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Economic forum wellbeing

Oct 19, 2014

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Economic wellbeing

Glenn Everett, Head of Measuring National Wellbeing

ONS Economic Forum7 April 201411Economic Well-being: BackgroundGDP inevitably and correctly plays a central role in monetary and fiscal policy

Traditional measures of progress such as GDP are increasingly considered an incomplete picture of overall economic well-being

Additional economic, social and environmental measures are needed alongside GDP to provide a complete picture of how society is doing

UKs Measuring National Well-being (MNW) Programme was launched in November 2010

Greek philosophers Aristotle: founder of formal logic happiness (Greek eudomonia) = worthwhile , not just material goodsEpicurus early development of scientific method needing direct observation to be believed taught to maximise happiness.

Robert Kennedy 1968:The Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage... It counts napalm and the cost of a nuclear warhead, and armored cars for police who fight riots in our streets... (It) does not allow for the health of our children, the quality of their education, or the joy of their play... it measures everything except that which makes life worthwhile.

Stiglitz-Sen-Fitoussi - Commission on the Measurement of Economic Performance and Social Progress:..the time is ripe for our measurement system to shift emphasis from measuring economic production to measuring peoples well-being.Moreover, it has long been clear that GDP is an inadequate metric to gauge well-being over time particularly in its economic, environmental, and social dimensions...

4 year development programme in UK till March 20152Measuring National Well-being: what are we trying to achieve?

Social

EnvironmentThe triple bottom line

EconomyAn accepted and trusted set of National Statistics to help people understand and monitor national well-being.3333Limitations of GDPGDP has known weaknesses as a measure of economic welfare or well-being

GDP does not consider:Changes in populationDepreciation of assetsDistribution of incomeNational and household wealthNon-market activities4Proposed additional measuresEconomy wideGross Domestic Product (GDP) per capitaNet Domestic Product (NDP) per capitaReal Net National Disposable Income (RNNDI) per capitaReal Net Financial and Physical Assets

HouseholdsReal Adjusted Household Disposable Income (RAHDI) per capitaReal Median Household Income Real Household Net Financial and Physical Assets

5UK GDP and GDP per capita (1997 = 100)

Adjust Gross Domestic Product (or other relevant aggregates) for population change. This can be done straightforwardly and the following chart compares the path in recent years of Gross Domestic Product (GDP) per capita with the more familiar GDP profile.

Figure 1 shows that there had been little recovery in GDP per capita as compared with 2008, whereas GDP had recovered significantly from the low point reached in 2009. Underlying this conclusion is the fact that the slow recovery in GDP itself since 2009 had been matched by an increase in population of roughly the same order.

6UK NDP and GDP per capita (2010 prices)Gross domestic product is gross in the sense that it includes depreciation or capital consumption. It treats such consumption of capital as no different from any other form of consumption. But most people would not regard depreciation of their cars or houses, for example, as adding to their material wellbeing. On this basis, looking at Net Domestic Product (NDP), as the Stiglitz Commission suggested, is liable to have a closer relationship with economic wellbeing than GDP. The chart below compares the behaviour of GDP per head with NDP per head in recent years

Figure 2 below compares the behaviour of GDP per head with NDP per head in recent years. The figure shows that the trend in the UK NDP per capita has closely mirrored the trend in GDP per capita, increasing during the pre-crisis period and falling during and after the recession. 7UK Real Net National Disposable Income and GDP per capita (2010 prices)

GDP measures the production in a country and, correspondingly, the income generated from that production. However from the viewpoint of assessing wellbeing, it is more likely to be the total income of the resident population that is relevant, including that from other sources. Three adjustments can be made to address this issue.

Adjusted for income flows to and from the rest of the world,

adjustments need to be made for net current transfers (for example, current international cooperation or remittances between households) from and to other countries

Adjust for effect from the relative price of foreign products - the rate at which exports may be traded against imports from the rest of the world, also known as terms of trade

GDP per capita measure which has been broadly flat since 2009, the RNNDI per capita measure has been continuing to fall gently to the end of 2013 8UK net financial and produced assets (2010 prices)GDP measures the flows of output or income but not the corresponding stock of wealth and net assets

Figure shows that wealth defined in this way rose fairly steadily in real terms in the years to 2007. It then fell under the influence of the financial crisis and the recession. Thereafter, there was some recovery but to 2012 it had not yet resumed its upward trend.

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UK Real adjusted household disposable income and GDP per capita

long been published as part of the National Accounts and represents the income received by the household sector, adjusted for taxes paid and benefits received and also taking account of changes in the price level.

households did not experience the full effects of the recession in 2008 and 2009. Indeed, household incomes held up during the first part of the recession. However, RAHDI per capita continued to fall gently thereafter to the end of 2013

10UK median household income, average household disposable income and GDP per head

Average measures of household income per person are helpful but give no indication about how available resources are distributed

suggests that median household income and real household disposable income per head grew broadly in line with each other over this period. In particular, both held up during the first phase of the recession as measured by GDP overall. However, both of them have shown a decline since GDP itself began a sluggish recovery.

11Real Household Wealth (2010 prices)income provides only a partial view of the economic resources available to households to support consumption. What is happening to their wealth is also important in assessing whether current consumption is sustainable

shows household wealth on this basis in real terms, using the GDP deflator to correct for changes in the price level. The figure shows that there was an increase in household wealth from 1997 to 2007, driven mainly by rising house prices. However, the onset of the recession in 2008 saw the net worth of household dropped significantly, but in 2012 it recovered and was almost at the pre-crises level

12Key FindingsGDP recovered substantially from the falls in recent years, but GDP per capita has only recovered a little

Real net national disposable income per capita has continued to fall gently

Real adjusted household disposable income per capita held up well during the deepest phase of the recession but has been falling gently in the subsequent period

Median household income and real household income have grown broadly in line with each other in recent years, suggesting no major distributional factors13Way forwardRegular publication of additional measures

Continue to develop and refine additional measures (eg natural capital, human capital)

Update the dashboard accordingly

Update the Household Satellite Accounts

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