BEHIND, BESIDE AND BEYOND THE GDP: ALTERNATIVES TO GDP AND TO MACRO‐

INDICATORS

Chiara Gigliarano – UNIVPM, Italy

(joint with M. Ciommi, F. Chelli , M. Gallegati) 

Workshop on New National Accounts ArchitectureBucharest, November 11‐12, 2013 

“European Framework for Measuring Progress”

E‐FRAME Project

UNIVPM: Work Package 3, Task 2• To carry out a stock‐taking of alternative measures to GDP

• To discuss about GDP, its definition, historical evolution, characteristics, pros and cons.

• To provide a state‐of‐the‐art in research on alternative measures to GDP and a synthesis of scientific results from recent and on‐going studies and to collect and assess key findings from recent literature in this area.

• To provide suggestions and recommendations for further development of Beyond GDP indicators.

Outline

• BEHIND GDP: – Definition and historical background of GDP – its drawbacks as a measure of progress and well‐being

• BESIDES AND BEYOND GDP: – a taxonomy to categorize alternative indicators

• RECOMMENDATIONS AND SUGGESTIONS

BEHIND GDP: historical background– William Petty (1623‐87) “Political Arithmetic”: a first

attempt to estimate the produced resources.– Gregory King (1648‐1712): the first thorough system of

national accounts with the stated purpose of comparing theeconomic consequences of a long war for England, Hollandand France.

– Sébastien Le Prestre de Vauban (1633‐1707) “DixmeRoyale”: aimed to improve the efficiency of the tax system.

– Mercantilists and Physiocrats: productive and unproductivelabour.

– Adam Smith (1723‐1790) redefined the concept of wealthof nations, establishing that it was not grounded only onagriculture, gold and silver but rather on the overall nationalproduction.

– Karl Marx (1818‐1883) shifted the attention from labour to workers. Self‐employed labour as unproductive.

– John Stuart Mill (1806‐1873) defined as unproductive any kind of labour that did not contribute to the accumulation of stocks or establish permanent benefits.

– Alfred Marshall (1842‐1924) recognized that production could not be effectively measured without taking into account the evaluation of individual consumer utilities.

– Simon Kuznets (1901‐1985) “National Income”: a first set of national accounts (and GDP proposal) in 1934.

BEHIND GDP: historical background (2)

BEHIND GDP: its definition• GDP measures the monetary value of all final goods and services produced in a country in a given period of time – monetary value: goods and services considered in the GDP definition are evaluated at current market price

– all, except for those commodities illegally produced and sold and those goods and services that are provided  by self‐ (non‐farm) production;

– final: not intermediate goods;– produced: GDP measures the value of goods and services produced and not the transactions;

– in a country: GDP measures what is produced in Italy and not what is produced by the Italians;

• It measures only economic activities to which a price can be attributed.

• GDP has become a tool with which to evaluate the economicprogress of a country.

• Over time, GDP was allocated a property that does not have: to try to measure well‐being. 

• However GDP:– neglects the output and production activities goods or services 

that do not pass through the market mechanism.– does not consider the distribution of resources among 

individuals.– measure only cash income products and not the stocks of 

assets and resources accumulated.• Simon Kuznets warned 50 years ago that:  “The welfare of a 

nation can scarcely be inferred from a measurement of national income... “

BEHIND GDP: one indicator many aims

Warnings (1)

• “We cannot measure the national spirit on the basis of the Dow‐Jones, nor can we measure the achievements of our country on the basis of the gross domestic product .

• Our gross national product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage

• The GDP does not allow for the health of our children, the quality of their education, or the joy of their play.

• It measures everything, in short, except that which makes life worthwhile.”

Robert F. Kennedy, March 1968

“ We ought to combat the dominant conception whereby one single model of development and of its living (the model centered on the growth of marketable goods) is proposed and accepted as the only valid one. We ought to urge every population to seek the form of progress that matches better its history, its feature, its circumstances, and not to feel inferior merely because another country produces more goods. Today, although this may seem pure Utopia, one must nevertheless think about it”

Giorgio Fuà, “Economic Growth”, 1993

Warnings (2)

Debate: Beyond or Beside GDP?• Academic and political consensus on the need to go beyond GDP. Why?– to take account of unemployment, climate change and energy, social inequality, education, non‐market activities,..

