus enabling comparison between countries anywhere in the world. GDP was created in the wake of the great depression and second world war to provide decision-makers with a measure of economic activity and performance.

2) What are the limits of GDP?

There is nothing wrong with GDP itself. It is a valuable economic indicator which serves an important purpose in economic policy making. Due to the implicit link between economic growth and aspects of well-being such as employment and consumption, GDP is often regarded as a proxy indicator of human development and well-being. Within the existing framework of national accounts the information covered could be broadened by putting more emphasis on indicators such as adjusted disposable income taking into account public services provided to households as social transfers in kind.

But the way GDP takes into account social and environmental issues in measuring economic growth is questionable. GDP does not factor in a number of elements important in determining the wealth of a nation and the well-being of people. For example, it overlooks the value of certain non marketed goods and services such as natural resources and unpaid activities (i.e. voluntary and domestic services) and leisure. GDP per capita highlights average income which may not correspond to the actual income of any specific group of the population. Average income provides no indication about the distribution of income between citizens. And GDP focuses on short-term economic activities rather than longer-term sustainable development aspects such as the growth of natural and human capital.

Most other mainstream economic indicators are also limited in the way they tackle non-economic issues such as progress and well-being. It is not alternatives to GDP that are needed, but additional indicators to complement it. It is still important to know how many goods and services are produced and how strong an economy is. But more needs to be taken into account, such as the pressures on the environment, the loss of eco-system services, the evolution of social issues, and progress towards sustainable development.

Citizens are as a general rule better off if they are richer. However, the quality of life or well-being also depends on the type of goods consumed, the amount of leisure time available, the relationship with families and friends, the personal health and the quality of the surrounding environment. Today a greater number of people feel their well-being is undermined by too much pressure of work, unemployment, family break-ups, pollution and climate change. This is why policymakers are interested in having more statistics that address these.

3) What other indicators besides GDP are there to measure wealth and well-being?

To compensate for the limits of GDP a number of alternative and complementary indicators have been developed and tested. These can be grouped according to the aspects of social progress they cover.

Some indicators such as the Genuine Progress Indicator considers additional economic factors not covered by GDP while others such as the Genuine Savings approach look at long-term capital accumulation, including the value of natural, economic and social capital. Another approach is to produce a single index – such as the Human Development Index - which weighs a number of sub-indicators by combining measures of life expectancy, literacy, and education in addition to GDP.

Canada is developing a single index, the Canadian Index of Well-being and the research community has developed different indices of well-being, life satisfaction and happiness.

Another way to complement the use of GDP is to consider sets of indicators that comprise environmental, economic and social indicators, such as Sustainable Development Indicators, which have been produced by the European Commission, the United Nations and several countries.

Some countries have started applying the internationally recognised environmental and economic national accounting standards found in the Handbook of National Accounting: Integrated Environmental and Economic Accounting 2003 (SEEA 2003).

More information on various indicators can be found on the Beyond GDP website:

http://www.beyond-gdp.eu/links.html

4) What is the European Union doing to move beyond GDP and to better measure progress?

The European Union is committed in taking leadership in the move to integrate non-economic factors into policy-making beyond those currently used by mainstream economic indicators.

The European Commission is proposing 5 actions:

1) to complement GDP with environmental and social indicato rs by developing an environmental pressure index, which will be based on indicators on climate change and energy use, nature and biodiversity, air pollution and health impacts, water use and pollution, waste generation and use of resources; and by developing quality of life and well-being indicators further.

2) to increase the timeliness of environmental and social indicators by using new mechanisms such as nowcasting techniques and the new European System of Social Statistical Survey Modules.

3) to report on distribution and inequalities more precisely by regularly updating the analysis on key distributional effects and analysing the link between social exclusion and environmental deprivation.

4) to develop a European Sustainable Development

Scoreboard by complementing the EU SDI set, with other more up to date quantitative and qualitative measures and exchanging experience between Member States and by identifying physical environmental threshold values for key pollutants and renewable resources.

5) to extend, in consistency with the European System of National Accounts (ESA), the analysis of environmental and social issues and derive - in the longer term - new top-level indicators by developing key elements of an integrated environmental economic accounting system by 2013 and implementing a detailed action plan and by improving and increasing the use of indicators derived from the ESA, like the disposable income of households and adjusted disposable income.

The European initiatives are being co-ordinated by the European Commission as part of the Global Project on "Measuring the Progress of Societies" launched at the Istanbul World Forum in June 2007 where the European Commission, the OECD, the Organisation of the Islamic Conference, the United Nations, the UN Development Programme, and the World Bank made a commitment to measure and foster the progress of societies in all dimensions with the ultimate goal of improving policy making, democracy and citizens' well-being. The first results of this project will be presented at the third OECD World Forum in Busan, Korea, on 27-30 October 2009.

5) How can one measure wealth and well-being?

GDP is not meant to measure wealth. It measures consumption and investments in a given year, not how rich people are, or how much wealth society has acquired through the accumulation of buildings, machinery, consumer goods, schools, universities, road and rail networks, and art.

There are very few statistics on material wealth and even fewer on natural, environmental, social and cultural wealth. Material wealth too often overshadows the pursuit of non-material wealth, such as leisure time, knowledge and security. Access to improved data on non-material and non-economic wealth would help citizens and policy-makers better balance the various aspects of well-being.

What citizens do care about is their quality of life and well-being. However, well-being and happiness are difficult to measure. Researchers have now developed reliable ways of measuring how satisfied people are with life in general and with specific aspects such as the level of satisfaction with work, family, friends, neighbourhood, income and wealth, and country and government. This research is important for policy-makers in implementing policies that foster a higher degree of satisfaction and happiness among citizens.

Further information on GDP and beyond

Source: European Commission