Towards a measure of welfare-relevant national output

Robert Barro says GDP overstates national income because it counts investment twice. 

Here is Scott Sumner explaining Barro’s point with an example:

Thus suppose Tesla builds a battery factory that costs $1 billion, which lasts for 20 years.  They hire workers and pay another $2 billion in wages over 20 years.  The batteries sell for a total of $3.3 billion, a profit margin of 10%.   In this example, $4.3 billion is added to GDP over the life of the factory—$1 investment and another $3.3 billion in consumer goods (batteries).   But there is actually only $3.3 billion worth of actual “goods” being produced; the $1 billion factory investment is an input.

As Scott Sumner points out, GDP isn’t meant to be a measure of national welfare, but of national output. This should always be kept in mind and should be pointed out whenever someone is using GDP per capita as a measure of welfare. But it’s clear that GDP, understood as national output, is really useful for many policy discussions.

That said, I was thinking about how to correct GDP to better measure that part of national output which is directly relevant to people’s wellbeing. And here’s what I would do: I would count all spending on consumption goods (private and public) as well as residential construction spending which is presently counted as „investment“. Following Barro’s critique I would not count spending on capital goods such as factories, machines, tools, and intellectual property which are only indirectly useful to consumers in so far as they help produce consumer goods in the future.

As for government consumption, I would suggest to apply a “waste correction” to take into account the fact that some of that consumption just isn’t useful to consumers. Spending billions of euros on a tunnel or an airport or a bridge which nobody has used yet or on a weapons system which (hopefully) will never be used, is to a large degree wasted money, although views will differ exactly how much of it is really wasted. At any rate, I think GDP should try to account for government waste.

So to sum up, I’d propose the following measure:

Welfare-relevant GDP
= Private consumption
+ Government consumption x (1 – waste ratio)
+ Investment in residential construction

Here’s what this would look like for Austria in 2018:


million euros, 2018
Private consumption199.459
Government consumption 74.295
      of which waste 14.859
Residential investment 17.232
Welfare-relevant GDP276.126
Conventional GDP386.063
Ratio: welfare-relevant 
/ conventionalGDP
71,5 %

In other words, conventional GDP overstates the supply of goods that are directly relevant for the welfare of households by almost 30%. I would like the welfare-relevant GDP measure to be used when comparing living-standard across countries or within countries across time. And I would like growth theory to focus on the growth of this measure.

(PS: What about exports and imports? Exports aren’t welfare-relevant for the home country, because those are goods consumed by foreigners. Imports are, of course, already included in measures of private and public spending measures. So there’s no need to add exports and subtract imports as done in conventional GDP.)

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A quick game theoretic thought about the Brexit negotiations

In the last few days, I watched the British news a bit about Boris Johnson forming the new UK government. There was of course a lot of talk about the Brexit negotiations. I was a bit puzzled at one point about some of Boris Johnson’s statements. On the one hand there is a lot of talk about being prepared for a hard Brexit and on the other I also heard him say something like that “the chance of a hard Brexit is one in a million” a little while back. So why prepare for some contingency that you do not expect to happen under essentially any circumstances? Also you get the feeling that Boris Johnson, despite having said that, would not so much mind a hard Brexit. In this short post, I explore why all this might actually all make good game theoretic sense (and why perhaps, at least for this matter, his UK opponents should get on board with his strategy if they care about the UK unless, of course, they think they can still stop Brexit).

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