GPI Versus GDP

Talking Points
  • Volunteer labor
  • Cost of crime
  • Family breakdown
  • Underemployment
  • Ozone depletion
  • Loss of old growth forests

The fact that the GNP does not really measure economic welfare is not news. Back in the early 1970's William Nordhaus and James Tobin proposed a new measure. They called it the Measure of Economic Welfare (MEW). They said that economic welfare is related to consumption, not to production.

They started with GNP but took out amounts related to production and investment, such as depreciation. They took out costs of education and health expenses because they said those are defensive expenses. They deducted the costs associated with commuting to work. How many people have a commute that is 30 minutes or less? If you had to drive an hour instead it would cost more but would you be better off economically? No. They also excluded costs for items such as police services, sanitation services, road maintenance, and national defense. A lot more money is going into the personal equivalent of national security: car alarms, house alarms. None of these improve the quality of our lives. So Nordhaus and Tobin said they shouldn't be included when measuring economic welfare.

In the early 1980's Xenophen Zolotas proposed another measure, the Economic Aspects of Welfare (EAW). It was similar to MEW. For example, he deducted the cost of commuting and treated education expense as investment. He also deducted:

  • Half of advertising costs, because he estimated that only half of all advertising is a valuable information delivery service
  • Pollution control costs
  • An estimate of damages from air pollution
  • Half of health costs, based on the assumption that half these costs are the result of environmental stress
  • A factor to account for national resource depletion
In the late 1980's Herman Daly and John Cobb proposed a measure that they called the Index of Sustainable Economic Welfare (ISEW). They also started with the GNP as a basis. What they included in their measure were expenditures on public education and health. They took out expenditures for advertising and commuting. They decided that increasing dependence on foreign capital was a negative influence, as was the loss of wetlands and farmlands. They said that an increase in income disparity was also a negative influence. They reasoned that the stock of land available was fixed and increases in real estate value due to inflation do not really increase overall economic welfare, so they designed their measure to reflect that. Then they calculated it all the way back to 1950 and compared it to the GNP.

Then, in 1995, Clifford Cobb, Ted Halstead and Jonathan Rowe proposed a measure they called the Genuine Progress Indicator. They went farther than Daly and Cobb did and factored in the value of volunteer work, cost of crime and family breakdown, the cost of underemployment, ozone depletion and the loss of old growth forests. They calculated the GPI from 1950 onward and compared it to the GDP. As you can see, according to the GPI we are not even breaking even.

(Sources: Daly, 1983; Cobb, Halstead, Rowe, 1995)
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Copyright © 1998 Maureen Hart. All rights reserved.