Chapter 6

EC102

How to improve National Accounts?

• Insufficiencies of traditional model and methods– Environment?– Household production?– Well-Being?

Environment

• Roles of the Natural Environment– Resource functions

• Minerals, petroleoum, fish, forests

– Environmental Service Functions• Clean air, drinking water, suitable climate

– Sink functions• Absorbation of wastes

ENVİRONMENTAL ACCOUNTS

eaNDP and Genunine Saving

• eaNDP=GDP-Depreciation of Manufactured Capital – Depreciation of Natural Capital– Proposed by UN

• Genunine Saving= Gross Saving - -Depreciation of Manufactured Capital – Depreciation of Natural Capital

How to Measure value of Environmental Resources?

• damage cost approach– Assigning a monetary value equal to damage

doıne when service is gone• maintenance cost approach

– Assigning a monetary value to that is equal to what would it cost to maintain the service by using an alternative method

Example:

Suppose Country A (the Ukraine) built a nuclear power plant that had a large accident and led to the release of radioactive iodine that damaged the population’s thyroids. It led to $1million in health costs. Country B (Poland) administered potassium iodide pills to the population, to protect the population’s thyr oids in the case of an accident. The protection pills cost the country $100,000. Country C (Germany) decided to ban thebuilding of nuclear power plants. What is the value of the adioactivity-free air in Country C due to this ban of nuclear power plants:a) measured in terms of the damage cost approach?b) measured in terms of the maintenance cost approach?

HOUSEHOLD PRODUCTION ACCOUNTS

Why household production is excluded?

• Households are nonproductive?• Its hard to distinguish from consumption• Including household production would not

make a big difference

How to Measure value of household production?

• Opportunity cost method– Valuing hours for a job

• Replacement cost method– Valuing the cost of the service

Example According to the results of the 2005 U.S. time use survey, women spent an average of 2.3 hours per day on household activities such as housework, food preparation, yardwork, or paying bills, while men spent 1.4 hours per day (when averaged over all responses). Suppose these findings reflect the hours spent in household production for a middle class professional couple, who can each make $20 an hour in paid work. Suppose they can hire someone else to do these household activities for them for $10 an hour. Estimate the daily value of these household pr oduction activities (assuming no one else in the household is contributing to household production) using:

a) the opportunity cost methodb) the replacement cost method

MEASURİNG ECONOMİC WELL BEİNG

GPI• Genuine Progress Indicator (GPI)

– A measure of economic well being that adds many benefits, substracts many cost not included in GDP

• The calculation formula of Genuine Progress Indicator presented in the simplified form is the following:

– GPI = A + B - C - D + I

– A is income weighted private consumption

– B is value of non-market services generating welfare

– C is private defensive cost of natural deterioration

– D is cost of deterioration of nature and natural resources

– I is increase in capital stock and balance of international trade

Component Indicators of GPI

positive positive positive negativeBase Data only ----- negativenegative

Excluded as a Stock

Excluded as a Stock

Excluded as a Stockpositive negative negative negativeNegative (positive)

Negative (positive)

Negative(positive) Negative

(positive)

negative Negative(positive) Negative

(positive)

negative

negative

X

X

X

• Primary Motivation = to develop a better measure of societal progress than the GDP

• GDP was never intended to be a measure of the nation’s welfare

“the welfare of a nation can scarcely be inferred from a GDP” (Kuznet 1934)

• GDP measures ‘the amount of production of goods and services in the economy’