• How to measure social and sustainable well‐being?– Different approaches

• Goal: to arrive at a measure or set of measures of progress and social well‐being shared at European and/or international level

CHRONOLOGY OF MAIN MEASURES OF PROGRESS LINKED TO GDP

In particolar, since 2009:• Commission on the Measurement of Economic Performance and social

Progress (Stigliz, Sen, Fitoussi, 2009)• GDP and beyond (EU, 2010), “Sofia Memorandum”, 2010• Statistics for sustainable Development (OECD-Eurostat, 2010), • Inequality-Adjusted Human Development Index (United Nations,

2010)• Europe 2020 Strategy (European Commission, 2010): “smart,

sustainable and inclusive growth”• Better Life Index, 2009 (OECD)• BES 2013(CNEL-ISTAT)

Some global initiatives

Some European initiatives

Aim of the indicators

“The importance of the debate on well‐being indicatorsdepends on the fact that "what you measure"influences "what you do“. If the instruments usedare not correct, or fail to grasp the importantfeatures of the phenomenon of interest, they canlead to ineffective or even wrong decisions.”

(BES report, 2013, Istat)

THE STIGLITZ‐SEN‐FITOUSSI COMMISSION

• On 14 September 2009 the Commission on theMeasurement of Economic Development and SocialProgress published its final report.

• A key message of the Commission was the need “toshift emphasis from measuring economicproduction tomeasuring people's wellbeing”.

• Well‐being is amultidimensional phenomenon• The report included 12 recommendations on threemain issues: Material living conditions, Quality of lifeand Sustainability.

Recommendations: 1) Material living conditions

1. When evaluating material well‐being, look at income and consumption rather than production.

2. Emphasize the point of view of households.3. Consider income and consumption together with the wealth.4. Give more importance to the distribution of income, 

consumption and wealth.5. Extend income measures to the non‐market activities.

Recommendations : 2) Quality of life

6. Improve measures of health status of the people, education, personal activities and environmental conditions. But also of social connections, political voice, and insecurity.

7. Indicators of quality of life should take account of inequalities.

8. Surveys should be designed to assess the links between the various domains of quality of life.

9. Statistical offices should provide the information necessary to aggregate the dimensions of quality of life.

10. Objectivemeasures and subjective well‐being provide key information on the quality of people's lives.

Recommendations : 3) Sustainability

" Sustainable development meets the needs of the present without risking that future generations can not meet their needs."  (Brundlandt‐Report, UN, 1986) 

11. An index of sustainability should remain essentially focused on economic aspects of sustainability.

12. The environmental aspects of sustainability deserve a separate treatment based on a set of physical indicators. In particular there is a need for a clear indicator of our proximity to dangerous levels of environmental damage.

MANY DIMENSIONS OF WELL‐BEING

WELL‐BEING

Work

Family life

Housing

Social Partecipa ‐tion

Leisure

Health

Securety

Environmental

Financial Security

Learning

INTERSECTION OF THE DIMENSIONS 

A taxonomy of indicators• The literature has proposed several indicators of well‐being 

and social progress.

• There is not yet a consensus at the international level on the choice of the indicator / most appropriate methodology.

• Critical issues:– Composite Index or dashboard of indicators?– Index subjective or objective?– Corrective or alternative index of GDP?– Measurable at local/regional level or comparable internationally?

DASHBOARD VS COMPOSITE INDICATORSDashboard of indicators

Advantages Shortcomings

It takes into account many dimensions Information is highly heterogeneous

Minimization of  information losses The election of the variable is partially contingent on the conditions of a specific place and time

It highlights change over timeCollections of different indicators do not allow a parsimonious representation of quality of life and social progress.

Improvements in the quality (e.g. in terms of timeliness, consistency and comparability)

Composite Indicators

Advantages Shortcomings

Synthetic Ambiguous results depending on the domain covered

User friendly by policy maker  Ambiguous results depending on the normalization methodology used

Comparisons between countries Ambiguous results depending on weights used for aggregation

Comparisons over time

DASHBOARD COMPOSITE INDICATORS

OECD Fact Book Economic, Environmentand Social Statistics Human Development Index

Better Life Index Genuine Saving

OECD Going for Growth Economic Policyreforms ISEW (index of sustainable well‐being)

OECD Social Indicators GPI (Genuine Progress Indicator)

Key Environmental Indicators MEW (measure of economic welfare)

Government at a Glance SMEW (sustainable measure ofeconomic welfare)

Millennium Development Goals Index of Social Health (ISH)

CSD Sustainable Development Indicators ISEW (index of sustainable well‐being)and GPI (Genuine Progress Indicator)

