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5 Indicators of Economic Health Unique to The 21st Century

By Finserv MARKETS - Dec 31,2019
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5 indicators of Economic Health Unique to the 21st Century

Measuring economic progress is no easy task. The question of how to correctly identify economic well-being in regions, countries and the world has perplexed economists for centuries. While the Gross Domestic Product was conceptualized in the 20th century, it remains the most widely calculated, accepted, followed and compared statistic of economic progress around the world.

However, GDP has its set of limitations which tend to make it an inaccurate, if not entirely useless measure of economic progress. For instance, GDP only measures the monetary increase in incomes and production in the country while leaving out indicators of well-being, affordability, human development and life satisfaction. Without the solid foundation of how people and businesses are actually behaving in an economy, GDP gives a rather dry macro picture of what the income and output look like.

As a result, organizations and countries around the world are rethinking economic progress through different lenses in order to better capture economic well-being. Some of these measures aim to correct what GDP measures and leaves out, while others focus on improving the economic well-being indicators by measuring completely different things than just monetary increase/decrease in production. So, things like quality of healthcare, access to education and even general perception of happiness are now forming the bedrock of new-age economic indicators which are unique to the 21st century.

Some of the widely accepted new-age economic well-being indicators include:

1. Human Development Index:

Adopted by the United National Development Program post the 1990s, the Human Development Index is a comprehensive comparison scale for all the countries around the world. It takes into account life expectancy, access to education and expected years of schooling as well as the gross national income when it is adjusted with inflation levels to account for purchasing power parity.

5 indicators of Economic Health Unique to the 21st Century

Source: UNDP

The index is widely accepted around the world as a better indicator than GDP to indicate economic well-being of citizens and also guides policymaking for people rather than just focussing on the accounting of national income. The HDI indicators released in 2018 suggest that countries like Norway, Switzerland and the UK have a very high quality of economic well-being while countries like India are grouped with medium human development nations including Pakistan, Ghana and Iraq.

2. Gini coefficient:

While measuring total production in a region gives the estimation of the size of the economy, it doesn’t say anything about the distribution of the profits. Or in other words, knowing that a country is rich doesn’t tell us anything about the relative wealth of its people. Hence, income inequality has emerged a major economic theme in the 21st century and the Gini coefficient is arguably the most popular indicator of income inequality across the world. The indicator was formulated in 1912 by Italian statistician Corrado Gini to measure relative inequality in the society. For instance, the Gini coefficient is used to measure the distribution of income across a country by calculating the concentration of income in the total population. Hence, a country with the same levels of income for all will have a Gini coefficient of 0 (perfect equality) while a country with income concentrated in the hands of a few will have a Gini coefficient closer to 1.

3. Green GDP:

Green GDP is a variation of the GDP calculation modernized for the 21st century considering climate change and the realities of biodiversity decay being witnessed around the world. Green GDP accounts for the loss of biodiversity and harm to the environment caused by a country’s economic growth and includes those in the calculation to arrive at a better measure of the economic well-being. The major issue with Green GDP is that it requires conversion of each environmental decay factor into monetary terms for it to be subtracted from nominal GDP. These conversion rates could vary across countries and even vary across different periods based on advancement in science and technology. While the measure is not widely accepted yet, it’s heading towards more popularity owing to its rationale of promoting more sustainable growth and development.

4. Purchasing power parity:

Purchasing power parity is emerging as an important indicator of economic well-being in countries considering the levelling effect it provides to all other economic indicators. It takes into account the affordability of products and services relative to exchange rates between countries and prevailing inflation levels to give a true picture of the actual rise in standards of living. For instance, PPP-adjusted GDP figures are often very different from the nominal GDP numbers seen across countries. Some of the major ways this is being used is to calculate PPP-adjusted GDP or indices such as the Big Mac Index which estimates how much the same Big Mac burger will cost in US dollars around the world.

5. Inclusive Wealth Index:

In 2012, UN agencies launched the Inclusive Wealth Index which aims to further go beyond the GDP and HDI levels by measuring a country’s wealth across natural, human, manufactured and social capital. The report only measures a small section of the world’s total countries as of now but they represent more than 70% share of the global population and more than half of global income. The index is catching on the popularity because of its insights that dry numbers such as GDP growth cannot provide. For instance, it deals with the trade-offs between deploying technological and human capital. And it also provides an insight into natural capital decline due to climate change.

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