The various differences between GDE and economic welfare that could eventually be quantified in terms of money will now be described. Also, the efforts made in the literature to transform GDE into an
indicator of economic welfare, by including or excluding certain items, by using more consistent valuation, and by reclassifying certain groups, will be presented.
(1) The items and concepts relevant to economic welfare that could he
valued in terms of money.
First, a number of goods and services that do not yield a price on the market place are excluded from GDE. They range from home grown vegetables to housewives' services. Furthermore, the size of this barter and home-consumption economy varies among countries and is usually greater for poorer countries; in any event, its value can be estimated
(imputed) for each country. Second, the items entering GDE are not all valued consistently. While most goods and services are included at market prices, the public goods and services are usually included at
factor costs and therefore their impact may be underestimated. Third, as mentioned in Chapter I and in Section A above, economic welfare refers strictly to expenditures on private consumables. Hence, any expenditures
on intermediate goods and services included in GDE and all investment
expenditure represent a divergence between GDE and economic welfare. To
transform GDE into an indicator of welfare, these items should thus be
reclassified and eventually revalued.
Indeed, certain items treated as expenditures on final goods
and services in GDE are actually costs. For instance, the expenditures
on police or defence, included as a public service in GDE, are really
costs of maintaining peace. The same argument could apply to health
expenditure which can be interpreted as the cost of reaching high life
expectancy rates and low mortality rates. Finally, depreciation is
obviously a cost. Another group of items which should be included in a
measure of economic welfare as cost or as benefit and which are ignored
are the negative or positive externalities. The deterioration of the level
of living due to industralisation is not properly taken into account by
GDE. Moreover, when such concerns are included in GDE, it is usually
done incorrectly; for instance, if the task of cleaning up pollution is
left to the government, it is reckoned as a final expenditure, whereas
it should be treated as a cost.
Furthermore, as noted in Chapter I, investment goods can be
included in a measure of economic welfare only in the form of the dis
counted value of the flow of goods and services they will produce during
their life-time. This is obviously a major discrepancy between economic
welfare and GDE, which includes gross investment. Similarly, a number of
items included in GDE as final consumption expenditures should be reclass
ified as investments, and treated likewise. First, consumer durables
should really be considered as investments because their life span is
greater than a year (or unit of accounting). Second, education and health
expenditures are often considered as investment in human capital; however,
(2) Methods valuing and integrating these items or concepts into a
monetary aggregate.
The most famous study valuing and integrating various items
and concepts of economic welfare into a monetary aggregate is the one
undertaken for the USA by Nordhaus and Tobin (1972). The main line of
argument is as follows: If growth is measured in terms of an increase in
GNP only, its harmful effects may not be revealed. In fact, welfare might
even be deteriorating without our awareness. Hence the concept of GNP
should be amended in order to take into account various quantifiable
factors that affect the general level of welfare. A similar point of view
has been expressed by A.K. Sen (1973). We will now survey these two
pioneering studies.
Sen's approach is to supplement the traditional national income
measures with various partial indicators. Aware of the intricacies of
the index number problem, he admits that the new indicators cannot be
adequate measures of social welfare. However, within a simplifying frame
work, he shows how some important modifications of the national income
weighting scheme could produce important improvements by stressing under
rated considerations or by downplaying overrated ones. He focuses on
five main considerations and proposes specific ways to deal with them.
The five topics covered are: military and policing expenditures, environ
ment and exhaustible resources, saving valuation, life expectation, and
inequality and income distribution. However, Sen devotes almost his
entire attention to expositing the methods he develops to modify the
usual national income measures to take account of these five factors.
The only application presented is an attempt to take into account life
expectancy concerns for 27 countries.1
He actually weights "the GNP per head by the expectation of life compared with a standard longevity assumption."
Nordhaus and Tobin, on the other hand, although they do not include the
last two concerns in their study, carry out much more detailed empirical
development limited however to one country, the USA. They aim at trans
forming GNP into a more welfare-oriented measure, the MEW (Measure of
Economic Welfare), by correcting certain valuations, including certain
new items and reclassifying certain groups. Then, the effects of economic
growth on the depletion of the natural resources and the specific case
of economic growth with zero population growth are also surveyed.
The authors' initial task was to reclassify GNP final expend
itures and this gave rise to a number of difficult and controversial
issues. The first problem was to group government purchases into inter
mediate and final items. Furthermore, a number of other controversial
decisions had to be made; e.g. they chose to treat consumer durables
as capital investment; similarly education and health expenditure, both
public and private were reclassified as capital investment. As their
approach is growth-oriented, they took into account as costs the growth
requirements needed to sustain the same per capita consumption assuming
a certain rate of technological progress. Finally, they reclassified a
number of instrumental outlays that fulfil intermediate, rather than
final, consumption needs. They excluded defence expenditure and police
outlays as being "regrettable outlays" and not adding to welfare.