BES (Istat) Index of Economic Well‐Being

PSI (Personal Security Index) : DataIndex (objective) and Perception Index(subjective)

Happy Planet Index

Inequality‐Adjusted Happiness (IAH)

QUARS

Index of Living standards

Index of Economic Well‐Being

ALTERNATIVE VS CORRECTIVE MEASURES TO GDP

Adjusting GDP measures

Advantages Shortcomings

Derived from traditional notion of GDP Problems related to the evaluation of output

Uses extended national accounts

ALTERNATIVECORRECTIVE

Replacing Supplementing

Better Life IndexEnvironmental Sustainable Index (ESI) ISEW (index of sustainable 

well‐being)

Buen Vivir Environmental Performance Index (EPI) Genuine Saving

Regional Quality of Development Index (QUARS)

Canadian Index of Wellbeing Genuine Progress Indicator (GPI)

Ecological Footprint (EF) or Carbon Footprint Capability Index

Gender‐related Development Index (GDI) Carbon Footprint

Gross National Happiness Index (Buthan) Ecological Footprint

Happy Planet Index Living Plant Index

Human Development Index Measuring Ireland’s Progress

Measuring Australian’s progress National Accounts of Well‐Being

SUBJECTIVE VS OBJECTIVE MEASURESSubjective Indicators

Advantages Shortcomings

Participation of the Individuals Not a common definition

Incomparable over time

Incomparable over space

Objective Indicators

Advantages Shortcomings

Valid Not influenced by people’s experience

Reliable Biases

Subjective Objective

BES

Buon Vivir

Happy Planet Index

Better Life Index QUARSBES (equitable and sustainable well‐being) ISEW

INTERNATIONAL VS LOCAL MEASURES

International

Advantages Shortcomings

Simple to use Loss of information

Comparable across countries

Local (National – Regional)

Advantages Shortcomings

A better picture of the society under examination. Not always comparable across countries

Availability of data and parameters for estimating reliable and comparable applied at the local dimension, especially for "global" phenomena such as pollution and so on.

International Local

Adjusted Net Savings (or Genuine saving) Buen vivir (Good living)

Better Life Index (OECD Canadian Index of Wellbeing

Capability Index Gross National Happiness Index (Buthan)

Carbon Footprint Measuring Australian’s progress

Corruption Perceptions Index Measuring equitable and sustainable wellbeing in Italy (BES)

Ecological Footprint Measuring Ireland’s Progress

EEA Core Set of Indicators Measuring National Well‐Being

EU set of Sustainable Development Indicators QUARS

Gender Empowerment Measue (GEM)

Gender Related Development Index (GDI)

Genuine Progress Indicator

Genuine Saving Indicator

Happy Life Years

Happy Planet Index

Human Development Index

Human Poverty Index (HPI)

Index of Individuals Living Conditions

Index of Sustainable Economic Welfare

Living Plant Index

Measure of Domestic Product

National Accounts of Well‐Being

Millennium Development Goals Index

Sustainability Index (FEEM SI)

World Happiness Index

A TAXONOMY of availableindicators

Dashboard ReplacingRegionalNational

Objective

‐ Buen Vivir‐ Measuring Australian’sprogress‐ Measuring equitable and sustainable well‐being in Italy‐ Measuring National Well‐being

A GRAPHICAL REPRESENTATION

A CLASSIFICATION TREE OF INDICATORS

UNIVPM recommendation #1: TIME USE

• Time‐use is a key social indicator thatshould be included in the assessment ofindividuals’ material welfare and well‐being (“How much time do you usuallyspend in…?” or “How much time wouldyou like in this activity?”).

• However, problems in cross‐countriesand over‐time comparisons becausepeople in different countries could usetheir time in different ways since theyhave different daily routines.

UNIVPM recommendation # 2: POVERTY AND INEQUALITY

• Weighting income (bypoverty and inequality)would make it possible toobtain a more realisticassessment of well‐being,compared to indices thatonly consider conventionalincome

UNIVPM recommendation # 3: HUMAN AND SOCIAL CAPITAL

•Unanimous consensus that an improvement in societal well‐being requires adequate investments in human and socialcapital.•Monitoring human and social capital represents a key factor inanalysing well‐being.•Official statistics should include specific indicators to assesshuman and social capital over time and across countries.

UNIVPM recommendation # 4: VULNERABILITY TO POVERTY

• A good indicator of well‐being should also consider the individual or familiar vulnerability to poverty.

