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Good and Bad GDP Grow Rate

In this document I introduce the notion of good and bad GDP. By using a metaphor of good and bad cholesterol, we can start mitigate the negative effect of using only the GDP grow rate as an indicator of the shape of an economy.
After the coronavirus lock down we will see a lot of public economic stimulus packages and having a better metric for judging the impact of the measures will help governements make better and more sustainable decisions.

Gross domestic product (GDP) grow rate

Gross domestic product (GDP) grow rate is one of the most used indicators for figuring out the shape of an economy. A higher grow rate is considered positive, a lower one is a sign that the economy is not performing well. A negative is considered a recession and therefore negative for an economy.

Amartia Sen, Indian Nobel prize for economy, in 1981 has been one of the first to highlight that the economic grow could also negatively impact a large group of population and also bring then to starve and die.  GDP is a sum of all economic activities, it is just an indicator of the monetary volume of the economy. It is an important metric, but in order to assess the health of an economy other elements are necessary. Unfortunately, the GDP grow rate has a lot of importance also due to the fact that there is a lack of other easy to understand parameters. These is not the for companies, where different elements are considered, like revenue grows, profitability, capital structure, cash flow, in order express a judgement.

There have been a lot of attempts to create a better metrics that could replace the GDP to assess a performance of a country, but the success has been very limited or confined to some countries.

Good and Bad GDB

I think that in the near term the GDP will remain a powerful indicator and therefore, instead of trying to replace it, we should try to make it more expressive by also adding information regarding Good and Bad GDP. These two elements will not replace the GDP value, but serve to give some sort of better indication on how the economy is moving.

Distinguishing between activities that are positive or negative should not be that difficult. Currently the offices of statistic sum all economic activities in a single value. What we need to do is to separate between:

  • Good GDB.
    Economic activities that are judged positive.
  • Negative GDP.
    Economic activities that are judged negative.
  • Neutral GDP.
    Economic activities that we cannot give a judgement.
  • Mixed GDB.
    Economic activities that contains positive, negative and neutral elements.

Criteria for Good and Bad GDP

With today sophisticated statistics system, it is for sure feasible to separate. What is needed is a set of criteria that give us an indication if the economic activity is positive or negative.

A possible approach would be to calculate and divide the bad GDP from the good one. I think a good indicator would be the fact that the creation of value is associated with a destruction of value, like for example:

  • Destruction of assets.
    An economic activity, military output, produces a destruction of a county.
  • Negative impact on the environment.
    The production or use of the goods brings damages to the environment.
  • Negative impact on the health.
    The production or use of the goods brings damages and degradation to the heaths of people.

Most economic output would not be classified on the good or bad side, but it will contain parts of both. IN the statistics they can be separated with percentages.

It would take some time and different steps before we get a mature system for classification. But if we do not start, we will continue to refer on the very limited GDP metric. A good start is for governments to give a mandate to a university or to the office of statistic to introduce a first system for calculating the good and bad GDP.

Use of good and bad GDP

The first use of the good and bad GDP measure should be when setting up economic stimulus packages. Instead of just trying to grow the economic output each of the proposed measure should also assess the impact on the good and bad GDP.

End of March 2020, the US Environmental Protection Agency (EPA) to suspends environmental law enforcement, citing coronavirus. This measure will have a negative impact on the environment. The increased economic output should therfore classsified as bad GDP grow.

The good and bad GDP metrics will then help give us a better indication regarding the impact of measure taken by governments.