Conventionally, economists use gross domestic product (GDP) to estimate the sustainability of the economy and the quality of societal welfare. However, this approach is not only incorrect and logically flawed, but also in gross neglect of nature’s contribution to the society.
GDP measures the performance and level of economic activities though the market value of goods and services. This single indicator has such a profound impact on public policy and politics that even a decline in national income by half a percentage point in any quarter of the year creates political waves and generates talk about recession.
While national income provides useful information on the structure and performance of the economy, people mistakenly use it as proxy for human welfare and sustainability. The latter is not only unreliable and incorrect; it can mislead decision-makers. Nobel economists Nordhaus and Tobin were able to spot this early on. The system of national income accounting has serious flaws, but nothing is as serious as the asymmetry that arises between produced and natural capital (i.e., goods and services such as water, air, soil, biodiversity, and scenic beauty, which are critical for human existence) when using a GDP-based approach to value goods and services.
Conventional accounting systems do not adequately capture the functions and services of nature and ecosystems. The United Nations Environment-led Inclusive Wealth Index (IWI) is an alternative index to GDP and the Human Development Index. The IWI demonstrates that when produced capital, natural capital and human capital are combined, the growth rate of wealth is much slower than GDP growth for 140 countries. This indicates that traditional measures of economic growth and development may be substituting income for wealth, a practice that is dangerous as we consider how to balance economic growth with sustaining ecosystems and ecosystem services.
Read more at: Phys.org