In general, the performance of a company is assessed by its income statement and balance sheet, and even the wealth of an individual can be represented by both his income and saving. Similarly, it would not be comprehensive if the output of an economy is evaluated only by the Gross Domestic Production itself.
Gross Domestic Product of an economy would be the most widely used output measurement for a country. It was created in the 1930s with the aim to determine the recovery from the Great Depression for the policy makers. Due to the lack of diversity and the neglects of aspects, GDP cannot reflect the complete picture of economic progress and output. Even the chief architect of GDP, Simon Kuznet, realized that GDP is limited in many ways and thought it was a poor instrument for measuring economic development or national output in recent years.(Cha, 2013) There are no perfect measures in reality, and the method of GDP does include numerous drawbacks. The following passage will discuss on the problems and improvements and alternatives to GDP in order to pose a more accurate measurement of the economic output.
The four main components of GDP are Consumption, Private Investment, Government Spending and Net Export. The calculation gives out all the monetary value of goods and services consumed by domestic individuals, business, governments and foreigners. However, economic activities that take place outside the normal market and non-monetary activities such as volunteering community work are excluded from the consideration which also contribute to the economic growth and output by lifting productions. For instance, according to the Urban Institute, 25.4 percent of adults in the US volunteered with an non-profit organization in 2013, and they contributed an estimated 8.1 billion hours representing roughly $163.0 billion worth of work. (McKeever, Pettijohn, 2014) The value contributed by all nonprofit sector business (approximately 1.44 million of nonprofit sector businesses registered with the Internal Revenue Service (IRS) in 2012 in the US) and volunteering work should be added to GDP measure. It would lead to a huge improvements of the accuracy of the data. The situation is similar in Britain, the volunteering labour force employs 1.4 million volunteers. Formal volunteering produced £24 billion of economic output for Britain, reported by the Office for National Statistics, which equivalent to 1.5% of British GDP. And informal volunteering – helps between individuals – can add £19 billion more output. The sum of all the volunteering works done in Britain is almost the size of the energy sector. All of these numbers should be included in the value of GDP in order to get a more realistic output.
Besides, GDP does not capture the distribution of growth and thus cannot reflect inequality. This is known as a depletion of social capital, and is counted against gains in GDP. From the Inequality Organization in the United States, the top 10 percent citizens earn more than nine times as much as the rest 90 percent, where stunningly the very top 1 percent average over 40 times than the bottom 90 percent. However, from the data provided by the World Bank national accounts data and OECD National Accounts data files, the US GDP (US$19.4 trillion) has almost doubled the number 17 years ago (US$10.3 trillion). The rising data cannot provide a comprehensive outlook on the average quality of human life due to the large gap between the rich and the poor. In order to take into account of most citizens’ living condition and collect a more equal data, some subject measures of well-being should be used in addition to GDP. The World Values Survey (WVS) and gross national happiness index include questions about how satisfied people are with their lives, and ask about how people feel in nine aspects: psychological well-being, standard of living, governance, health, education, community vitality, cultural diversity, time use and ecological diversity. Besides evaluating the overall growth or output of a whole nation, the individual well-being inside the country can be taken into account as well. Another indicator called Adjusted Personal Consumption, is evaluated by Personal Consumption Expenditures / Income Inequality. The higher the level of inequality is, the lower the country’s Adjusted Personal Consumption. (Cha, 2013) Therefore, the overall consumption calculated in GDP would be more accurate if it takes into account of how equal the wealth is distributed in a nation.
GDP also cannot measure the environmental and social output of the economic activities. The enormous value of the country’s natural capital and ecosystems is also not reflected in GDP. (Cha, 2013) “Activities involving preserving a country’s natural resources – essential to our current and future wealth – is not counted, whereas exploiting them is.” Since 1997, there have been at least US$20 trillion in non-marketed ecosystem services a year globally, which has not been counted in the value of GDP. (Costanza, 2014) For the lower-middle-income countries around the world, natural capital constituted a major part of wealth of around 27 percent, while the data available, especially for renewable natural capital, are limited. For example, the coverage area of forest can be measured, but the condition of the forest is still unknown.(Lange, Wodon, Carey, 2018) Pollution, depletion of natural resources and land degradation are all counted as the depreciation of natural capital. The huge damage to the ecosystem brought by rapid economic developments is not reflected in GDP. The Environmental-Adjusted Net Domestic Product (EDP) can be more helpful than GDP in this case. It is calculated as the value of GDP – depreciation of manufactured capital – depreciation of natural capital. As early to 1985-1992, a Korean EDP study has found that “the subtraction of environmental degradation due to air and water pollution lowered GDP by an average of 3%.” Moreover, the Genuine Progress Indicator (GPI) can also be used. The metric gives out a fuller account of an economy’s progress by assessing the social and environmental impact of economic activities, including resource depletion, pollution, and long-term environmental damage. It measures factors such as the costs of pollution, the cost of climate change, and the cost of net changes in natural resources, which can give out a more complete picture of GDP as well.
Moreover, the inappropriate measure of GDP leads to the inaccuracy of the value. For instance, the increased rate of crime cannot boost neither living standards nor economic productivity, but the monetary GDP value would rise as a result of raising expenditure on security systems. (Costanza, 2014) India would be a great example here, the Indian Penal Code (IPC) reported that the total crime under record experienced a rise of 30% from 2004 to 2012, while the GDP is rising steadily at a rate of around 7% per year. Indeed, these transactions occupied a large percentage of GDP, according to the UN Office on Drugs and Crime, the estimated transnational organized crime make a profit up to $870 billion every year, equal to 1.5 percent of global GDP. It literally can rise the economic output of the globe, but the drawbacks and immorality brought by crimes need to be subtracted, such as the high level of casualty caused by gun shooting. Another factor would be the effects of natural disaster. The severe economic outcomes brought by natural disasters like hurricanes or earthquakes lead to sudden reductions in all factors of production: labour, production equipments, buildings and factories. However, most of these factors are not counted into GDP. In the contrary, all the afterwards rebuilding activities including repairing buildings and cleaning up, and money spent on convoy and compensation, are all recorded as a slight rise in the monetary value of GDP after the hardship. Though the replacement procedure can indeed boost some industries, the destructive outcomes are needed to count in as well.
Robert Costanza commented about all measures of output, “Non of these measures are perfect, so as GDP, but collectively they offer the building blocks for something much better than GDP.” It is essential to abstract the useful points from other instruments to offset GDP’s weaknesses.