Genuine Progress Indicator (GPI)

What Is Genuine Progress Indicator (GPI)?

A genuine progress indicator (GPI) is a metric used to measure the economic growth of a country. It is often considered an alternative metric to the more well-known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account but adds other figures that represent the cost of the negative effects related to economic activity, such as the cost of crime, cost of ozone depletion, and cost of resource depletion, among others.

The GPI nets the positive and negative results of economic growth to examine whether or not it has benefited people overall.

How the Genuine Progress Indicator Works

The Genuine Progress Indicator is an attempt to measure whether the environmental impact and social costs of economic production and consumption in a country are negative or positive factors in overall health and well-being.

The GPI metric was developed out of the theories of green economics (which sees the economic market as a piece within an ecosystem). Proponents of the GPI see it as a better measure of the sustainability of an economy when compared to the GDP measure. Since 1995, the GPI indicator has grown in stature and is used in Canada and the United States. However, both these countries still report their economic information in GDP to remain in line with the more widespread practice.

History of Genuine Progress Indicator

In the 1930s, the Roosevelt administration sought ways to measure the United States's economic output after instituting policies to address a failing economy using questionable data. The Department of Commerce enlisted National Bureau of Economic Research economist Simon Kuznets to establish more suitable economic metrics than what was previously used. In response, he presented to Congress his report "National Income 1929-1935", which gave birth to the concept of gross domestic product (GDP).

Prior to the 1930s, there was no way to measure national income and output.

However, Kuznets warned that the GDP would not be able to measure the welfare of a nation. So, some 30 years later in 1995, U.S.-based organization Redefining Progress built upon this notion, creating a pathway for Clifford Cobb, Ted Halstead, and Jonathan Rowe to create the Genuine Progress Indicator (GPI), which consists of 26 indicators. This new metric was designed to define a nation's welfare not only by its economic measures but also by the state of its social, environmental, and human conditions.

Because GPI is loosely defined, practitioners developed their own parameters for which to measure economic welfare. The inconsistencies made it difficult to compare one economy to another and, therefore, rendered some minimally useful.

Two GPI summits were held to address these inconsistencies, and, as a result, researchers and practitioners modified GPI_ — GPI 2.0 — _to streamline the accounting processes and replace antiquated methodologies that did not provide an accurate and complete picture of an economy. A pilot is underway in select U.S. states and Canada to test the efficacy of GPI 2.0.

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 the 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.

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.

Genuine Progress Indicator FAQs

How Is GPI Different From GDP?

Genuine Progress Indicator (GPI) factors in all the components of the Gross Domestic Product (GDP) and includes environmental and social elements that impact the economy, such as pollution, volunteerism, crime, and climate change. Some economists suggest that GPI is a better metric than GDP as it gives a holistic view of the wellbeing of a nation's economy.

How Is GPI Calculated?

The GPI formula is GPI = Cadj + G + W - D - S - E - N

What Are the Component Indicators of the GPI?

The GPI consists of 26 indicators, grouped into three categories (social, economic, and environmental). Each measures a different condition of the economy. Within the social category, you will find crime, family structure, academics, and more. In the environmental category, you will find pollution, climate change, and other factors that positively or negatively affect the environment.

Who Created the Genuine Progress Indicator?

Taking on Simon Kuznets's disclaimer that GDP could not adequately tell how a nation is faring overall, Clifford Cobb developed the Genuine Progress Indicator (GPI) along with Ted Halstead and Jonathan Rowe in 1995.

The Bottom Line

Genuine Progress Indicator (GPI) is an economic tool used to measure the health of a nation's economy. It incorporates environmental and social factors, such as family structure, benefits from higher education, crime, and pollution, not considered in the GDP. GPI determines whether these other factors negatively or positively the economy, and can provide a holistic view into how they affect the lives and welfare of society.