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Example 4 Beyond GDP: Unmasking the Fallacy of Economic Growth In the pursuit of economic prosperity, societies around the world have fixated on Gross Domestic Product (GDP) as the paramount measure of success. GDP is the universal yardstick for measuring economic growth; it is calculated using a simple formula which totals how much is spent on new goods and services in a country in a given period of time. The simplicity of GDP is attractive, it makes it easy to understand, easy to calculate, and easy to manipulate. However, this simplicity conceals a host of limitations, which discount important factors in measuring overall economic prosperity. The steadfast reliance on GDP as the primary measure of economic growth encourages policymakers, investors, and public opinion to overlook critical facets of social well-being. Throughout my experience in studying economics, I've come to learn that the emphasis on GDP as "growth" has obscured the lens through which we view our economic goals. By using GDP as the singular gauge for economic growth we are ignoring a number of economic failures that are inhibiting social progress. A major limitation of GDP is that, by definition, it is a gross measurement, meaning there are no deductions for the negative externalities associated with production. This means that production is always calculated as a net positive, without consideration for social costs such as the air pollution, water pollution, or carbon emissions it might generate. This is what economists often refer to as asymmetrical accounting; adding in all of the good and ignoring all of the bad. This issue of asymmetrical accounting can allow GDP to misrepresent production as growth, even when that production lacks the necessary progressive nature of growth. The economist Robert Mendelsohn developed his own index to counter this asymmetrical accounting called the Gross External Damages Index (GED) which attempts to calculate the social costs associated with production. In his studies, Mendelsohn found that a number of industries actually produce more costs in externalities than they do profit 1 . Another fundamental drawback of GDP is that it indiscriminately treats all spending as a positive influence on economic growth. Following the BP Oil Spill in 2010, the costs incurred to replace assets devastated by the disaster (amounting to approximately $20 billion) were simply added into the GDP, overlooking the nuanced economic fallout. The oil spill wreaked havoc on the local economy in ways entirely unaccounted for by GDP: fishermen lost their livelihoods, restaurants shuttered, and tourism plummeted 2 . The ecological balance was severely disrupted, leaving long-lasting and irreversible damage. Hurricane Katrina presents a parallel case. Cleanup efforts inflated GDP, failing to reflect the struggles of New Orleans' citizens. The city's population and economic recovery lagged behind GDP's optimistic projections, emphasizing the metric's inadequacy in capturing the profound impact of major disasters 3 . Inequality is also an issue in economic growth that cannot be highlighted through the GDP. It is entirely possible for a nation's GDP to surge while leaving significant segments of its population marginalized and excluded. In order to get a more individual sense of GDP, economists typically calculate it "per capita" by dividing the total sum of GDP across the population. GDP tends to disproportionately favor affluent segments of society, masking disparities. For instance, if a small portion of the population experiences substantial income growth while the majority faces stagnation or decline, GDP may still indicate overall growth. Additionally, it fails to account for unpaid work, often shouldered by marginalized groups, which is crucial for societal functioning but goes unnoticed in GDP calculations. This stark reality underscores the fact that economic growth, as defined by GDP, does not guarantee inclusivity and in fact is often misrepresented in marginalized communities. Economists have been aware of the shortcomings of GDP for decades; Simon Kuznets, one of the architects of GDP, acknowledged its limitations and cautioned against using it as a comprehensive measure of societal progress. Just as the study of economics is not a study of money, the goal of economic growth should not be increasing profits. Social justice has risen to the forefront of the political agenda, but social progress cannot be achieved without economic reform. It is imperative that economic growth be better defined and more accurately measured in congruence with the societal progress it promotes. 1 Blumberg, A., & Smith, R. (2011, October 25). Will Economic Growth Destroy the Planet. Planet Money. https://www.npr.org/transcripts/141701559 2 National Oceanic and Atmospheric Administration. (2017, April 20). Deepwater Horizon oil spill settlements: Where the money went. https://www.noaa.gov/explainers/deepwater-horizon-oil-spill-settlements-where-money-went 3 Sweet, R. (2017, August 31). How Natural Disasters Affect U.S. GDP : Moody's Analytics Economic View. Economy.com. https://www.economy. com/economicview/analysis/296804/How-Natural-Disasters-Affect-US-GDPmoney-went Need more help? Contact us at info@twc.edu

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