Young Economics.

Beyond GDP

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On the whole, GDP is an easy number to measure, it’s just the value of all goods and services produced. It’s a good measure to forecast tax revenue and the unemployment rate. When people interpret this measure as “general economic well-being”, though, I’ve got some problems (and so does Stiglitz in this video). With an analogy to security valuations, it would be like evaluating a company only on its revenue. This blog post does a good job of outline the major issues: inclusion of regrettables, inability of determining the median, exclusion of many transactions (gray and black markets), and (coming back to the bussiness analogy) exclusion of assets such as resources, capital, and wealth.

Financial investors have several methodologies of stock valuations, and maybe we can recreate them in the context of country valuations.

  1. To determine the “book value”, or “net worth”, of a country we’d need to know the assets and liabilities of people, companies, and the government. This data, though, is only available for companies that are public, individuals in countries that have a “wealth tax” (eg France), and is patchy for government assets. We have some house-hold surveys that include net assets, but a complete valuation of government assets (including land) would be amazing and doable.
  2. The most theoretically sound method is Discounted Cash Flow, which means converting into current terms expected future economic well-being. In essence this would try to take into account the sustainability of the economy,f similar to Green Economics and environmental sustainability. One trouble here is interpretation; what do you determine to “economic well-being”? I would propose consumption as defined through personal expenditures. For most people, this would be disposable income, but I’d also want to net-out personal expenditures on regrettables (eg health care in the US) and accounting for externalities like pollution (similar to methods for the GPI). Another trouble would be forecasting. The government does this all the time to figure out expected tax revenue, but using a model that often delivers a range of estimate from “optimistic” to “pessimistic” would be harder to interpret than a single number. This method would benefit from information gathered for method #1.
  3. The Efficient-Market Hypothesis says we should just look at the market capitalization The problem here is that stakes in the equity of a country are not exchange traded. Equity for countries could be thought of as “citizenship”(while all stock are generally equal not all citizens benefit equaly from national prosperity). To figure out the market price of citizenship all countries could provide a number of open citizenship spots to be bought and sold on an exchange.  The number of spots should be small so that it doesn’t affect aggregate immigration (say 1/1000 of the current number of immigrants, which would translate into 1,000 spots for the US). The eventual owner would of course have to pass the standard security checks and black-lists. One problem with this measure is that while people rarely buy stocks for non-economic reasons, people would often buy citizenships based partially on non-economic factors.  (See Gary Becker’s arguement for selling citizenship)

1 & 2 are the most concrete (though 3 might be the most interesting). Hopefully some more national level indicators will be developed (unlike how China killed “Green GDP” after it showed little growth when taking the environmental damage into account). After we figure out “economic well-being” then we can move onto general quatility of life indexes like the Gross National Happiness.

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Written by Brian Quistorff

March 6, 2009 at 6:55 pm

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