Alternatives to GDP in Measuring Countries

There are currently 195 countries on Earth. Each country is its microcosm—a world inside a world, where people encounter their own problems, just like all of us. It’s a world where leaders try their hardest to drive the society forward, towards the greater good.

Since childhood, we’ve been taught about competition. The best student has the best grades, while others look up to them, hoping to follow in their footsteps. Seeing mankind in its entirety, with their own countries, you can’t help but wonder — who is actually the best country on earth? The answer is, of course, complex.

But complex doesn’t mean complicated. Let’s carve a path to find the truth behind this question.

Gross Domestic Product

Commonly known as GDP, is the total monetary value of all the service and finished goods produced inside a country within a specific time period. It’s a rapport of a country’s economic condition.

The true meaning of finished goods is the sale of an actual finished product that can’t be sold again as a part of other goods. For example, a cook bought some eggs to make an omelette, which is sold to a customer. The eggs’ value will not be counted in the GDP, because it’s not a finished product. The omelette will be counted in the GDP.

However, if a family buy the eggs to make the omelette that they are going to eat, the eggs will be counted in the GDP. The egg is the final product because they consume the omelette.

Services rendered for customers will also be counted in GDP. For example, your electrical box is broken. You call an electrician to come and fix it. The electrician gets the job done, and you paid him $50. That $50 will be counted in the GDP.

There are three ways to count the total GDP:

  1. Output: This method counts the sum of value added created through the production of goods and services within the economy. The sum value is the total value of the whole economy subtracted by the cost of intermediary goods.
  2. Income: This method counts the total income generated by the production of goods and services within the economy, including income earned by companies, employees, and self-employed people. This method is the middle ground between the output method and the expenditure method.
  3. Expenditure: This method counts the total expenditure on all finished goods and services produced within the economy. The GDP mainly comes from consumers who buy services and goods.

All these three methods should be interchangeable. Meaning all methods should yield the same or very close result.

Limitations of GDP

A country’s measuring index, like a GDP, is supposed to be the metric we use to rank countries. Ideally, the number one country should be the best in almost all factors. Unfortunately, the only thing the GDP is good at counting is value. Here are some limitations of the GDP system:

Well-Being

The GDP system only favors monetary value. Monetary value doesn’t always mean happiness or good human well-being. For those who have worked to escape poverty, happiness is a feeling, not a static objective. While having money certainly helps, it doesn’t guarantee your happiness nor your well-being.

Environmental Damage

Climate change is upon us. Its terrifying, dangerous, unnerving, and the worst of it all — inevitable. Polar ice caps are melting while sea levels rise. Global temperatures increase with carbon dioxide, and methane is released into the open air. Countless rural civilizations are slowly but surely turning inhospitable.

The GDP system would want companies and citizens to spend and produce as much as possible, no matter how much the smog blots the sky, how inefficient the machines are, or how the surrounding environment dies as they dump their toxic wastes.

As long as it produces money, machines should stay on as long as they can.

Distribution of Wealth

The GDP system only counts the spending of wealth. It does not account which wealth it belongs to. The top 10% richest can easily hold 50% of the total value of an entire economy.

This should be recognized as a flaw. Monopoly is not a characteristic of a strong economy, as the GDP system should aim. And this kind of economy is very prone to boom and bust economic cycles.

Alternatives to GDP

Since GDP cannot cover other important metrics of life, scientists and politicians all over the world have tried to create a new measurement as an alternative to GDP.

Human Development Index

Human Development Index (HDI) is a combined statistic of education, life expectancy, and per-capita income. HDI is developed by Pakistani economist, Mahbub ul Haq in 1990. The HDI system is the first system that puts emphasis on people’s happiness instead of raw economic power.

There are three main dimensions in the HDI system.

Long and Healthy Life

The main factor in this dimension is life expectancy. Life expectancy at birth is the average length of life for certain people who are born at the same specific year, from birth to death.

Knowledge

The factors in this scale include the expected years of schooling and the average years of schooling. Expected years of schooling means the number of years a child of a specific age can expect to receive age-adjusted education, continuing through their life. The average years of schooling mean the average amount of education received by students older than 25.

Decent Standards of Living

The main factor at play is the Gross National Income per capita with 2011 Purchase Power Parity standards. GNI is the total amount of the nation’s people and businesses earnings, divided with population density, and converted with 2011 PPP dollar rates.

The number one country is Norway. Germany is ranked fourth. The USA is ranked fifteenth. Japan is ranked nineteenth.

Genuine Progress Indicator

Genuine Progress Indicator (GPI) is a measurement intended to assess the prosperity of a country, which relates to the well-being of the country’s economy, by joining ecological and social variables which are not estimated by Gross Domestic Product (GDP).

GPI has been recommended to replace or reinforce GDP as a proportion of financial development. The connection of GDP and GPI emulates the connection between the gross benefit and net benefit of an organization.

The net profit is the gross profit deducted by the costs incurred, while the GPI is the GDP minus the natural and social expenses. The GPI will be zero if the money related expenses of poverty and pollution equivalent to the profit of production of goods and services, assuming other factors are constant.

Key Points

  • Essentially, GDP focuses too much on total wealth while ignoring other important humanly and environment aspects.
  • The HDI is a prime alternative to the GDP system, factoring in life expectancy, education length and quality, and standards of living.
  • Another alternative is the GPI system, which factors in ecology to measure a country’s total value. A country that emits less pollution but has moderate economy will have a better GPI index overall.