Explain the differences between Gross Domestic Product and Genuine Progress Indicator (two methods for measuring economic activity).
The major difference between the genuine prosperity index (GPI) and gross domestic product (GDP) is that GPI purports to make up for the shortcomings of GDP. GDP is purely an indicator of the amount of economic activity in a country. GPI tries to measure the quality of life in the country as well as the amount of economic activity.
- GDP does not count work that is done for free. GPI does count all such work as if someone were being paid to do it.
- GDP does not take into account the distribution of wealth in a country. GPI attempts to do this. It goes up when the poor receive a greater share of the national income and it goes down when they receive a lower share.
- GDP does not take into account the harm that some economic activity can do to an economy. GPI tries to measure the cost of things like pollution. It subtracts the cost of pollution, both short and long term. It tries to measure the cost of the fact that we are depleting our resources. Thus, it tries to distinguish between economic activity that is good and economic activity that is bad.
- GDP does not take into account the amount of leisure time people have. GPI does increase when people have more leisure time. It treats this time as if the time has a monetary value.
In these ways, and a few others, GPI tries to improve upon GDP and to truly measure progress as opposed to pure economic activity.