GDP as an indicator, or not

GDP has had its share of ups and downs recently, both in real terms and as an indicator. If economy was the only thing worth measuring, then a case can be made for GDP, but it’s not.

The World Economic Forum takes a good look at this in their article from November:

GDP is no longer an accurate measure of economic progress. Here’s why

You see, GDP does not account for losses in natural capital, the part of nature that keeps us alive and provides numerous and valuable natural benefits.

If, for example, a river becomes polluted by an industry and a city must build infrastructure to clean that water, GDP rises (huh?!?) because more money is being spent in the economy to remedy what was a ‘free’ resource. I know this sounds simplistic, but that’s the way GDP works. So, the economy could be booming in the short term, as measured by GDP, even if the very foundations of the economy are being undermined.

It’s why economists must hate ‘land banks’ like national parks, provincial parks and nature conservancies. They don’t contribute to the economy in a meaningful way. Going for a hike through the forests and mountains only generates GDP for the clothes you wear, the boots on your feet and your daypack. But mow down the trees and build a golf course and ski hills – now you have GDP!

Another example: if a storm ruins a dozen houses, GDP rises because money is being spent in the economy to repair them – hiring tradespeople, purchasing building supplies. Sadly, it’s also why war increases the GDP of countries supplying arms. GDP is blind to all the other losses, provided the economy gains. Sickening, isn’t it?

Read the article linked above as it has a few excellent alternatives, one of which is being developed and used by Statistics Canada, “one of the finest statistical organizations in the world“.

There is also an excellent series of articles about the Future of GDP at the WEForum website: Agenda in Focus: Beyond GDP

GDP as an indicator, or not
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