Name: Divyansh Khare

Roll number: B23194

Assignment 1
Case: National Economic Accounting: Past, Present, and Future

Case background
The case ‘National Economic Accounting: Past, Present, and Future’ has been developed by
David Moss and Sarah Brennan to shed light on the idea of accounting for the total value
flowing in a nation’s economy. The case directs the readers’ attention to the importance of
measuring the well-being of a nation and how some key metrics like GDP can be used to do
so. Three different approaches have been proposed by the authors to calculate GDP and they
have taken an effort to establish the coherence between the different methods. The case then
proceeds to how GDP has been perceived by different economist, namely, Menshevik, Adam
Smith, Simon Kuznets, and John Keynes’s. The authors walk the reader through the different
approaches these economists advocated for, and the way things were changing specifically in
United States during that time both from economically and politically. As pointed out in the
case, the task of National Economic Accounting is in no manner straightforward and requires
a knack for details. And this can be assessed when the authors talk about the challenges
associated with the calculation of the GDP or the aggregate output of a nation. Precisely, the
focus is on highlighting the issues related to double counting of value addition at different
stages of the products and services, taking into account the contribution of unpriced services
and how they add to the overall well-being of the nation, issues associated with measuring the
contribution of services provided by the government and the recording of natural resources in
the GDP. The case makes an effort to go beyond the traditional notions out output and extends
the idea of well-being by considering the non-tradable unowned aspects of environment like
clean air, clean water, and climate. It also considers unobvious but intuitive costs such as the
environmental degradation because of production. When considering the environmental impact
of production activities, a holistic understanding of a nation’s well-being can be developed.
The attempt to quantify this holistic understanding gives rise to the Net National Product
(NNP). There has been a substantial amount of debate around whether it makes sense to include
the effect of environmental factors in calculating the overall well-being of a nation. Many
renowned officials have mentioned that the idea of a green GDP, which considers the
sustenance of the environment, is an imaginative idea and it cannot be implemented. Despite
the criticism, the importance of acknowledging the environmental impact of production has
been realized by multiple government authorities. As this concept is still emerging, the case
does not explicitly mention where the debate about the green GDP will end. After reading the
case one can certainly appreciate the importance of considering various factors for determining
a nation’s well-being and realize that GDP, though an informative metric, fails to capture the
bigger picture and there is big ad spacious room for development in this area.

Critical issues and challenges

The case highlights various challenges associated with the GDP calculation. These have been
a longstanding concern for economists and policymakers. One major challenge is imputing
output for goods and services that are not sold in the formal economy or are not priced in the
private market, such as homemade clothes or unpriced financial services. The US Commerce
Department has estimated these forms of output to have constituted approximately 15 percent
of GDP in 2001. Early economists like Kuznets recognized the value of non-market output like
housework, but these were not included in national accounts due to impractical measurement
methods.
Consumer durables, like automobiles and refrigerators, also pose a challenge. While the initial
purchase is recorded, the long-term services these goods provide are not fully accounted for in
national accounts, except for housing, where imputed rent is calculated. Government services,
funded through taxes and provided without charge, face a similar problem. Although current
expenditures on salaries and supplies are recorded, the value derived from fixed assets like
school buildings often remains hidden. To address this, imputations have been introduced,
assuming that the hidden value includes the depreciation of government buildings, adding it to
government consumption serves as a proxy for private consumption of government services.
Financial services, particularly those in the private sector, are equally challenging to measure.
Imputations have been used for services provided by banks, such as check cashing, with the
difference between interest received on loans and interest paid on deposits being imputed as
the value of these services. Different countries use varying techniques for such imputations,
making international GDP comparisons complex. For instance, Zimbabwe’s adoption of U.N.
recommendations regarding imputations for subsistence farming and informal economy led to
a 20 percent increase in GDP, making comparisons with neighboring countries difficult.
The question of whether to include natural-resource discoveries and depletions as changes in
the capital stock is a significant concern. The U.S. initially excluded mineral depletion, but in
1994, estimates of the annual value of subsoil mineral discoveries and depletion were
published, albeit halted later by Congress. The U.S. lagged behind the international community
in environmental accounting, with the United Nations providing guidance on estimating the
annual value of natural resource use since 1993. Some countries, like Norway, had started
estimating natural resource use value in the 1970s, and the World Bank compiled estimates of
mineral and forest depletion for over 100 countries.

