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GDP forms the wrong picture

GROSS Domestic Product (GDP) is widely used to measure national economic progress and well-being.

Yet GDP increases with each monetary transaction, irrespective of whether it adds or detracts from national well-being. Road accidents, environmental disasters, etc all increase GDP, as they result in monetary transactions.

A business wouldn’t measure its financial strength in this way, by simply adding all of its income, expenses and liabilities together!

Other indicators provide a more accurate measure of economic progress and national well-being, such as the Genuine Progress Indicator (GPI). The GPI includes both the market economy and the economic value of the household and community sectors, and adjusts for the degree of income inequality. It subtracts three categories of costs: those required to respond to the harmful effects of economic activity; social costs such as unemployment; and the depreciation of environmental assets and natural resources.

United States GPI data by Redefining Progress (www.rprogress.org) demonstrates that despite the continuous rise in GDP, the GPI has been falling over the past two decades. UK data using an indicator similar to the GPI, the Index of Sustainable Economic Welfare, shows a similar pattern.

Two Australian studies of our national economic well-being provide similar results. The Australia Institute (www.tai.org.au) found that the GPI has not increased since the mid-1970s. Philip Lawn and Richard Sanders found that their GPI-like measure, the Sustainable Net Benefit index, has steadily declined since the mid-70s.

The gap between GDP and more comprehensive measures of national economic well-being is clearly increasing through time.

By focusing on GDP, we are forming an inaccurate picture of the health of the economy, and are consequently making some wrong decisions in terms of economic and social policy.

Microeconomics considers issues of optimum scale, so that the costs of a particular economic activity don’t outweigh the benefits. Macroeco-nomics needs to do the same.

It appears that our economy is now so large that the costs of our nation’s economic activity are growing at a faster rate than the benefits.

l Rodney Vlais is a social

analyst involved with non-profit organisations.

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