GDP – Gross Domestic Product, seems to be making lot of headlines in the media lately. It turns out that, this term has become the toast of political discussions and almost all the channels are debating relentlessly on who performed well on this matrix – was it #UPA or the present #NDA Govt. Never thought, that politicians will take over this term and use (misuse) it to slugfest each other without knowing the real meaning of this term. Leave aside these politicians, even the best #Economists sometimes suffer myopicism in analyzing GDP. I haven’t found anything ingenious – but Yeah! Surely something interesting to deliberate.

Let us first understand the basic meaning of Nominal GDP. It is a macroeconomic measure derived by adding all the monetary value of economic produce in an economy for a period between two points on the time-scale. This figure is adjusted for price changes (i.e., inflation or deflation) to arrive at the Real GDP number – reported commonly as #GDP. Inflation is the changes in prices in the period over same points on the time-scale.

Now, that we have understood how Inflation is a necessary ingredient to calculate Real GDP number, let me introduce another important term which, incidentally is known to the World leaders & thinkers, but very conveniently overlooked. But before that, let me take a tangent to understand this famous scientific Law – “The Law of conservation” . This law states that, Nothing in this universe gets created or destroyed – it simply changes forms. Should I infer that all this “GDP” that Nations chase, is nothing but converting one form (of natural resources) into another form (usable resource)? Oh yes! Does that mean, we as constituents of the economy are Converting things and not Producing them contrary to what we commonly thought? Yes again..!

If I were to pull a “Scientist” to explain the term GDP in the light of this famous law – the explanation would say that it should defined as the “Gross Conversion Ratio” rather than a production ratio. Now assume, we also have An Environmentalists on the panel. S/He would suggest that all this Conversion is happening at an environment cost. So before one calculates the “Real GDP” – please account for this cost also. How to measure this cost? Well simple, it could be measured by creating few yardsticks like Carbon foot-prints, green-house gasses, air quality etc. Differences in values between two set of points(same points as GDP calculation) on the time-scale be accounted for. This number could be positive or negative – the way we have inflation and deflation. And the way Inflation is used to reduce the Nominal GDP to derive the Real GDP – similarly this Environmental index should be given its due weightage and Nominal GDP should be adjusted to arrive at the real GDP.

There are countries which have increased forest cover, but surprisingly such work doesn’t reflect in their GDP. At the same time, there are few Nations which have mindlessly exploited mother earth and might have added numbers to their GDP – but turned out to taxing on the World environment. Shouldn’t, therefore World Bodies sit back and rethink on introducing proper indexes to give a better meaning to this term Real GDP. This number decides the country’s ranking in world order. It decides the currency values and defines the World trade. Shouldn’t the World Bodies be little serious on this index then?

Developing & Underdeveloped nations might cry foul stating that this might impede their growth which is true. Such countries can be taxed with a reduced multiple of this “Environmental index” damage from their nominal GDP till they don’t become developed. And then can we say – we are sitting on right set of numbers that could be compared.