Genuine Progress Indicator (GPI) Explained: What It Is, How It Works, and Examples

The genuine progress indicator (GPI) is a national-level measure of economic growth and prosperity. Unlike GDP, GPI takes into account the externalities of economic activity, such as pollution and social breakdowns. It aims to provide a more comprehensive picture of a country’s economic health.

GPI measures not only the financial aspects of a nation but also its social, environmental, and human conditions. It acknowledges that economic growth should not come at the expense of society’s well-being and the planet’s health. This holistic approach allows policymakers and economists to gauge the genuine progress of a nation, considering both the positive and negative consequences of economic activity.

GPI attempts to measure whether the environmental impact and social costs of economic production and consumption are positive or negative factors in overall health and well-being. It emerged from the principles of green economics, which view the economy as a part of a broader ecosystem. In this context, economic growth should align with the sustainable use of natural resources and the well-being of the population.

Unlike GDP, which merely adds up the value of goods and services produced, GPI accounts for the social and environmental externalities. This means that negative factors like pollution, crime, and resource depletion are subtracted from the overall economic output, while positive contributions like volunteerism and higher education are added. The goal is to strike a balance, aiming for a scenario where economic growth translates into a net gain in overall well-being.

In the 1930s, the concept of GDP was introduced to measure economic output. However, its limitations became evident as it couldn’t gauge the welfare of a nation. Recognizing these limitations, in 1995, the genuine progress indicator (GPI) was created to offer a more holistic view of a nation’s welfare.

The development of GPI was a response to the need for a better metric to assess a nation’s well-being. GDP failed to consider crucial factors such as the depletion of natural resources, the impact of crime on society, and the value of unpaid work, like housework and volunteerism. As a result, GPI was designed to consider not only economic measures but also social, environmental, and human conditions.

However, the early years of GPI faced challenges related to inconsistencies and subjectivity in measurements. To address these issues, GPI 2.0 was introduced, which aimed to streamline the accounting processes and replace antiquated methodologies. A pilot program was launched in select U.S. states and Canada to test the effectiveness of GPI 2.0.

The primary difference between GPI and GDP lies in their treatment of externalities. GDP counts pollution and other negative effects as economic gains when they are created and again when they are cleaned up. This double-counting leads to an inflated view of economic progress. In contrast, GPI accounts for these externalities as losses, including the cost of cleanup and the negative impacts in the meantime. This balanced approach provides a more reliable measurement of economic progress, as it considers the true costs of economic activity.

In essence, the relationship between GDP and GPI is similar to the distinction between gross profit and net profit in a company. GDP represents the gross economic output, while GPI reflects the net economic well-being of a nation. If the financial costs of pollution, crime, and resource depletion equal the financial gains from the production of goods and services, the GPI would be zero, indicating that economic growth has not translated into improved overall well-being.

The genuine progress indicator (GPI) offers a more holistic view of a nation’s economic health by accounting for societal contributions and the true costs of externalities like pollution and crime. While subjectivity and varied interpretations have limited its adoption as the primary economic measurement standard, GPI continues to be a valuable tool in assessing economic prosperity beyond GDP.

GPI factors in all components of GDP and includes environmental and social elements that impact the economy. It offers a holistic view of a nation’s economic well-being. Unlike GDP, GPI considers the impact of pollution, crime, and the value of unpaid work, providing a more comprehensive understanding of a nation’s progress.

GPI is calculated using the formula GPI = Cadj + G + W – D – S – E – N, where each variable represents different aspects of the economy. This formula considers personal consumption, capital growth, unconventional contributions to welfare, defensive private spending, activities negatively impacting social capital, costs associated with environmental deterioration, and activities negatively impacting natural capital. The resulting value offers an overall assessment of a nation’s economic progress.

GPI consists of 26 indicators grouped into social, economic, and environmental categories. These indicators measure various conditions of the economy, including crime, pollution, family structure, academics, volunteerism, and more. By considering a wide range of indicators, GPI provides a comprehensive assessment of a nation’s well-being beyond the scope of GDP.

The genuine progress indicator was developed in 1995 by Clifford Cobb, Ted Halstead, and Jonathan Rowe. It aimed to provide a more holistic view of a nation’s welfare compared to GDP, acknowledging that economic growth alone does not determine the well-being of a nation’s population. The creators recognized the limitations of GDP and the need for a more comprehensive measure of progress.