# Understanding Genuine Progress Indicator: GPI vs. GDP Explained

## What Is Genuine Progress Indicator (GPI)?

The Genuine Progress Indicator (GPI) offers a broader measure of economic health than [GDP](https://www.investopedia.com/terms/g/gdp.asp) by including environmental and social factors. It evaluates whether economic activities enhance the well-being of citizens, considering costs like resource depletion and pollution. This metric provides a more comprehensive view of an economy's real progress.

### Key Takeaways

*   The Genuine Progress Indicator (GPI) is an alternative to GDP that includes environmental and social factors, such as pollution and crime, to assess economic growth holistically.
*   Proponents argue that GPI provides a more comprehensive measure of a nation's welfare by including factors like volunteerism and environmental sustainability.
*   Critics point out that the subjectivity and variability in GPI calculations make it difficult to compare across countries or use as a standard economic measure.
*   GPI is compared to net profit in business; it subtracts the social and environmental costs from the economic growth measured by GDP.  
    

## Understanding the Genuine Progress Indicator's Functionality

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](https://www.investopedia.com/terms/g/greeneconomics.asp) (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.

## The Origins and Development of the 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).

However, Kuznets warned that the GDP would not be able to measure the welfare of a nation. In 1995, Redefining Progress created the Genuine Progress Indicator (GPI) with 26 indicators, led by Clifford Cobb, Ted Halstead, and Jonathan Rowe. 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.

GPI's loose definition led practitioners to develop their own parameters, making economic comparisons difficult.

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 testing period occurred from 2012 to 2014 in the U.S. and Canada to test the efficacy of GPI 2.0.

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

## How to Calculate the Genuine Progress Indicator

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

Assigning monetary values to non-market goods and assessing social and environmental impacts involves subjectivity. It's entirely possible for one analyst or economist to have a GPI calculation that differs from another because the two just may not have the same perspective on a less quantitative item from above.

## Valuing Non-Market Factors in GPI Calculations

Determining the monetary values for non-market goods and services in GPI can be tough. These calculations can be complex, requiring various methods from economists. 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](https://www.investopedia.com/terms/c/consumer-theory.asp) 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](https://www.investopedia.com/terms/s/shadowpricing.asp). 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.

## Comparing Genuine Progress Indicator With Gross Domestic Product

GDP rises twice from pollution: initially during its creation and later during its cleanup. 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.

## Pros and Cons of the Genuine Progress Indicator

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](https://www.investopedia.com/investing-in-pollution-control-and-waste-reduction-5220620) 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.

Activities like volunteerism, housework, and higher education significantly benefit 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.

Assigning values to these activities can be problematic since it involves subjective judgment. 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.

Pros

*   Includes 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
    

Cons

*   Makes 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)
    

## Real-World Example of the Genuine Progress Indicator in Action

Let's look at a real world example of GPI. The Maryland Quality of Life Initiative, a collaborative effort involving businesses, non-profits, academics, and the state, uses the Maryland Genuine Progress Indicator as a resource to gauge quality of life.

The initiative aims to build a "Quality of Life Dashboard" for the state, highlighting areas where the state can do better. The GPI methodology has changed and it's current form, GPI 2.0, has 12 categories with 50 indicators. The state of Maryland can then use these indicators to prove out successes or failures.

For example, from 2012 to 2019, the GPI for Maryland decreased $14.41 billion. There was a substantial decrease in overall household budget expenditures as well as an increase in defensive expenses. Note that the GPI also factored in some non-monetary considerations such as Marylanders gaining 6.5% more leisure time and a 12% increase in unpaid labor.

## 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.

## 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

The Genuine Progress Indicator (GPI) serves as a comprehensive measure of a nation's economic health by integrating environmental and social elements often overlooked by GDP, such as crime, pollution, and volunteer contributions.

By providing a fuller picture, GPI helps evaluate whether economic activities contribute positively or negatively to societal welfare and long-term sustainability. Although it offers a more nuanced view than GDP, differing interpretations in assigning values may lead to challenges in consistent application and comparison.

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