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National Accounts and Gross Domestic Product

The most developed conceptual and measurement framework available to capture a country's living standards is the System of National Accounts (SNA), which includes the commonly used measure gross domestic product (GDP). National income and product accounts were developed by Simon Kuznets in the 1930s in response to information gaps revealed by the Great Depression. They represent a milestone in measurement systems and, as a key tool of macroeconomic analysis, have contributed to economic stability and economic growth (OECD, 2010c).

However, the drawbacks of GDP as a proxy for living standards are well-documented (OECD, 2010b; Stiglitz et al, 2009; Jones & Klenow, 2010; Australian Treasury, 2004). As a flow measure of the activity in the market over a certain time period, shortcomings of GDP include:

  • that its coverage of non-market activities is incomplete (many services produced in households and in the community do not enter measures of production);
  • that it includes activities which may be detrimental to living standards (such as commuting);
  • that it is an aggregate measure which does not recognise who accrues the income; and
  • that, as a flow measure, it provides limited information about what is happening to society's stock of wealth.

More fundamentally, the determinants of living standards are wider than economic wellbeing and include a variety of intangible factors, such as health, the environment, human relationships and freedom.

Two other measures in the national accounts address some of the above shortcomings and are therefore a better proxy for living standards. Gross national income (GNI), defined as GDP plus net receipts of wages, salaries and property income from abroad, measures the income that accrues to the residents of a country, rather than the total income produced within a country. Net National Income (NNI), takes into account depreciation of fixed capital assets over time and provides a better measure of sustainable production. However, measuring both GNI and NNI raises significant practical and methodological difficulties, such as those of measuring international flows of wages, salaries, property income and depreciation. Therefore, GDP per capita continues to be widely used despite being theoretically inferior (OECD, 2010e).

As noted in the introduction, it has become increasingly accepted that countries and governments need to develop a more comprehensive understanding of living standards and a way of measuring them that goes beyond GDP (Treasury, 2001a, 2002a, 2002b; MSD, 2009; Australian Treasury, 2004; OECD, 2010c). One response has been to develop composite indicators that combine several different factors into a single measure, many of which have been developed in order to adjust GDP or other macro-economic indicators in some way.[2] For example,

  • The Human Development Index, developed in 1990 by the United Nations Development Programme, combines GDP per capita with three dimensions of human wellbeing: life expectancy; adult literacy rate and educational enrolment.
  • The Genuine Progress Indicator (GPI) adapts the common metric of GDP in a number of ways, including taking account of the negative aspects of output such as crime and pollution.
  • The Index of Sustainable Economic Welfare (ISEW), takes household consumption as its starting point and adjusts it for items such as the distribution of income, the value of non-market activities, damage caused by economic activities, and the depletion of natural capital and pollution.

These indicators are useful as they recognise a range of factors as being important for living standards. However, they are necessarily exclusionary, and there are difficulties around monetising, weighting and aggregating the factors they include (Kulig et al, 2010).

Notes

  • [2]A more detailed summary of composite indicators of wellbeing can be found in Kulig et al 2010, p.121-122.
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