I stumbled upon this metric in the economy named the genuine progress index (GPI). I explored a little bit to see how it was constructed and what sort of domains it covers.
The formula to calculate GPI is below, along with a brief explanation of what each component means.
GPI = Cadj + G + W - D - S - E - N
- Cadj = personal consumption with income distribution adjustments
- G = capital growth
- W = unconventional contributions to welfare, such as volunteerism
- D = defensive private spending
- S = activities that negatively impact social capital
- E = costs associated with the deterioration of the environment
- N = activities that negatively impact natural capital
It's important to note that assigning monetary values to non-market goods and services and assessing the impact of social and environmental factors involves a degree of subjectivity. Therefore it is possible that there are some intersubjective variations in GPI calculations.
Assigning Monetary Values in GPI Calculations
Determining the monetary values for non-market goods and services in GPI can be tough. The calculations can be a bit of a puzzle, and economists use several methods to crack it. One way is through market price estimation where economists look at the prices of similar market goods as stand-ins for non-market ones. In cases where there's a direct substitute (or similar good), this is typically the most ideal case.
Economists could also go straight to the source, asking people directly about their preferences or observing consumer behavior in surveys and revealed preference methods. Surveys can often reveal consumer sentiment about the value additions and deductions from any given good.
Another approach to assigning monetary value involves shadow pricing. Shadow pricing happens when we estimate the economic value of non-market goods by looking at the costs or benefits associated with their use or depletion. For instance, think about the cost of environmental degradation or the loss of biodiversity. Even though there may not be a direct economic cost there that contributes to a good, there is still value lost that can be at least tracked, if not measured one way or another.
Last, economists may choose to layer on assumptions when looking at market transactions. They may choose to analyze a price from the lens of what that good's price or cost could be due to non-market factors or how a price is derived from a hedonic pricing angle. For instance, the price of a home may be based on the size of the home, age of the home, or neighborhood. Understanding these factors may attribute value to other comparables, and this strategy can be used across different types of goods.
GPI vs. GDP
GDP increases twice when pollution is created – once upon creation (as a side-effect of some valuable process) and again when the pollution is cleaned up. By contrast, GPI counts the initial pollution as a loss rather than a gain, generally equal to the amount it will cost to clean up later plus the cost of any negative impact the pollution will have in the meantime. Quantifying the costs and benefits of these environmental and social externalities is a difficult task.
By accounting for the costs borne by society as a whole to repair or control pollution and poverty, GPI balances GDP spending against external costs. GPI advocates claim that it can more reliably measure economic progress as it distinguishes between the overall "shift in the 'value basis' of a product, adding its ecological impacts into the equation."
The relationship between GDP and GPI mimics the relationship between the gross profit and net profit of a company. The net profit is the gross profit minus the costs incurred, while the GPI is the GDP (value of all goods and services produced) minus the environmental and social costs. Accordingly, the GPI will be zero if the financial costs of poverty and pollution equal the financial gains from the production of goods and services, all other factors being constant. The following is from the website investopedia.com
Advantages and Disadvantages of GPI
Genuine Progress Indicator (GPI) measures the economy holistically by considering economic indicators that the GDP doesn't. For example, it accounts for negative externalities, such as pollution and crime, and other social breakdowns that compromise the economy and the welfare of the people it serves. These events create large societal costs from the resulting damages.
Benefits to society, such as volunteerism, housework, and higher education are significant contributions to society but were largely ignored because they were difficult to quantify.
And as no consideration is given in exchange for these types of services, they are not included in the GDP. However, to account for their impact on the economy, the GPI prescribes values to each.
Accounting for these activities and events that ordinarily have no assigned values can be problematic. Including them requires values to be assigned, and these values can differ based on who is ascribing them. This level of subjectivity can make it difficult to compare GPIs.
Also, the broad definition of GPI allows for different interpretations and calculations. These inconsistencies can make it difficult to get an accurate accounting of factors and compare GPIs. They also make it difficult for GPI to be adopted as the economic standard of measurement.
ProsIncludes environmental and social factors not considered in the GDP
Assigns values to societal contributions, such as volunteering
Quantifies an overall impact in a single, simple number that may be easier to compare over time
ConsMakes it difficult to compare GPIs due to subjectivity
Allows for different interpretations and calculations due to broad definition
May result in assumptions (at least for the non-monetary variables)