Case analysis and interpretations

In the historical evolution of national economic accounting, the United States faced a delayed
entry into the practice of collecting aggregate economic data. The turning point was the Great
Depression, a period of unexpected economic events that compelled the nation to reevaluate
its understanding of economic activity and develop comprehensive measures to gauge national
output. The journey towards this understanding involved significant contributions from notable
economists, including Karl Marx, Simon Kuznets, and John Maynard Keynes.
Karl Marx's influence, as mentioned in his work Das Kapital, provided a foundation for
conceptualizing 'material production.' Marx's ideas, inspired from Adam Smith's thoughts,
spurred the development of national accounts in Russia and later in the Soviet Union, where
state-planned economic growth demanded detailed knowledge of net product. Marx's emphasis
on the significance of accounting in socialism highlighted the critical role of economic data in
shaping national policies and planning.
In the United States, the push for comprehensive economic data came from Senator Robert M.
La Follette, Jr., during the Great Depression. Facing a lack of accurate information about the
nation's income and economic conditions, La Follette advocated for a resolution directing the
Commerce Department to collect detailed estimates of the national income, including its
various sources and distribution. This initiative led to the formation of a team of economists,
with Simon Kuznets as the lead, who published the first set of U.S. accounts in 1934. Kuznets
and his team measured different components of income, revealing the unequal impact of the
economic downturn on various income groups.
However, the initial data collection efforts faced criticism, with concerns raised about potential
political manipulation of national income statistics. Despite these challenges, the publication
of John Maynard Keynes's General Theory of Employment, Interest, and Money in 1936
significantly influenced the direction of national economic accounting. Keynes's advocacy for
deficit spending during economic downturns highlighted the importance of understanding the
relationship between employment, money quantity, interest rates, and aggregate expenditures.
As a result, the Keynesian expenditure approach became central to national accounting during
the 1940s, especially in the context of wartime economic planning.
The adoption of the Keynesian expenditure approach led to the transformation of the national
accounts. Gross Product, or GDP, emerged as the primary measure, emphasizing gross output
and incorporating government spending as a significant component of aggregate expenditure.
This approach, however, faced criticism from Kuznets, who argued that including government
spending inflated the true value of output by double-counting certain products. Despite these
disagreements, the emphasis on gross output persisted and became the standard method for
estimating national income in many countries.
Internationally, the Keynesian influence led to a shift from net income or value-added methods
to gross expenditure, with most nations adopting the GDP formula (C+I+G+X-M) to calculate
their economic output.
There has been an increasing effort by authorities to understand well-being in terms of the
environmental impact that the production has. This approach to well-being has been applauded
and criticized by many at the same time. The economists have pointed out various shortcomings
of both traditional GDP and that of incorporating the environmental impact.
Traditional GDP failed to account for unpriced social costs associated with production, such as
pollution. This led to a paradox where GDP could rise due to environmental degradation,
especially after major disasters. There was a recognition of the need to expand economic
indicators to include non-tradable aspects of the environment like clean air, water, and climate.
The National Research Council (NRC) supported this idea, arguing that it would provide a
more comprehensive view of economic performance and living standards.
Sustainability was an issue. It was defined differently by various proponents. Some argued for
the preservation of the environment without degradation, while others, including the NRC,
advocated for sustainability in terms of intergenerational equity. According to this view,
depletion of natural resources was acceptable if equivalent investments were made in other
forms of capital.
Sustainable growth, as per the NRC, was linked to Net National Product (NNP). NNP should
incorporate all economic activities and effects, including environmental impacts and human
and physical capital formation.
There were concerns and debates about how to address the weaknesses in traditional GDP
accounting, especially regarding environmental impacts. Skepticism existed about the accuracy
of pricing non-market assets, including environmental resources. Nations had different options,
including maintaining the status quo, creating satellite environmental accounts based on
physical or economic indicators, or fully integrating environmental accounting into national
economic accounting, resulting in a “green” GDP. Different regions had different approaches.
The European Union favored combining physical data with monetary national accounts, while
the World Bank calculated the monetary value of pollution damages for numerous countries.
Japan and South Korea were among the countries considering environmentally adjusted GDP.

Macroeconomic tools and theories

Okun’s law can be used in this context to better understand the correlation between
unemployment and GDP. It was developed by economist Arthur Okun from Yale University.
He highlighted the significant connection between GDP fluctuations and macroeconomic
trends. As he observed, a 1% decrease in the unemployment rate typically led to a 3.3% rise in
real (inflation-adjusted) GDP growth. This relation has been recognized as one of the most
consistent and crucial empirical patterns in macroeconomics, making a significant contribution
to economic understanding and practical policy.
Learnings
Since its very beginning, the case points to the shortcomings of GDP as an effective metric and
the need for supplementary metrics for critically measuring the well-being of a nation. The case
also points towards the importance of timely decision making especially in case of developed
economies. Several factors need to be considered before arriving at the GDP of the nation and
these need not always be financial in nature. The impact of production on the environment is
something that all nations need to consider as the environment invariably adds to the overall
welfare and any detriment to the existing natural resources must be accounted for. The Net
National Product is promising metric in this case. It is not that some economists are against this
notion of incorporating environmental effects without any reason, there are factors which make
collection of relevant information regarding the economic impact of our environment
extremely difficult to capture. Although GDP is a useful metric to understand how well a nation
has been performing, it in no manner provides a complete picture. The development of better
metrics still remains an unsolved problem and amid the criticism, it looks like it will take some
time before we can find a better metric which can replace GDP.