What is the Genuine Progress Indicator (GPI)?
A natural progress indicator (GPI) measures a country’s economic growth. It’s a popular alternative to the GDP economic measure. In addition to GDP, the GPI measure considers negative repercussions of economic activity, such as crime, ozone depletion, and resource depletion.
The GPI weighs the pros and cons of economic growth to determine its overall benefits.
How Genuine Progress Indicator Works
The Genuine Progress Indicator measures whether a country’s economic output and consumption’s environmental and social costs harm or help health and wellbeing.
Green economics ideas, which view the market as an ecosystem, inspired the GPI statistic. Proponents of the GPI say it better measures economic sustainability than GDP. GPI has gained in popularity in Canada and the US since 1995. To follow the norm, both nations present their economic data in GDP.
Genuine Progress Indicator History
After employing dubious statistics to fix a failing economy, the Roosevelt administration sought techniques to assess economic activity in the 1930s. The Department of Commerce hired National Bureau of Economic Research researcher Simon Kuznets to create better economic indicators. In response, he provided Congress with his “National Income 1929–1935” report, which introduced GDP.
Kuznets warned that GDP cannot measure national welfare. Thirty years later, in 1995, U.S.-based Redefining Progress improved on this idea, allowing Clifford Cobb, Ted Halstead, and Jonathan Rowe to construct the 26-item Genuine Progress Indicator (GPI). This new statistic measures a nation’s economic, social, environmental, and human well-being.
Because GPI is vague, practitioners created their own economic well-being metrics. The discrepancies make comparing economies harder, making some less valuable.
After two GPI summits to resolve these anomalies, academics and practitioners improved GPI—GPI 2.0—to streamline accounting operations and replace outdated approaches that did not give an accurate and complete economic picture. A GPI 2.0 experiment is ongoing in several U.S. and Canadian states.
There was no means to assess national income and output before 1930.
Calculating GPI
Here is the GPI formula with a brief explanation of each component.
GPI = Cadj + G + W + D + S + E + N
Cadj=personal consumption with income distribution adjustments
G=capital growth
W = unusual welfare contributions like volunteering
D = private defense spending
S = social capital-damaging activities
E = environmental degradation costs
N = natural capital-damaging activities
Assigning monetary values to non-market products and services and appraising social and environmental issues is subjective. One analyst or economist may calculate a GPI differently from another since they may have different perspectives on a less quantitative issue.
Monetary Values in Genuine Progress Indicator Calculations
Valuing non-market products and services in GPI is difficult. Economists employ numerous approaches to solve the computations, which might be difficult. Economists estimate market pricing using similar market commodities as substitutes for non-market ones. A straight alternative (or equivalent good) is usually best.
Economic researchers can directly question consumers’ preferences or observe consumer behavior using surveys and revealed preference methodologies. Consumer surveys can indicate a product’s value additions and reductions.
An alternative method for determining monetary worth is shadow pricing. Shadow pricing occurs when we assess the economic worth of non-market items by analyzing their usage, depletion costs, or benefits. Consider the cost of biodiversity loss or environmental damage. Even if there is no direct economic cost to a commodity, value is lost that may be traced if not measured.
Finally, economists may add assumptions to market transactions. They may examine a price based on non-market considerations or hedonic pricing. A property’s size, age, and neighborhood may affect its price. Knowing these criteria can help you appraise other comparables across different items.
GDP Versus GPI
Pollution generation and cleanup lead to double GDP growth. In contrast, GPI considers initial pollution as a loss, equivalent to the cost of cleanup and whatever negative impact it may have. Quantifying the costs and benefits of environmental and social externalities is challenging.
GPI balances GDP expenditure against external costs by including society’s environmental and poverty expenses. GPI proponents say it better measures economic growth by identifying the “shift in the ‘value basis’ of a product, adding its ecological impacts into the equation.”
The link between GDP and GPI resembles a company’s gross profit and net profit. Net profit is gross profit minus costs, whereas GPI is GDP (the worth of all products and services generated) minus environmental and social costs. All other conditions being constant, the GPI will be zero if poverty and pollution costs equal goods and service production gains.
Genuine Progress Indicator Pros and Cons
The Genuine Progress Indicator (GPI) considers economic variables and says GDP doesn’t assess the economy holistically. For instance, it considers negative externalities like pollution, crime, and social breakdowns that harm the economy and its beneficiaries. Damages from these occurrences cost society a lot.
Volunteerism, housekeeping, and higher education help society, but they are hard to quantify. The GDP does not include these services because they are free. The GPI assigns values to each to reflect their economic effect.
Accounting for unvalued actions and occurrences is difficult. Including them involves assigning values, which might vary per assigner. This subjectivity makes GPI comparisons challenging.
The broad GPI definition allows for numerous interpretations and calculations. These anomalies make factor accounting and GPI comparisons challenging. They also hinder GPI adoption as the economic measuring standard.
Pros
- Including environmental and social variables, not in GDP
- Values social efforts like volunteering
- Summarizes an influence in one number for easy comparison across time.
Cons
- Subjectivity makes GPI comparisons harder.
- A broad definition allows for several interpretations and calculations.
- May need assumptions (for non-monetary factors)
Examples of Genuine Progress Indicator
Consider a real-world GPI example. Businesses, non-profits, academia, and the state use the Maryland Genuine Progress Indicator to measure the quality of living in the Maryland Quality of Living Initiative.
The effort seeks to create a state “Quality of Life Dashboard” to identify areas for improvement. GPI 2.0 comprises 12 categories and 50 indicators. Maryland can utilize these markers to indicate success or failure.
Maryland’s GPI fell $14.41 billion from 2012 to 2019. Defensive spending increased, while family budget spending decreased significantly. The GPI also included Marylanders’ 6.5% rise in leisure time and a 12% increase in unpaid labor.
How Does GPI Differ From GDP?
The Genuine Progress Indicator (GPI) considers all GDP components, including environmental and social aspects that affect the economy, such as pollution, volunteering, crime, and climate change. Some economists prefer GPI over GDP because it provides a more complete picture of a nation’s economy.
What are GPI component indicators?
The 26-item GPI includes social, economic, and environmental aspects. Each gauges economic health differently. The social category includes crime, family, academics, and more. Pollution, climate change, and other environmental factors are in this category.
Genuine Progress Indicator Creator?
Clifford Cobb, Ted Halstead, and Jonathan Rowe created the Genuine Progress Indicator (GPI) in 1995 to address Simon Kuznets’s assertion that GDP cannot accurately measure a nation’s progress.
The Verdict
Economic indicators like the Genuine Progress Indicator (GPI) evaluate a nation’s health. It includes environmental and social aspects, including family structure, higher education advantages, crime, and pollution, that GDP does not. GPI assesses whether these other variables hurt or help the economy and how they affect society.
Conclusion
- The National Genuine Progress Indicator (GPI) measures economic development and prosperity.
- As an alternative to GDP, GPI accounts for externalities like pollution.
- Thus, green or social economics prefers GPI to quantify growth.
- Proponents say GPI gives a fuller picture of a nation’s health.
- According to critics, specific GPI measurements are subjective, making them less helpful in tracking economic growth.
