Author Name: Shweta Suri

In addition to being one of the most useful and trusted indicators of a nation’s economic growth since decades, GDP also hints at the standard of living which the people of the country share. GDP is theoretically defined as the total market value of all the production (both goods and services) that occurs in a country. The higher is the rate, the more efficient is the economy. GDP’s utility also lies in the macro-economic analysis of the nation. The exact formula to know the value is- GDP = Value of total Consumption + Amount of Government Purchases + Amount Invested + Net Exports Consumption constitutes the largest portion of this parameter as it comprises both the goods and services, that too both durable and non-durable. Net Exports are the total exports, reduced by the amount of imports. Investment considers the amount put in fixed assets and inventory. Government Purchases are calculated by subtracting the transfer payments from total expenditure incurred by a nation’s Government.

However, the utility of GDP became doubtful over the course of time as it was realized that this indicator is not apt for accurately measuring the contribution made by a nation’s environment towards its growth and the effect exerted by country’s growth on surroundings. In other words, the interplay of national progress and environment is not appropriately reflected by GDP. This is attributed to the variety of roles played by a country’s environment, such as provider of raw materials, accumulator of wastes and supporter of basic life-processes. One of the ways by which this can be understood is- depreciation is allowed only for man-made assets and not for the natural assets. Consequently, depletion and deterioration of environment is taken as increase in income, although by no logical means can this be advantageous. After all, degradation will affect the economic growth in some or the other way. So, GDP does not completely mirror a country’s economic state.

The problem lies in the one-way view of the relationship between economic growth and environment. This interaction is considered only from the economy’s perspective and not the other way round. Another flaw GDP harbors is that it takes into consideration only those goods and services that are ‘traded in markets’. The services that are provided by natural assets and therefore lie outside the premises of markets are over-looked. Say for example, ‘flood control systems’ and ‘measures to prevent soil erosion’ that are provided by nature itself are not valued. Similarly, the natural systems that exist for waste disposal are not considered in GDP. Moving on, sometimes the amount spent in restoring the degraded natural conditions are recorded as ‘income’, which is again a misrepresentation of numbers. This rise in income, at the expense of environment fuels an illusory state. The problems can be resolved by valuing both the services that are non-marketed and natural resources. Various methods by which this can be done are- Physical Accounting, Pollution expenditure accounting, green indicators development. To sum it up, after incorporating the corrections in the calculations, GDP as measure of a country’s expansion can be made more accurate and effective.