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Stiglitz on GDP

Stiglitz argues for “green net national product” as a better way to measure the health of economies.

Good numbers gone bad – October 2, 2006
Good numbers gone bad
Why relying on GDP as a leading economic gauge can lead to poor decision-making.
FORTUNE Magazine
By Joseph Stiglitz
September 25 2006: 8:07 AM EDT
(Fortune Magazine) — Gross domestic product, the leading economic measurement, is outdated and misleading.
Long the standard scorecard for any national economy, GDP has become deficient as a measure of long-term economic health in our resource-driven, globalizing world.
Think about it. It’s like grading a corporation based on one day’s cash flow and forgetting to depreciate assets and other costs.
In today’s business reality, where intangible assets have become increasingly important, cash flow can be a particularly bad indicator of a company’s value. A startup can have no cash flow and yet be creating a software program of immense value. A company with positive cash flow can be running itself into the ground as its capital depreciates. Economies are no different.
That’s why economists looking for an alternative accounting framework to supplement the use of GDP are considering a new measure: green net national product.
The “green” means that GDP must be reduced to take into account the depletion of natural resources and the degradation of the environment – just as a company must depreciate both its tangible and intangible assets. “Net” national product (NNP) means that there has to be an adjustment for the depreciation of the country’s physical assets.
A country that gives away its natural resources will see gross domestic product rise, but gross national product – which focuses on income earned by those inside a country as opposed to what is produced inside a country — may not rise much, since the value of what is produced accrues to foreigners.

Filed under: Economics

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