UNIVPM recommendation # 5: UNEMPLOYMENT

• Unemployment should be introduced in a dashboard of indicators aimed at evaluating well‐being.

UNIVPM recommendation # 6: TRANSFERS IN KIND

• Social transfers in kind should assume a key role in measuring well‐being in the same way as individual consumption. 

• It is necessary to improve comparability across countries and over time

UNIVPM recommendation # 7: IN REAL TERMS

• In order to make comparisons across countries and over time, all monetary items should be computed in real terms. 

UNIVPM recommendation # 8: SUBJECTIVE WELL‐BEING

• Importance of improving the National Account System by using subjective measures 

• National Statistical Offices should put more effort in producing integrated measures, together with across countries and over time comparable measures.

UNIVPM recommendation # 9: HOUSEHOLD PERSPECTIVE

• Family composition has been changing in last decade and new types of families are emerging (for instance “single mothers”)

• Therefore also family composition should play an important role in the definition of well‐being indicators.

UNIVPM recommendation # 10: DEMOCRATIC PARTICIPATION

• Involvement of the society in defining dimensions and aspectsof well‐being and in the debate on what they consider to bethe various aspects of well‐being (health, environment,employment, economic conditions, etc.).

• We believe that in the future it will become even moreimportant to organize meetings and round tables in order tofoster discussions and exchange views between citizens andexperts.

UNIVPM recommendation # 11: SMALL AREAS DIMENSIONS 

• Even if the ability to produce internationalcomparisons is one of the main objectives ofindicators, the regional dimension should beequally important.

• There are many advantages in calculatingwell‐being indicators at local level:– it is possible to capture regional disparities and

inequalities at sub level, which the average used tocalculate the same indicator at national level couldhide.

– it gives a better picture of the society examined.Local evaluations also help policy makers toaddress more efficient policies.

UNIVPM recommendation # 12: SUB‐GROUP DECOMPOSABILITY

• It is very interesting to determine whether a specific characteristic or dimension changes its distribution across some segment of the population (for instance among young people or women…).

UNIVPM recommendation # 13: WEIGHTS

• Defining a composite indicator raises the problem of how toweigh single dimensions and, therefore, how to assess thesubstitutability among them.

• Choosing equal weights implies considering a sort ofsubstitutability among dimensions

• Using a democratic participation of citizens (dialogueprocedure) to determinate weight.

UNIVPM recommendation # 14: SUBJECTIVE WEIGHT AT LOCAL LEVEL

• Putting subjective weights at local level, obtained by involving the whole community, could generate a more realistic picture of the region under examination.

UNIVPM recommendation # 15: SMALL NUMBER OF INDICATORS

• If, on the one hand, the number of collected indicatorsincrease and information about the system becomes moreaccurate, on the other, it is very important not to resort to toomany of these indices since.

• It is necessary to choose a relatively small number ofindicators to be included in a dashboard in order to obtain amore comfortable overview of the phenomenon.

UNIVPM recommendation # 16: DASHBORD IS THE BEST OPTION

In our opinion, a dashboard ofindicators is the best way tocollect information aboutthe phenomenon.

A dashboard of indicatorsreflects themultidimensional nature ofthe notion of well‐being;however, following ourprevious recommendation,using a very large numberof specific indicators shouldbe avoided.

UNIVPM recommendation # 17: MONETARY TRANSLATION

• If we use market prices to evaluatequantities, we are implicitly assumingthat prices are representative of themarginal contributions of the differentgoods consumed compared to the utilityof individuals.

• Although this monetisation would havethe advantage of allowing easyaggregation among dimensions, webelieve that this type of aggregationdoes not always provide moreinformation than keeping the indicatorsseparated and with their own originalunit .

Concluding remarks• In the literature there have been proposed several indicators of well‐being, progress  and social development.

• There is not yet a consensus at the international level on the choice of the indicator and the most appropriate methodology.

• We have compiled a comprehensive overview of the state of the art by proposing a taxonomy that is based on what are considered the most important features to reflect on.

• It is then up to the policy‐makers make decisions about, and choose a shortlist of indicators.

THANK YOU FOR YOUR ATTENTION!

Report: Ciommi M., Gigliarano C., Chelli F., Gallegati M. (2013) “Behind, beside and beyond the GDP: alternatives to GDP and to macro‐indicators”, 

Deliverable D2.1, E‐Frame EU‐project

available at www.eframeproject.eu

Email: c.gigliarano@univpm.it