Katrin Jakobsdottir has teamed up with Scottish First Minister Nicola Sturgeon and New Zealand's PM Jacinda Ardern to promote a "well-being" agenda.
Ms Jakobsdottir called for "an alternative future based on well-being and inclusive growth".
She said new social indicators were needed besides traditional GDP data.
Nobel Prize-winning economist Joseph Stiglitz is among several economists arguing that gross domestic product - measuring a country's production in goods and services - fails to capture the impact of climate change, inequality, digital services and other phenomena shaping modern societies.
In a Guardian article last month, Prof Stiglitz said the 2008 global financial crisis "was the ultimate illustration of the deficiencies in commonly used metrics".
GDP failed to reveal distortions in the bloated US housing market which triggered the crisis.Ms Jakobsdottir said environmental devastation was a key factor driving Iceland to incorporate new social
indicators besides GDP in its budget planning.
She began a speech at London's Chatham House think-tank by highlighting the disappearance of Iceland's Okjokull glacier. Scientists say the retreat of glaciers is clear evidence of global warming, which is blamed largely on CO2 pollution.
Asked if a "well-being" budget was equally appropriate for developed and developing nations, she said: "It's about how you prioritise in the public budget - you can always have an emphasis on well-being."
Developing countries "need to take a leap" to embrace renewable energy, she said, rather than repeat the developed world's carbon-based industrialisation.
GDP's focus on economic performance means it tends to undervalue quality of life and the social damage caused by inequality.
Ms Jakobsdottir said an Icelandic poet had joked that "having sex with your wife doesn't count in GDP, but with a prostitute it does".
A Left-Green politician, Ms Jakobsdottir formed a coalition government in 2017 with the conservative Independence Party and centre-right Progressive Party.
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