Using Income to Measure National Progress

Using Income to Measure National Progress

Governments today continuously talk about increasing growth. However, perpetual growth is impossible. Today’s growth is unsustainable and our prosperity is at the expense of future generations. We need a broader measure of progress that includes environmental sustainability and non-monetary indicators like happiness and quality of life.

The most commonly used measure of national income is Gross Domestic Product (GDP), which measures the market value of all final goods and services produced in a country in a year. The traditional circular flow of income model shows real flows of goods and services and money flows between firms and households. But these flows are generated from the stock of capital in the economy: physical capital, social capital, human capital and natural capital. GDP growth that erodes the stock of this capital reduces future prospects. GDP growth can deplete our natural capital through the use of non-renewable resources and the destruction of ecosystems through pollution and deforestation. Growth that increases stress or that increases health problems by encouraging a materialistic lifestyle damages our human capital. The economist Joseph Stiglitz said that GDP judges a country solely on its income without looking at its balance sheet. (European Commission, 2011).

A specialised indicator

GDP is easy to calculate and it gives a timely indication of the state of the economy. It is usually calculated quarterly and aids governments, central banks and other policymakers in forming policy. There is a strong correlation between GDP and indicators of basic welfare like nutrition and life expectancy. Unlike measurements of happiness or quality of life it is uninfluenced by subjective factors. Many economists have made the point that GDP is a specialised indicator designed to measure national output and have warned against using it as a measure of general well being. The economist Simon Kuznets who...