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Chapter 6

Chapter 6. EC102. How to improve National Accounts ?. Insufficiencies of traditional model and methods Environment? Household production ? Well-Being ?. Environment. Roles of the Natural Environment Resource functions Minerals , petroleoum , fish , forests

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Chapter 6

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  1. Chapter 6 EC102

  2. How toimproveNationalAccounts? • Insufficiencies of traditional model andmethods • Environment? • Householdproduction? • Well-Being?

  3. Environment • Roles of the Natural Environment • Resource functions • Minerals, petroleoum, fish, forests • Environmental Service Functions • Cleanair, drinkingwater, suitableclimate • Sinkfunctions • Absorbation of wastes

  4. Environmentalaccounts

  5. eaNDPandGenunineSaving • eaNDP=GDP-Depreciation of ManufacturedCapital – Depreciation of Natural Capital • Proposedby UN • GenunineSaving= GrossSaving - -Depreciation of ManufacturedCapital – Depreciation of Natural Capital

  6. How toMeasurevalue of EnvironmentalResources? • damagecostapproach • Assigning a monetaryvalueequaltodamagedoınewhen service is gone • maintenancecostapproach • Assigning a monetaryvaluetothat is equaltowhatwould it costtomaintainthe service byusing an alternativemethod

  7. Example: Suppose Country A (the Ukraine) built a nuclear power plant that had a large accidentand led to the release of radioactive iodine that damaged the population’s thyroids. It ledto $1million in health costs. Country B (Poland) administered potassium iodide pills tothe population, to protect the population’s thyroids in the case of an accident. Theprotection pills cost the country $100,000.Country C (Germany) decided to ban thebuilding of nuclear power plants. What isthe value of the adioactivity-free air inCountry C due to this banof nuclear power plants: a) measured in terms of the damage cost approach? b) measured in terms of the maintenance cost approach?

  8. HouseHOLD PRODUCTION ACCOUNTS

  9. Whyhouseholdproduction is excluded? • Householdsarenonproductive? • Its hard todistinguishfromconsumption • Includinghouseholdproductionwould not make a bigdifference

  10. How toMeasurevalue of householdproduction? • Opportunitycostmethod • Valuinghoursfor a job • Replacementcostmethod • Valuingthecost of the service

  11. Example According to the results ofthe 2005 U.S. time use survey, women spent an average of2.3 hours per day on household activities such as housework, food preparation, yard work, or paying bills, while men spent 1.4 hours per day (when averaged over allresponses). Suppose these findings reflectthe hours spent in household production for amiddle class professional couple, who can eachmake $20 an hour in paid work. Supposethey can hire someone else to do these household activities for them for $10 an hour.Estimate the daily value of these household production activities (assu ming no one else inthe household is contributing tohousehold production) using: a) the opportunity cost method b) the replacement cost method

  12. Measuringeconomicwellbeing

  13. GPI • GenuineProgressIndicator (GPI) • A measure of economicwellbeingthataddsmanybenefits, substractsmanycost not included in GDP • The calculation formula of Genuine Progress Indicator presented in the simplified form is the following: • GPI = A + B - C - D + I • A is income weighted private consumption • B is value of non-market services generating welfare • C is private defensive cost of natural deterioration • D is cost of deterioration of nature and natural resources • I is increase in capital stock and balance of international trade

  14. Component Indicators of GPI Base Data only ----- positive positive positive negative negative negative X X Excluded as a Stock positive negative negative negative Excluded as a Stock Negative (positive) Negative (positive) Negative (positive) negative Negative (positive) negative Negative (positive) Negative (positive) negative X Excluded as a Stock

  15. Primary Motivation = to develop a better measure of societal progress than the GDP • GDP was never intended to be a measure of the nation’s welfare “the welfare of a nation can scarcely be inferred from a GDP” (Kuznet 1934) • GDP measures ‘the amount of production of goods and services in the economy’

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