Question

Having completed our course in “natural resources economic policy” think back to the opening chapter of the text. The authors discussed the importance of measuring environmental objectives and what it is that society desires. You have seen reference to GDP and alternative measure that purport to improve upon it. You have also seen the importance paid to it when talking about the impacts environmental policy have upon the economy.

a. What does GDP measure? (be specific and clear)

b. How might it be meaningfully improved from your viewpoint and those of others? (use at least a few specific examples of items not appropriately treated within the existing GDP framework)

c. Do you think there might be a problem evaluating environmental policy changes using measures of beneficial and adverse consequences, that is, using financial estimates based upon the price system that arises from the same system that produces the current GDP? Why or why not?

Answer 1

a) GDP is Gross Domestic Product.The OECD defines GDP as "an aggregate measure of production equal to the sum of the gross values added of all resident and institutional units engaged in production and services (plus any taxes, and minus any subsidies, on products not included in the value of their outputs). As seen from this definition, GDP measures values of the goods and services 'produced' in the country and not those 'sold' in the country.

b) Measurement of GDP could be improved by:

1) Correcting the measurement errors by using mathematical and statistical tools

2) Including goods and services which are not currently included in GDP measurement but should be accounted for.

The limitation of current method of GDP measurements are:

a) GDP does not account for natural resources present in the country. Natural resources are only counted in GDP after they get exploited. For example, 'value' of mineral resources does not show in the GDP but the 'price' of minerals mined and sold in the market are accounted for. If the value of existing natural resources could be accounted in GDP, it would be improved and more realistic measurement. When measuring GDP, the amount of resources which are untapped should also be accounted for. The resources include minerals, wood, coal and also other natural resources like water.

b) GDP does not include voluntary work done, only paid services are accounted for. However, voluntary work done also contributes to a nations progress and overall wellbeing. There should be a system in place to account for the value added due to voluntary work.

c) GDP does not consider the value destruction due to pollution and other economic activities. For example, if a natural resource is blatantly overused and gets severely depleted, GDP will still show an improvement despite the environmental damage caused by overuse. Also, if increased industrial activity leads to increased pollution, GDP will show an improvement not accounting for the value destruction due to pollution. Thus, there should be a system that will account for the value destruction.

3) The answer is yes, there might be a problem. If you consider the facts that GDP does not include the value of natural resources availabe in the country and that GDP only considers price of goods and services sold in the country in given financial year, it could be said that there might be a problem evaluating environmental policy changes. Please refer the the points a and c in above explanation for more details.