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Alternate Measure for Economic Performance

In: Business and Management

Submitted By jayantkumarkarn
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Business Sustainability
Alternate measure for Economic Performance
Jayant Kumar

An indicator is something that helps one to understand inclusive position, the path and how far one is from the point they want to be. A good indicator gives the alert about the problem before it gets too bad and helps to recognize things to do in-order to fix it. Indicators of sustainable community point to areas where the links between the economy, environment and society are weak. It allows one to identify the problematic area and helps the ways to fix restore it. GDP and profit currently dominate society’s discussions of economic performance. They shape the way people think about the economy and business, affecting their behavior and the actual outcomes of economic activity. So what is economic success? Going beyond GDP and profit will explore what we mean by economic success, the role that GDP and profit play in this, and the potential for broader measures of economic success to help us balance our economic priorities, our social goals, and the constraints imposed on us by the natural environment we live in.


Current measure of Performance
Right measurement is a powerful instrument for social progress; wrong or imprecise measurement a source of hazard and even havoc. Two main measure of economic success are currently are GDP at the national level and profit at the Organizational level. GDP is the value added measure that is broader than Profit. GDP and profit are contested concepts that are subject to ongoing refinement. They are defined and calculated using extensive rules, processes and practices, including the system of national accounts and financial reporting standards. What do we mean by Economic success? To assess the suitability of measures of economic success, we first need to clarify what we are trying to measure. What does a ‘successful’ economy look like and how do individual organizations contribute to success. Well over half a century, the most prevalent measure of a country’s economic progress has been changes in its Gross Domestic Product (GDP). GDP is an estimate of market throughput, adding together the value of all final goods and services that are produced and traded for money within a given period of time. It is typically measured by adding together a nation’s personal consumption expenditures (payments by households for goods and services), government expenditures (public spending on the provision of goods and services, infrastructure, debt payments, etc.), net exports (the value of a country’s exports minus the value of imports), and net capital formation (the increase in value of a nation’s total stock of monetized capital goods). Since its creation, economists who are familiar with GDP methodology have emphasized that GDP is a measure of economic activity, not economic well-being. In 1934, Simon Kuznets, the chief architect of the United States national accounting system, cautioned against equating GDP growth with economic or social well-being. The US Bureau of Economic Analysis’ description of GDP states the purpose of measuring GDP is to answer questions such as “how fast is the economy growing,” “what is the pattern of s pending on goods and services,” “what percent of the increase in production is due to inflation,” and “how much of the income produced is being used for consumption as opposed to investment or savings”. Since its evolution GDP continues to be misused as a scorecard for national well-being. People need to understand the exact meaning of GDP. It is also important to recognize that GDP is not inherently bad—it measures what it measures. Rather it is being misused as an indicator of something it doesn’t measure and was never intended to measure.

Critical View
Robert F. Kennedy once said that a country's gross domestic product (GDP) measures “everything except that which makes life worthwhile”. The metric was developed in the 1930s and 1940s amid the upheaval of the Great Depression and global war. Even before the United Nations began requiring countries to collect data to report national GDP, Simon Kuznets, the metric's chief architect, had warned against equating its growth with well-being. GDP measures mainly market transactions. It ignores social costs, environmental impacts and income inequality. If a business used GDP-style accounting, it would aim to maximize gross revenue — even at the expense of profitability, efficiency, sustainability or flexibility. That is hardly smart or sustainable (think Enron). Yet since the end of the Second World War, promoting GDP growth has remained the primary national policy goal in almost every country.

Alternate measure for Economic Performance



Meanwhile, researchers have become much better at measuring what actually does make life worthwhile. The environmental and social effects of GDP growth can be estimated, as can the effects of income inequality. The psychology of human well-being can now be surveyed comprehensively and quantitatively. A plethora of experiments has produced alternative measures of progress. The limits of GDP are now clear. Increased crime rates do not raise living standards, but they can lift GDP by raising expenditures on security systems. Despite the destruction wrought by the earthquake in Gujarat in 2002 or to that matter sudden cloud burst in Uttarakhand both events boosts India GDP because they stimulated rebuilding. Do we really call them a Progress or success? Isn’t it a high time to devise alternate measure of performance?

Alternate Measure
As material living standard improves and natural environment increasingly becomes a limiting factor in economic activity, it is time to re-assess current measures in light of our definition of economic performance & success. Alternate to GDP and profit already exist. Their appropriateness and usefulness can be assessed with reference to our definition of Economic Performance. Should these measures be used more widely and/ or new measures needed? The economy draws benefits from natural, social, and human capital and that the quantity and quality of such capital, in turn, is affected by net investment from the economy. One of the alternate for performance measure is Genuine Progress Indicator (GPI). While GDP is a measure of current income, GPI is designed to measure the sustainability of that income, essentially measuring whether progress is a result of living off the interest of community capital or spending it down.

Alternate measure for Economic Performance


Dimensions of sustainable economic welfare

GPI was first proposed in 1989 by Daly and Cobb in their book For the Common Good as “a way of measuring the economy that will give better guidance than the GNP to those interested in promoting economic welfare”. Many Economists are of the view to replace GDP with GPI mainly citing the points below in favor of GPI:  GDP only counts spending  GDP encourages Layoffs  GDP celebrates disaster  GDP omits what matters most  GDP sets a bad example for businesses. There are various other measures that are being debated and proposed to use multiple parameters to measure the performance.  Genuine Savings  Ecological Footprints  Human Development Index  Living Planet report  Happy planet Index Comparing the strength and weaknesses of national and organizational accounting systems will identify lessons these systems can learn from each other and areas where there may be scope for common improvements.

Alternate measure for Economic Performance


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