Gross Domestic Product: Need for Change

Executive Summary

GDP (Gross Domestic Product) is one of the most arguable and debatable topic through out the world because of the way it works. It does not represent the quality of life because during the valuation of GDP, we never consider the factors associated with society, natural capital and culture. As an example, Albert Einstein said that that the speed of light will be the same no matter the situation but on the other hand, the value of it depends on how we calculate it. Throughout this time, there have been lots of improvement in lighting and all of them are better than before but according to economist at Yale University, if we calculate the price of light as the way we calculate GDP, price of it will increase throughout that period. (The Economist, 2016) In this paper, we will discuss on how criticism of calculation of GDP forces economist to change the way and how it will affect the global-scale ecosystem threats. Also, how GDP affects the normal life cycle, wildlife and how after implementing recommended changes in GDP calculation, these threats can be prevented or removed. As GDP doesn’t count non-market transaction such as babysitting, lawn moving, quality of life depreciation, right now one can’t say that GDP helps in preventing the ecosystem threats but after implementing below changes, it can help in preventing it.

GDP only accounts the marketed activity which is only the one side of coin while the other side has more important things such as sustainability which provides basic human needs. This paper will discuss why it is important to consider these things in economy and also various limitation and replicable techniques of GDP. At the moment, country’s GDP represents the life cycle of that country’s people and their ecosystem but when we are not considering the basic items on which people lives like sustainability, then one can’t say proudly that their country’s GDP totally represent the life cycle. It can be wrong in terms of good GDP value but not good life cycle and poor economy or it can be the other way like bad GDP but good and healthy life cycle and better economy. (Costanza, 2009)

Effects of GDP Measure on Sustainability

First of all, let’s understand how actually GDP is being measured. Accounting marketed activity such as adding the final value of goods and services, personal and government expenditure we measure the GDP. From this you can understand that it does not include any daily life-cycle item that affects the human behaviour on ecosystem. It includes some other things like federal government spending on defence, housing care and health care which are non profiting spending but it does not consider a lot of things that is directly associated with people which are capital formation of family, crime and prison population, volunteer work and most importantly natural resources depletion.

Higher GDP means good life and good money is only applicable up to certain level. Talking about sustainability perspective of GDP measure, until the depletion of natural resources is not occurring and GDP is still growing, one can say that that country acquires good GDP. But as we all know that GDP calculation does not include depletion of natural resources, we need to change the way it works because if we continue to work as same than a country will have no natural resources and still its GDP will be higher. The things that gives every people happiness are spending time with family, enjoying nature and its beauty, good job. These all things are outside the scope of GDP. If any country faces natural disaster such as flood, earthquake, it is most likely to face problems such as health issues, life lost and etc. but at the same time it is most likely to happen that same country will be having the upward graph in its GDP because at this time, people need more supply which means more production, more service which are the main factors in GDP calculation. (Dean, 2014)

Country’s well being is also defined by its natural recourses handling and its environment but these things are excluded from GDP and GDP represents country’s well being. As an example, India’s capital Delhi is facing very difficult problem which is air pollution, its air is very much polluted that the government forced to implement odd-even formula for cars meaning on the odd day people with even numbers on the car number plate will not be using their car and vice-versa. As this thing affects on that country’s well being, it should be included in GDP which is not the case. For the environment purpose, GDP will grow with the market value of timber but it will not consider that for the timber government is cutting the trees. It will grow with more agricultural products but it will not count that for the agricultural they use water and it cost the depletion of natural resource. GDP will grow if country is producing more items using soil water, digging process but it will not account the environmental cost of these items. Most of the developing country will do these things to stay in competitive market and it will also affect on its GDP by increasing it and policy makers and economist will acknowledge the work of that county but this GDP value will not show the effects it has on its environment. As environmental effects take more time to show its damage, it can be too late when the effect starts. (National Income and Environmental Accounting)

Revising & Replacing GDP

There are different alternatives of GDP such as Indexes making correction to existing GDP, Indexes that measures aspects of well-being directly, composite indexes that combine approaches and last but not least Indicator Suits. Let’s talk about them one by one and their approach to sustainability. (Measuring Societal Well-Being and the Environment, 2018)

Indexes Making Correction to Existing GDP

For the sustainable economic welfare, if we include cost associated with pollution and other cost like this, we can balance the all expenditure. Also, GPI (Genuine Process Indicator) is a tool that helps calculating the cost associated with environmental hazard, happiness of people. So, if these costs are added into the current GDP calculation, it can explain much better the performance of human being and sustainability of particular country.

This alternative also have the features like Green GDP and Genuine Wealth. These features consider the environmental consequences of growth of the country by measuring overall well-being and happiness and by calculating the depletion of natural resources. Indexes that measures aspects of well-being directly Through this class, one can measure the happiness, satisfaction of a well-being of their people. Also, this feature includes the resource management tool which describe how fast an individual, city or nation is using the natural source and how fast it is renewable or replaceable. The most valuable aspect of this feature is “Living Planet Report”. LPI which is Living Planet Index implicates the state of world’s natural environment and the burden placed by humanity on environment. Through these reports and measurement, it can be derived that truly a county is having a good life and good GDP or not. Also, this feature has Human Development Index which describe the balance between country’s economic growth and their people development through which one can identify the problem and nullify it.

Happy planet is a concept that combines both the approach and focus on three main things which are life expectancy at birth, life satisfaction and ecological footprint. All of these formats contain all the things that GDP doesn’t and does have. By considering life expectancy at birth and life happiness, we are considering the effects of environment on human and their daily to daily activities happiness and with that we are also including ecological approach through out the period. Green National Accounting and Green Corporate Accounting are most likely the very important items that is providing the combination between ecological footprint and environment. Green National Accounting is the system which helps to understand the effects of economic activities on environment. As we all know, economic and human behaviour and human needs affects environment in every way but to take these things into consideration while working on any project is a different thing. In Green Corporate Accounting, corporate companies have the track record of how they are hurting environment and what they are doing to prevent it by preparing the environmental profit and loss statement such as land use, water use and waste, production of greenhouse gas. These approaches give a proper value which people can understand and get consciousness on how, when, where they are hurting the environment and it helps government understand their people happiness rely. The approach or the sustainability that believes that man made resources can replicate the natural resources so that its no need to maintain the natural resource, it’s a weak sustainability and this leads to less happiness in that country’s people but in a long term. On the other hand, if a country’s approach is opposite like if they think that natural resources cannot be replicated or replaced and should be maintained than it called strong sustainability.

Conclusion

At the end, it is safe to say that current GDP measurement needs to be changed as it is not accounting well-being of people and we can’t respond to global economical threats with that value. Also, there are different approaches on how well we can be prepared to respond to these threats but the important thing is whichever approach we choose, it should include both economical footprint and environmental footprint.