Flaws in Conventional System - Representation

The measures like GDP and, NDP do not adequately represent the degradation of environment. Sometimes the expenditures incurred in restoring the environmental quality are accounted as increases in national income and product. For example, cleaning up of rivers, treating water for drinking, preventive expenditures to protect from ill effects of pollution all are shown as increases in GDP.

Thus, we see that the conventional/traditional system of national accounting implies that the environmental assets like air and water may be degraded due to economic activity, resulting in a reduction in social welfare. However the corresponding adjustment is not made in the accounts. This gives a false impression of increase in income while natural wealth is reducing. Further, ignoring the contribution of non-market value of environmental goods and natural resource depletion would result in misrepresenting the current well-being and would distort the economy's production and substitution possibilities. Thus the current measures of national income are inadequate as indicators of social welfare.

Moreover, these provide misleading information about whether an economy is using its resources in a sustainable manner. Thus the policy-makers are not rightly informed on the important link between economic growth and the environment. Hence environmental accounting can be useful in removing the current biases.