The gross domestic product (or GDP) is the traditional measure of economic prosperity and is the basis for the economic growth figures that appear in the media. We have grown used to hearing economic growth forecasts that project another robust year of two to five percent growth in GDP. We automatically assume that more growth is inherently better and that stagnant and negative GDP growth is bad. Few of us understand what economic growth and the GDP really mean and how they are measured.

The GDP can be expressed on the basis of expenditure or income.¹ Based on expenditures, it...

Simon Küznets, the U.S. economist who pioneered the development of national income accounting and the GDP/GNP metrics in the 1950s, following from the work of John Maynard Keynes and Sir Richard Stone, remarked:

“The welfare of a nation can scarcely be inferred from a measurement of national income as defined (by the GDP) ….Goals for more growth should specify of what and for what.”²

That is to say, we seek answers to the question: “If GDP is up, is that necessarily good if other human, social and natural capital indicators are down?”

Küznets went so far as to recommend the...

Most economists will agree with the standard definition of income by Hicks (1946):

Income is the maximum amount an individual can consume during a period and remain as well off at the end of the period as at the beginning.

Statistics Canada defines the income of a nation or province as “the amount it (nation) can collectively spend during a period without depleting the capital base (or wealth) upon which it relies to generate this income.”⁵

Given our clarification that wealth encompasses more than financial capital and includes natural, social, human and built capital, we can extend the definition of...

Since personal consumption is the largest component of GDP, this presumed correlation between consumption and well-being is the conceptual starting point for those who use GDP as a measure of economic progress. To be conservative and contemporary, the GPI implicitly accepts that premise. The U.S. and Australian GPI analyses begin with personal consumption expenditures as the starting point for deriving a GPI net sustainable income line to compare against the GDP, based on the idea that the expenditures on goods and services by households are a first order measure of economic welfare.

The GPI Income Statement uses gross personal consumption...

Between 1961 and 1999, Alberta’s economy, as measured by real (1998$) GDP grew by 401 percent – an average of 10.5 percent per annum over almost 40 years. On a per capita basis, Alberta’s GDP grew 126 percent while the average annual rate of real (1998$) GDP growth per capita growth was 2.2 percent from 1961 to 1999. According to these figures we are better off than at any time in our history, producing and consuming more and spending more money in the process. The GDP growth figures suggest we are better off, but are we missing something in this...

The GDP can be expressed in terms of expenditures or income. Generally we express the GDP statistics in terms of expenditures by households, business, government, farms and other institutions. The GDP on an expenditure basis comprises the following components; their contribution to Alberta’s 1999 GDP is shown in brackets:

personal consumption expenditures by households on goods and services (48.2% of 1999 GDP);

net government expenditures on goods and services (14.1%);

gross fixed capital formation by business (26.0%);

gross fixed capital formation by government (1.7%);

investments in inventories (0.7%);

exports (53.3% of GDP value) less imports (-44.6% of GDP value).

Figure...

All government expenditures on goods, services and capital are included in the GDP and in national and provincial economic accounts without distinguishing between those expenditures that contribute to genuine improvements in well-being and those that are defensive, or regrettable. GPI Accounting attempts to make a clear distinction between public (that is, government) consumption expenditures that improve well-being of society and the environment and those that merely compensate for damage or erosion to human, social, and environmental capital.

Deciding which government expenditures genuinely contribute to well-being can be difficult and fraught with philosophical challenges. Drawing from the earlier work by Cobb...

The GDP and economic accounts include spending or investment by businesses on fixed capital formation. As a rule, spending by business is not considered to contribute to the economic wellbeing of households. Most of the economic benefits attributed to business activities are already captured in personal consumption expenditures by individuals and households. Thus we must be careful to avoid double counting and double attribution of expenditures to economic welfare.

The Australian GPI deducts for the value of advertising by business as a contribution to genuine well-being (see www.gpionline.net). While acknowledging the importance of information and product awareness, 50 percent of...

Alberta’s economic prosperity is highly dependent on the trade of capital assets, primarily the export of natural capital – oil, gas, coal, timber, and agricultural products. In 1999, over 53 percent of the value of Alberta’s GDP resulted from exports of all forms of capital; this was balanced by imports, which as a negative deduction in GDP calculations, made up almost 45 percent of Alberta’s 1999 GDP value.

The Alberta economy would not be as prosperous had it not been for the endowment of natural capital stocks, in particular non-renewable fossil fuel resources, most of which is exported to Canadian...

Alberta’s economy has long depended on primary, natural capital-intensive industries – agriculture, oil and gas, coal, and the forestry industry. Was Alberta’s economy more diversified in 1999 than it was in the early 1970s before the oil boom? Are we less or more dependent on natural capital as the basis of economic prosperity?

Diversification of the province’s economy does not necessarily have positive implications for the well-being of citizens. However, an economy with a more diverse base is healthier, more resilient and thus more sustainable than one that depends on a single sector or cluster of sectors.

Economic diversity can...

Simon Küznets challenged us to continually ask that calls for “more economic growth define of what and for what.” When we examine the Alberta evidence over the past 40 years, the sectors showing the most growth since 1971 include the financial services (banking, investment), insurance and real estate sector, forest industries, manufacturing and petroleum refining (see Table 4).

As Figure 14 has shown, Alberta’s economy was only slightly less dependent on resource-based industries in 1999 (25.9 percent of GDP) than it was in 1971 (28.0 percent of GDP). The importance of the service and knowledge-based economy has grown only marginally...