Discussion Board

Analyze and comment on the "You're The Economist" box below. In calculating GDP, what items should be included and their values be added to GDP and what items should be subtracted from GDP? Under the current system, every dollar spent added to GDP and nothing subtracted from it. What kind of changes, if any, would you recommend? Please make your main answer minimum of 100 words). 

Is GDP a False Beacon Steering Us into the Rocks?

Suppose a factory in your community has been dumping hazardous wastes into the local water supply and people develop cancer and other illnesses from drinking polluted water. The Environmental Protection Agency (EPA) discovers this pollution and, under the federal “Superfund” law, orders a cleanup and imposes a fine for the damages. The company defends itself against the EPA by hiring lawyers and experts to take the case to court. After years of trial, the company loses the case and has to pay for the cleanup and damages.

In terms of GDP, an amazing “good” result occurs. The primary measure of national economic output, GDP, increases. GDP counts the millions of dollars spent to clean up the water supply. GDP even includes the health care expenses of anyone who develops cancer or other illnesses caused by drinking polluted water. GDP also includes the money spent by the company on lawyers and experts to defend itself against the EPA. And GDP includes the money spent by the EPA to regulate the polluting company.

Now consider what happens when trees are cut down and oil and minerals are used to produce houses, cars, and other goods. The value of the wood, oil, and minerals is an intermediate good implicitly computed in GDP because the value of the final goods is explicitly computed in GDP. Using scarce resources to produce goods and services therefore raises GDP and is considered a “good” result. On the other hand, don’t we lose the value of trees, oil, and minerals in the production process, so isn’t this a “bad” result?

The Bureau of Economic Analysis (BEA) is an agency of the U.S. Department of Commerce. The BEA is the nation’s economic accountant, and it is the source of GDP data cited throughout this text. Critics have called for a new measure designed to estimate the kinds of damage described above. These new accounts would adjust for changes in air and water quality and depletion of oil and minerals. These accounts would also adjust for changes in the stock of renewable natural resources, such as forests and fish stocks. In addition, accounts should be created to measure the effects of global warming and the destruction of the ozone layer.

figure

haak78/ Shutterstock.com

As explained in this chapter, a dollar estimate of capital depreciation is subtracted from GDP to compute national income (NI). The argument here is that a dollar estimate of the damage to the environment should also be subtracted. To ignore measuring such environmental problems, critics argue, threatens future generations. In short, are we really better off producing more things if that results in a less pristine environment? Perhaps conventional GDP perpetuates a false dichotomy suggesting there is a trade-off between economic growth and progress, and environmental protection and sustainability

Critics of this approach argue that assigning a dollar value to environmental damage and resource depletion requires a methodology that is extremely subjective and complex. For example, how do you measure the lost value of an extinct species? Nevertheless, national income accountants have not ignored these criticisms, and the National Academy of Sciences has reviewed BEA proposals for ways to account for interactions between the environment and the economy.