If per capita GDP rose by 1 percent last month, this need not imply that your personal quality of life improved by 1 percent. Your income and GDP growth may be correlated, but the relationship is far from perfect. For example, GDP would fall if you took a year off from work for a world tour. You might gain subjectively, but GDP accounts would not reflect your enjoyment of added travel and leisure. The GDP accounts ignore the value of leisure.

 

"Green" GDP and the Measure of Economic Welfare (MEW)

 

            The GDP  accounting system also fails to deduct for negative aspects of economic growth, particularly environmental degradation. Greater outlays on product packaging boost measured GDP, but the accounting process fails to deduct the accompanying destruction of national forests and increased trash. GDP does include the costs of removing litter and of increased medical care caused by pollution or auto accidents, but would we be better off if a nuclear meltdown necessitated a billion-dollar cleanup? Hardly!

 

            Some critics favor development of an index that emphasizes well-being instead of economic production. In 1993, the Clinton administration briefly considered keeping track of "green GDP," which would correct GDP figures for harm from pollution, use of such nonrenewable resources as oil or iron ore, and restoration or destruction of such renewable natural resources as "old growth" forests. Economists William Nordhaus and James Tobin once adjusted GDP to account for certain deficiencies, arriving at an index they called a measure of economic welfare.

 

The Measure of Economic Welfare (MEW) deducts items that do not contribute to economic welfare and adds beneficial items not now counted in GDP.

 

            Major items they deducted from GDP included (a) spending that does not add to a better life—e.g., commuting costs and national defense—and (b) losses associated with pollution, urban congestion, and so on. Their major additions were (a) more inclusive estimates for unmarketed outputs (e.g., do-it-yourself projects) and (b) the value of increased leisure.

 

            The controversial MEW estimates by Nordhaus and Tobin suggest that individual welfare seldom keeps pace with the growth of per capita GDP, but the data available are far too rough to yield definitive results. Despite the many difficulties associated with accurately measuring GDP and its components, it remains our best measure of economic growth and aggregate economic activity. Figure 6 traces changes in real per capita GDP over the years. In the discussions of macroeconomic theory and policy that follow, we will constantly refer to GDP (both real and nominal) and the rates of unemployment and inflation. You should, however, keep in mind the limitations of all these estimates as described in this part of the book.

Figure 6   Percentage Rates of Change in Real Per Capita U.S. GDP, 1950–1993

MISSING !!!!

 

Per capita GDP equals nominal GDP divided by population. These data must be divided by the CPI to make the data—real per capita GDP—comparable across time. Panel A loosely reflects growth in the material welfare of Americans across this century, measured in 1993 dollars. Panel B shows that this growth has not been smooth.

Sources: U.S. Dept. of Commerce, Business Conditions Digest, various issues, and Economic Report of the President, 1970–1994.