GDP alternatives: 8 ways of measuring economic health

The HPI combines four elements – life expectancy, wellbeing, ecological footprint and inequality – to show how efficiently people in different countries are using environmental resources to lead long, happy lives.

Governments and organisations are considering measures to supplement the commonly used Gross Domestic Product (GDP), to provide a more holistic picture of economic health.

Human Development Index (HDI)

The HDI, created by the United Nations, is now the most used progress indicator for developing economies. It is a geometric means of normalised indices across three dimensions – life expectancy, average years of schooling and gross national income per capita – that recognises people and their capabilities in assessing a country’s development. 

Pros: The HDI provides a broader picture of an economy that includes social development. It also demonstrates that, while there is a correlation between economic and social development, the former does not guarantee the latter.

Cons: The HDI may hide widespread inequality as it does not consider factors such as protecting personal freedom, pollution levels or gender disparity.  

Genuine Progress Indicator (GPI)

This American metric incorporates social and environmental factors not measured by GDP, such as the cost of ozone depletion, crime or poverty on a nation’s economic health. It nets the positive and negative results to decide whether economic growth has benefited the population overall, for example, balancing GDP spending against external costs.

Pros: GPI shifts the value basis of a product by adding its social and environmental impacts to the equation. It also assigns values to non-financial human contributions, such as volunteering. 

Cons: Some finance professionals believe that non-economic variables are too subjective and that GPI is not an effective tool for assessing the state of the business cycle.

Thriving Places Index (TPI) 

The wellbeing of people and the planet underpins the TPI, developed by the Centre for Thriving Places in the UK. The TPI provides a breakdown of holistic elements that help support thriving communities and economies. It includes a wide variety of factors – including mental and physical health, education and learning, work and local economy, and “green” infrastructure – to measure economic health.

Pros: TPI supports a move away from defining success purely in terms of consumption. By looking at factors such as land use, recycling and income disparity, it can also help planners understand how to better support communities.

Cons: TPI may be too radical a departure from the current GDP paradigm to be widely accepted by finance professionals.

Green GDP 

China’s Green GDP measures the cost of environmental damage as the result of economic growth by subtracting factors such as resource depletion and environmental degradation from the GDP, with local governments accountable for ecological conservation

Pros: Green GDP embraces broader accounting of economic development that considers the effects of pollution and resource depletion.  

Cons: Local governments that don’t want their economic growth statistics affected by environmental factors have been resistant to adopting this as a GDP alternative.

Better Life Index  (BLI)

The BLI allows for a comparison of wellbeing across 35 countries, based on 11 topics identified by the Organisation for Economic Co-operation and Development (OECD). These range from housing, income, community and education to environment, civic engagement and health. The index also allows a comparison of gender differences.

Pros: The index includes 80 indicators of wellbeing that provide a comprehensive picture of natural, human, economic and social capital.

Cons: For finance professionals, the information in the index may not contain enough economic indicators to provide a satisfactory GDP alternative. Some of the assessment criteria are also vague

Inclusive Wealth Index (IWI) 

The IWI, developed by the UN, measures the wealth of nations using a comprehensive analysis of a country’s productive base, including the assets from which human wellbeing is derived –  manufactured, human and natural capital. 

Pros: By injecting “green” accounting into the assessment of capital assets, and assessing changes in natural capital, such as forests or waterways, the IWI could help drive climate change policies and action. 

Cons: The IWI needs to be part of broader macroeconomic planning, alongside other indicators, if economic progress is to be evaluated based on a balanced assessment of capital.

Genuine Savings Indicator (GSI)

The World Bank’s savings analysis argues that factors such as public investments of resource revenues and the social costs of pollution emissions are equally relevant in determining the overall level of saving.

Pros: The GSI encourages discussion around natural resources in a language familiar to finance policymakers. 

Cons: Until tools have been developed to measure this reliably, it is a fundamentally flawed way of measuring economic health.

Happy Planet Index (HPI)

The HPI, developed by the UK’s New Economic Foundation, combines four elements – life expectancy, wellbeing, ecological footprint and inequality – to show how efficiently people in different countries are using environmental resources to lead long, happy lives. 

Pros: This GDP alternative is a nicely rounded, composite measure considering the social and environmental aspects of life to measure economic health. 

Cons: Ecological footprint is a contentious measure of economic development. The HPI also fails to account for some key “happiness killers”, such as human rights violations and modern slavery.

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December 2021
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