GDP in the Future

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GDP in the Future

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Bibliographic details

• Authors: BERT KROESE
• Published: December 3, 2024

Overview

• GDP is a longstanding benchmark of economic performance, introduced "some 90 years ago."
• GDP is limited as a welfare measure: it counts all goods and services produced without regard to whether they enhance well-being (example: "$100 spent on concert tickets or courtroom litigation" counted equally).
• GDP focuses on present production and ignores depletion of resources and environmental costs.
• Two complementary approaches can provide a sustainability perspective:
  • Net domestic product (NDP).
  • Comprehensive wealth.

Net domestic product (NDP)

• Definition and purpose:
  • NDP subtracts depreciation of capital from GDP to reflect sustainability of national income and future prosperity.
  • Recognizes two-way impact of economic activity: building new stock while degrading old stock.
• Empirical magnitudes:
  • Available data suggest that the average country’s NDP is about 10–20 percent lower than its GDP.
  • In countries that depend heavily on mining and mineral extraction, NDP could be more than 30 percent lower than GDP.
• Proposed improvements and accounting changes:
  • NDP will "soon subtract the depletion of natural resources" and the IMF is proposing to adjust NDP for the costs of nonrenewable resource depletion in the updated System of National Accounts (SNA) that will be finalized "next year."
  • The updated accounting standards will have a relatively small impact on NDP in most countries but a greater impact on resource-dependent countries.
  • The refined measure of NDP will affect growth rates: "Higher output driven by accelerated resource extraction would give less of a boost to the headline growth rate."
• Conceptual and measurement challenges:
  • Further refinements could consider air pollution (reducing worker productivity and quality of life) and greenhouse gas emissions, but measuring atmospheric deterioration—especially greenhouse gases—is difficult because effects are global and persistent for centuries.
• Policy implication:
  • "NDP should complement GDP, not replace it, by adding a much-needed sustainability perspective."
  • The IMF encourages more countries to compile NDP statistics and use them in policy analysis and decision-making.

Comprehensive wealth

• Rationale:
  • Policymakers benefit from considering both flows and stocks (analogies: budget deficits and government debt; income and assets/liabilities).
  • A measure of wealth should include all resources that enable future consumption and production.
• Expanded components of wealth:
  • Human capital (education and health).
  • Natural capital (mineral resources, renewable resources, ecosystems, water).
  • Social capital (good governance, civic-mindedness).
• Quantitative decomposition (World Bank):
  • "Human capital constitutes the largest share of global comprehensive wealth, at 64 percent."
  • "Physical capital accounts for 31 percent."
  • "The remainder is split equally between renewable and nonrenewable natural capital."
• SNA developments:
  • "Next year’s updated SNA will spotlight measures of wealth in national accounts and how wealth is distributed."
  • The updated SNA "expands the definition of natural capital" to include renewable energy resources such as solar and wind.
  • It will place greater emphasis on compiling human-capital accounts as extensions to the main sequence of national accounts.
• Policy implication:
  • These changes will "contribute to a more comprehensive measure of wealth and provide policymakers with clearer signposts toward an economy that’s better for people and planet."

Keeping up with structural and technological change

• Need for timely updates:
  • "The world is changing, and economic statistics must keep up."
  • The new SNA will better account for the digital revolution by including "the value generated by data, in both gross and net domestic product."
• Integration across domains:
  • Better integration of standards is required for economic performance, government activities, cross-border flows, greenhouse gas emissions, and more, to enable a clear, consistent, and comprehensive view of the economy.
• Practical and institutional challenges:
  • Definitional and technical difficulties in defining NDP and comprehensive wealth.
  • Standards must be applicable across economies with different development levels and industrial structures.
  • Many national statistical agencies struggle to collect the data needed to meet higher standards; "quite a few countries have yet to implement the previous update agreed 16 years ago, in 2008."
• IMF role:
  • The IMF is "working closely with other international institutions, national statistical agencies, and others to establish conceptually sound standards."
  • Through capacity development activities, often in partnership, the IMF helps countries produce more reliable and relevant estimates of GDP and related statistics.

Key policy recommendations and implications

• Use complementary measures alongside GDP:
  • Compile and use NDP to add a sustainability perspective to GDP.
  • Develop comprehensive-wealth measures that include human, natural, and social capital.
• Update statistical frameworks and standards:
  • Finalize and adopt the updated SNA to incorporate nonrenewable resource depletion, renewable natural capital, human-capital accounts, and the economic value of data.
• Strengthen statistical capacity:
  • National authorities should compile comparable comprehensive-wealth measures and use them in decision-making.
  • International cooperation and capacity development are necessary to help statistical agencies meet higher standards.
• Integrate new data and technologies:
  • Leverage AI, big data, and satellite imagery to measure ecosystem degradation and assess natural-capital values.
• Maintain GDP’s role while broadening focus:
  • GDP will remain the go-to measure of economic output, but it should be complemented by measures that better reflect sustainability and well-being.

F&D Magazine — BERT KROESE, December 2024.

Content in this bundle

• GDP in the Future
  • GDP in the Future (Markdown version)
  • GDP in the Future (PDF)