CLICK THE SPONSORS' LOGOS FOR THE LATEST SPECIALS !HALE-IAW PART 2: IMPROVING OUR MEASUREMENT ECONOMIC WELLBEING Home Index O'view Glossary Part 1 Part 2 Part 3 Part 4 Part 5 References Appendix on Method Acknowledgements Boxes - 10 Figures - 11 Tables - 18 Disclaimer Copyright PART TWO: IMPROVING OUR MEASUREMENT OF RECURRENT ECONOMIC WELLBEING 4 From GDP to NNI
a Congestion
b Leisure, caring and the value of non-market activity
4. FROM GDP TO NNI
The ABS has been a world leader in doing the national accounting work that
is necessary to correct GDP to more accurately reflect economic welfare.
To this end, it has calculated Real Net National Disposable Income (RNNDI)
since the early 2000s.
This corrects all of John Quiggin’s concerns elaborated in Box 1 above.
RNNDI is a transformation of GDP, which accounts for:
1 the impact of changes in prices of our exports relative to changes
in prices of our imports (the terms of trade effect);
2 the real impact of income flows (both primary and secondary)
between Australia and the rest of the world; and
3 the depreciation of fixed capital – i.e. machinery, buildings and
other produced capital.(9 )
As Figure 4:National Accounts shows, RNNDI generally moves in line with
GDP growth, although it has exhibited significantly more volatility during
the last few years.
This is because GDP abstracts from price changes in measuring production,
whereas there is no rationale for doing so where one is measuring income.
Thus, though they move sympathetically, RNNDI is much more volatile in
recent years, reflecting large fluctuations in the terms of trade that
rose over the 2000s only to whipsaw at the end of the decade with a sudden
dip at the depths of the financial crisis before returning to the current
historically high levels.
Tracking RNNDI rather than GDP helps explain both why the mining boom is
increasing the average Australian’s standard of living and how vulnerable
this is to changes in the terms of trade.
Conversely, this figure also shows that GDP is a relatively good measure of
its core purpose, the aggregate level of economic activity.
GDP dipped almost into recession territory (negative growth below the line)
towards the end of 2008 before rebounding during 2009 and 2010, whereas
RNNDI would suggest a much sharper and deeper reduction of wellbeing,
followed by a sharper rise.
The difference in these two trajectories is overwhelmingly accounted for
by the gyrations in the terms of trade.
(9)
For greater detail on the construction of RNNDI, see Australian Bureau of Statistics, 2002
Box 4: RNNDI v NNI - What's the Difference ?
Net National Income (NNI) is generally taken to be a real measure.
In constructing RNNDI, the ABS also points out that national income measures
only primary income flows between Australia and other countries.
This includes wages, dividends, interest payments, rents, taxes and subsidies
on domestic production or imports.
National disposable income includes so-called secondary income flows.
These are transfer payments between Australia and other countries without any
good or service being provided in return, including income tax, social benefits
and other transfers such as donations to international organisations.
Having accounted for all forms of income flows to and from foreigners, RNNDI
is a more accurate measure of a country’s consumption possibilities.
Such subtleties could matter for countries with high levels of remittance
payments, but for Australia, the difference between RNNDI and NNI is quite
small (with changes over time being an order of magnitude smaller again).
Accordingly in this report, the terms NNI and RNNDI are used synonymously.
We typically use the term ‘NNI’, though the variant of NNI we use is ABS’s
RNNDI.
One thing to consider when using NNI is whether we desire to track elements
of wellbeing that are within our power to change.
If we are genuinely seeking to measure changes in wellbeing, it matters not
what their origin is.
On the other hand, one might argue that it makes sense to pay greater attention
to those aspects of welfare we can influence than those we cannot.
Figure 4:National Accounts:Movements in income and production(%change)
Source:ABS,2011.
Australian National Accounts:National Income,Expenditure and Product,
December Quarter 2010,cat.no.5206.0
a Congestion
The Bureau of Transport and Regional Economics (2007) estimated congestion
costs in 2005 to have been about $10 billion and expected them to double by
2020.
If they were captured in our measure it would likely reduce economic wellbeing
by about 1½ to 2 per cent by 2020.(10 ) This is a substantial but not
massive effect. Ideally we would like to include them in our index.
Figure 5: Congestion costs in Australian cities
Source: Bureau of Transport and Regional Economics [BTRE] (2007) ,
However, we have been unable to locate a satisfactory means of measuring
them with reasonable regularity.
It would be possible to build such measures, but they would be costly to take
and calculate and would make only modest difference to the index when
incorporated with all its other constituents.
Even if we were able to include them, the likelihood is that they would shave
a little under 0.1 per cent of growth of our index each year in a relatively
steady way, so that their absence is unlikely to substantially undermine the
information our index captures.
(10)
Estimating congestion costs is difficult.
The BTRE responds to this problem by publishing a range of likely scenarios.
Its ‘Low’ congestion costs scenario has costs that rise to about half of the estimated figures above in 2020, while its ‘High’ scenario
would increase the estimated 2020 congestion costs by about 50 per cent to about $30 billion.
b Leisure, caring and the value of non-market activity
The national accounts take little or no account of non-market activity.
Yet it is obviously a substantial source of wellbeing.
Providing it is in a desired relation to work, leisure is important to us as
is the value of voluntary contributions to our community, caring for others
and in turn being cared for.
Some measure to account for such things could be added to NNI to capture
both the economic and wider community and social value of voluntary activity.
However, this is an area that has not, to date, been well covered by the ABS’s
MAP project and as a consequence we doubt it can be readily taken into
account.
The Melbourne Institute has used time-use accounts to determine the
economic value of formal and informal volunteering (Ironmonger, 2008 ).
It might well be worth developing this area if one of the principle purposes of
the index were to reflect on Australia’s economic wellbeing relative to other
countries.
This is because the extent to which the benefits of economic growth have
been taken as additional leisure and non-market based activity varies quite
substantially among countries in ways that make simple comparisons of
market output (GDP) or income (NNI) misleading guides to relative national
prosperity and wider wellbeing.(11 )
However, the principle purpose of the index is to reflect on changes within
Australia over time.
It is unlikely that changes within Australia would produce substantial changes
in the index over the course of a few years sufficient to move the index in an
interesting way.
Given this and the practical difficulties of accounting for this aspect well,
we do not include this issue in our index.
(11)
Those in the United States typically take shorter holidays, while most of the wealthiest Western European countries take substantially
longer holidays with Australia somewhere in the middle.
Market-based measurements of income therefore systematically overestimate the relative economic wellbeing of low leisure countries
like the US while underestimating the relative economic wellbeing of high leisure countries in Europe.
Home Index O'view Glossary Part 1 Part 2 Part 3 Part 4 Part 5 References Appendix on Method Acknowledgements Boxes - 10 Figures - 11 Tables - 18 Disclaimer Copyright
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