Measure of Welfare

12 December 2016

Individual living conditions include non material aspects as health, life expectancy, education and environment. Happiness, as the ultimate goal, does not change much over time as it depends on family, friends, work satisfaction, not much on income. Hence, GDP (a frequently varying and objective measure based on raw formulas and numbers) can definitely not be an accurate measure of a nation welfare (or happiness, by far more subjective and non-changing in nature. ) As discussed in the previous paragraph, there are several layers we need to go through from GDP in order to reach welfare.

Each layer will inevitably impose encompassing new considerations in finding the ‘right’ measure for welfare, should the latter be initially based on GDP. To illustrate, the figure below shows a relatively low economic well being in spite of a high GDP per capita for USA, while it depicts a relatively high economic well being in spite of a low GDP per capita for France. In both countries overall happiness and life satisfaction are quite steady over time. 2. From GDP to Welfare Our analysis of the way from GDP to welfare is based on the following illustration.

Measure of Welfare Essay Example

Yet, depreciation does not contribute to welfare in any way, and the replacement of old capital only gets the economy back to the “starting” position. Such capital consumption (ranging from 10% in UK and more than 20% in Japan) prevents (at least partially) any rise of GDP from benefiting consumers and only replaces physical capital. Similarly, expenditure on crime prevention and security adds significantly to GDP but only restores a safe environment.

Medical expenditure as a result of air and noise pollution also adds to GDP as do diet classes, antidepressants and a sizeable list of other items… . e. hence comes the notion of the Net Domestic Product as the result of subtracting capital consumption from GDP. Second, GDP measures income produced in a country but not how much of it is received by people in that country. Implicitly speaking, some income may go to foreigners. This is particularly the case in Ireland, which transfers a non negligible 15% of primary income to the rest of the world. On the other side, other countries (Japan and Germany for instance) are net recipients of income from abroad leading to the rise in income of residents outpacing the rise in GDP.

Here comes to notion of the Net National Product as the result of subtracting net income receipts from abroad from net domestic product. Third, GDP “objectively” counts monetary transactions (including estimates for those in the shadow economy) and very often misses many other activities that people “subjectively” value like caring for children or elderly at home, spending leisure time spent relaxing or with family and friends. GDP does not include the value of clean air and water… i. e. ; therefore, any useful measure of well-being would try to capture these items, which are not considered at all by GDP.

However, if we take our reasoning the extreme line, this would imply that basic food and clothing also should not be included. This again highlights some of the arbitrariness of the different measures. 2. 2 Some Initiatives towards Welfare Measurement In 1970s a measure of Economic Welfare (MEW) was proposed by James Tobin and William Nordhaus. The principle was to add to GNP the value of household services and leisure, to subtract the cost of capital consumption and “bring-back” costs such as pollution, and to excludes police services to combat crime and similar.

Many later studies used components and weights of different measures, but they were all based on researchers’ own subjective judgment. A very comprehensive and thorough Index of Economic Well-Being comes from the Canadian Centre for the Study of Living Standards. It starts from the flow of private and government consumption (excluding household work). The stock of physical and human capital owned by residents tries to measure the stock of productive resources that can be passed on to the next generation. Inequality is captured through the Gini coefficient and the poverty intensity.

Finally, the security component aggregates diverse items such as divorce rates and employment rates (with a negative sign). The overall Index of Economic Well-Being is a weighted average of the four components. The preliminary 2004 results shows that economic well being ranking differ significantly from the ranking for GDP per capita, favoring countries with high income equality and low insecurity. Several countries started publishing or developing national economic well-being measures. So far, there is no international standard for calculating them.

The measures differ significantly across countries and may reflect the values and priorities of the researchers who construct them. Over the coming decades we are likely to see more standardization in this area. 4 MBAXIV A – MA 1407 – Business Economics in a Global Market GDP & Welfare – The Moroccan Example Still, consumption, wealth, equality and security only capture part of a human’s well-being. Many other elements are relevant as well. Perhaps, the best-known, but rather narrow measure of human living conditions is the

United Nations’ annual Human Development Index (HDI): a combination of the levels of life expectancy, education and GDP to measure human development (not necessarily welfare); which makes it a valued contribution but still narrow in scope because of its high correlation with GDP. A more comprehensive measure of human living conditions is the Weighted Index of Social Progress (WISP) calculated by Richard Estes at the University of Pennsylvania and going back to 1970. This index tries to capture many dimensions of wellbeing, covering income, education, health, role of women, environment, social peace, diversity and welfare.

In UK, the “new economics foundation” publishes a Happy Planet Index (HPI): a combination of data on life expectancy, surveys on satisfaction and consumption of natural resources (in an attempt to measure how happy people live without damaging the planet). With such strong focus on the environment, this index favors countries near the equator. Anecdotal evidence suggests that HPI may be a good guide for holiday destinations! Another measure in the UK is the Measure of Domestic Progress (MDP). From consumer expenditure, social costs (inequality, accidents, crime, family breakdown etc. , environmental costs and the loss of natural resources are subtracted.

This indicator peaked in the mid-1970s, declined until the mid1980s and has not yet regained any considerable improvement due to rising social and environmental costs. Because the Labor government’s focus on improving the overall quality of life in the UK, this measure has some influence on policy priorities, and reversibly, policy influences measured wellbeing. 2. 3 Happiness and Life Satisfaction The well-being indicators still cannot tell how happy individuals are. Measuring happiness requires a different approach mainly based on surveys.

According to the survey of spring 2006, 66% of Danes said they were very satisfied with the life they lead. Only 17% of Germans and just 4% of the Portuguese felt the same way. Over the past 15 years, the average level of life satisfaction has not changed much in spite of the large increase in per capita income. Football events and achievements greatly contributed to satisfaction bumps (france in 1998, Portugal in 2000). Satisfaction of life is influenced by factors other than income, and it is very difficult to boost satisfaction on a sustainable basis mainly because people get used to igher income, consumption and circumstances. For example, by the hedonic treadmill, driving a new car for the first time may make one very happy, but only for a short time. Naturally, humans always aim higher for better living conditions. The satisfaction treadmill can make one feel that it would have been better to have a house in a better or safer neighborhood rather that the just recently completed new house. To make thing even worse, an individual’s satisfaction tends to be influenced by how well others are doing.

Driving a big car may make one happy if she is the only person with such a car, but satisfaction with that same car quickly diminishes if friends and neighbors drive similar cars. Also, if one buys a big car, this may depress the happiness of neighbors, so aggregate happiness may not rise. According to Lyubomirsky et al. (2005) a part of happiness appears to be genetically determined (around 50%), another part determined by happiness-relevant activities (40%) and the remainder by circumstances (income, climate, environment, stable democracy etc. ).

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