The world uses GDP as a measure to rank countries. It is considered that countries with higher rankings in GDP are doing much better than countries with a lower ranking in GDP. GDP tells you about a country’s economic capital but doesn’t cover another critical aspect of a country’s development, its natural capital. Things like healthy forests or clean air are some values of natural capital. These natural goods contribute a lot to any country’s economy but sadly their contributions are seen as free. There is a need for a new and better metric that accounts for monetized economic wealth as well as vital social and environmental factors. There is a need to bring a more holistic approach to redefining Gross Domestic Product (GDP) to account for sustainability.
Why There is a Need for Redefining Gross Domestic Product?
The total market or monetary value of all finished services and goods within a country’s border in a specific period is referred to as Gross Domestic Product (GDP). It’s the need of the hour to incorporate sustainability into the equation while calculating the nation’s GDP. The calculation of GDP ignores the merit of natural capital like clean rivers, healthy forests, or clean air. Natural services and goods are great economic contributors but sadly they are viewed as free.
GDP also fails to measure things that are good for our society and economy, like volunteer work, home production, impacts like pollution, etc. It also doesn’t measure the quality of economic activity which means things like manufacturing output which usually produces toxic gases and chemicals also get counted as a positive in the GDP calculation. Because of all these reasons, there is a need for redefining Gross Domestic Product (GDP) to account for sustainability.
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What are Some Frameworks for Natural Capital Accounting and Assessment?
Apart from redefining Gross Domestic Product (GDP) to account for sustainability, the world should also try different frameworks for natural capital assessment and accounting. A few such frameworks are-
1. Inclusive Wealth Index- It was developed in the USA and was designed to expand GDP as a measure of economic progress. In a bid to assess the sustainability of a country’s growth, it adds natural capital to the list of economic measurements. It incorporates changes in human capital (education, health, etc), produced capital (machinery, buildings, etc), and natural capital (natural resources, land, etc).
2. Genuine Progress Indicator- In 1994, this indicator was developed in the USA. It takes GDP and corrects it for various environmental and social factors, like costs of pollution, under-employment, and inequality. It aims to separate economic growth and societal progress.
3. Green GDP- In 2006, the Green GDP was developed by China as a measure of national economic output that also considers environmental factors.
4. System of Environmental-Economic Accounting- This accounting system aims to draw focus toward the impact of economic activity on the environment. It has also been adopted by the UN Statistical Commission. It has five core accounts that measure the condition, contribution, area, stocks, and values of ecosystems.
5. The Changing Wealth of Nations- This index was developed by the World Bank. It measures 141 countries’ produced, human, and natural capital. It also measures the net foreign assets of these countries. It was designed to be used alongside GDP and help governments plan for a more sustainable future.
6. Gross National Happiness Index- It was developed in Bhutan and suggests that sustainable development should take a holistic approach towards notions of progress. This single-number index is developed from 33 indicators. These indicators are further categorized under nine domains, including health, psychological well-being, and ecological resilience and diversity.