Their second task was to impute values to a number of final
goods and services not included in GNP. In the same manner as rent is
imputed on owner-occupied homes, they allowed rent imputation for consumer
durables (now included in capital goods) and for other public investments.
Leisure and non-market activities,mainly housewives' services, were also
taken into account in the new measure.
Finally, they undertook to impute some values to various nega
tive externalities in order to substract them from this measure. As many
used the differential between urban and rural earnings to evaluate the
disamenities of urbanisation.
This study, the first of its kind, is extremely valuable for
several reasons. It develops a method which permits one to appreciate
the real effect of growth on the public and not only on the productive
capacity of a country; it also relates growth to the stock of natural
resources and to population increase. However, the greatest contribution
of this study is to develop actual techniques to quantify a number of
concepts and items linked to the general welfare and otherwise ignored
by the traditional national accounting methods. These techniques might
be crude or one may not agree on some specific assumptions, as a certain
amount of personal judgment has to enter into each imputation. However,
these criticisms do not deny the great value of the study as many re
finements can readily be applied to it.
The only additional remarks we will make are the following.
It was stated at the beginning of this chapter that income and welfare
could depart from each other on two levels; on the theoretical level of
valuation and on the level of the inclusion of the goods and services.
Evidently Nordhaus and Tobin apply themselves to solving the second set
of problems only and they do not choose to include any distributional
concerns.
Nordhaus and Tobin performed their welfare corrections for the
US, and thereby inspired other economists to develop and apply similar
techniques to different countries; see e.g. a study by the Economic
Council of Japan (1973) and a study by Gillin (1974) for Australia.
The concept of MEW, so far applied only to individual countries,
can eventually be extended for purposes of making international compari
sons. To do so, MEW would have to be strictly defined by an international
agency and then each country would have to adjust its GNP into a MEW
an undertaking, although time consuming, is not impossible, But as MEW
is a monetary measure, if we want to transform it into an internationally
comparable indicator, all the problems linked with exchange rates or
purchasing power parity will still be present. However, in Part II we
will show that some of the difficulties introduced by exchange rate con
versions could be avoided by a non-monetary approach and of course, as
many authors do, we can always ignore the worst theoretical difficulties
by assuming the existence of a social welfare function. In Part III of
this thesis we will thus try to integrate some of the Nordhaus and Tobin ideas into a non-monetary approach in order to perform international wel
fare comparisons. Moreover, we will be able to integrate additional
concerns that are quantifiable in a non-monetary manner only.
To summarise, this section has dealt with the limited concept
of economic welfare implying the possibility of valuing everything in
terms of money. However, many authors have adopted a much wider and
general definition of welfare and have criticised national accounts for
not embodying these concepts. We will now exposit these criticisms and
in the next chapter describe the attempts made by various authors to
measure a wider interpretation of welfare that we have called socio
economic .
II. GDE versus socio-economic welfare
A number of concepts which are deemed quite important in a
rather popular view of welfare fall in the classification of socio
economic concerns. They can sometimes be translated into monetary values,
but such transformations are usually cumbersome, indirect, and hence
often inexact. These socio-economic concepts are usually quantifiable
more directly in a demographic form and such evaluation is thus much
more reliable, A large body of welfare concerns is thus available
health, education, labour conditions etc. Other welfare concerns are
quantifiable in number of units and it would be very difficult to assign
a price for such units. For instance, some might be of the opinion that
the average daily intake of calories and proteins is a better welfare
indicator for nutrition than the average expenditure on food; as there
is no market price for calories, they would have to use these indicators
in their physical or non-monetary form.
In fact, many authors believe that, for most of the socio
economic indicators, the non-monetary or physical form is much superior
to the monetary form. A large body of literature concerned with the task
of identifying and aggregating such non-monetary indicators has thus
emerged. The first section of the next chapter will be devoted to the
presentation and to the discussion of this non-monetary literature.
Ill, GDE versus qualitative welfare
Finally, there are a number of sociological and political con
cerns like racism, individual freedom, etc. which do not lend themselves
readily to quantification. Attempts to give a score to the degree of
intensity of such concerns are most subjective. Moreover, the philosoph
ical aspects of welfare like happiness, pleasure, religious satisfaction,
etc. can only be appraised in a qualitative manner. In our study, we will
thus avoid including any of these non-quantifiable aspects of welfare
and we will restrict ourselves to a socio-economic and quantifiable (in
a monetary or in a non-monetary way) definition of welfare. In the second
section of the next chapter, we will thus present the non-monetary and
quantifiable socio-economic indicators along with the purely economic
indicators themselves in a physical or non-monetary form.
In conclusion, if we ignore the theoretical dilemma described
in the first section of this chapter, or if we circumvent them by assuming
between some existing national accounting aggregate that we will inter
pret as Gross Domestic Expenditure and the narrowest concept of welfare
that we will call economic welfare can not only be isolated, but they can
also be valued in monetary terms. Thus it is possible to transform
empirically a national income aggregate into a measure of economic wel