Net national product, wealth, and social well-being

This paper is about net national product (NNP). We are concerned with what NNP means, what it should include, what it offers us and, therefore, why we may be interested in it. We show that NNP, properly defined, can be used to evaluate economic policies, but we also show that it should not be used in any of its more customary roles, such as in making intertemporal and cross-country comparisons of social well-being. We develop such indices as would be appropriate for making those comparisons. In particular, we show that welfare comparisons should involve comparisons of wealth. Writings on the welfare economics of NNP have mostly addressed economies pursuing optimal policies, and are thus of limited use. Our analysis generalises this substantially by studying economies whose governments are capable of engaging only in policy reforms. We show how linear indices can be used for the evaluation of policy reform even in the presence of non-convexities in the economic environment. The analysis pertinent for optimising governments are special limiting cases of the one we develop.The literature on green NNP has widely interpreted NNP as ‘constant-equivalent consumption’. We show that this interpretation is wrong. It is the Hamiltonian that equals constant-equivalent utility. Since both theory and empirics imply that the Hamiltonian is a non-linear function of consumption and leisure, the Hamiltonian should not be confused with NNP.

Accounting for the distributional impacts of policy in the green accounts

Green income accounting models are designed to appropriately value changes in a country's natural resource (natural capital) base. However, green NNP is useful as a guide for domestic and international policy only to the extent that it accurately reflects the economic goals and policy options of policy makers. For example, international policy designed to slow natural capital depletion in a developing country is more effective if policy makers recognize the developing country's perceived income effects of the policy. Traditional green accounting models do not satisfy this criterion because they are based on the assumption that policy makers are either not concerned with the distributional consequences of policies, and/or are not limited in the instruments available to them. We present an alternative green NNP measure that reflects distributional goals and policy implementation. Using this measure, the depletion (accumulation) of natural capital stocks in excess of economically efficient rates may increase income.

Green national accounting: why and how?

The present paper gives an overview of the theory of green national accounting. Three purposes of green national accounting (measurement of welfare equivalent income, sustainable income, or net social profit) and two measures (Green NNP and wealth equivalent income) are considered. Under the assumption of no exogenous technological progress, Green NNP is shown to equal wealth equivalent income if there is a constant interest rate or if consumption is constant. It is established as a general result that sustainable income [les ] wealth equivalent income [les ] welfare equivalent income, while Green NNP [les ] welfare equivalent income under no exogenous technological progress and a constant utility discount rate. Green NNP is shown to measure gross social profit rather than net social profit.