Thursday, October 25, 2007

Green Net National Product

Nobel Prize-winning economist Joseph Stiglitz suggests a replacement for GDP.

Long the standard scorecard for any national economy, GDP has become deficient as a measure of long-term economic health in our resource-driven, globalizing world.

Think about it. It's like grading a corporation based on one day's cash flow and forgetting to depreciate assets and other costs.

That's why economists looking for an alternative accounting framework to supplement the use of GDP are considering a new measure: green net national product.

The "green" means that GDP must be reduced to take into account the depletion of natural resources and the degradation of the environment - just as a company must depreciate both its tangible and intangible assets. "Net" national product (NNP) means that there has to be an adjustment for the depreciation of the country's physical assets.
I completely agree with him that it makes no sense to look at GDP without also looking at assets. I would have thought the analogy would work better with revenue of a company than cash flow, but he has the Nobel Prize (though likely isn't a CPA) so I will go with that. GDP tells you how many goods and services are being produced each year, but they don't tell you what is happening with assets. Building tanks that get blown up or houses that stick around both have the same impact on GDP, but the later is much better for the economy.

It seems to me that the financial report card should also look at total assets to cover this situation. If you were to add up all of the nation's stocks, bonds, CDs, cash and real estate and then subtract off the debt, you could see how we look. Although this isn't as simple as it seems due to asset bubbles that overstate the value of stocks and real estate.

I think the idea of making it green makes sense, but it is just one of many non-standard asset classes that could be added. What about knowledge or human resource assets of people that go to college? They definitely help to produce more GDP and have the student loans to prove it. I think there are also health assets for those that are healthy and don't need to see the doctor (or the opposite that need to see a doctor more). The problem with all these non-standard assets is that they are difficult to measure objectively and put into a number that can be reported quarterly. But, ignoring them and treating their value as zero has even larger problems.

via Business 2.0 via Greg Mankiw Blog


Audacious Epigone said...

You're right, making the analogy to revenue is more accurate than to cash flow.

Fat Knowledge said...

Good. I will sleep well tonight knowing that I was able to correct a Nobel Prize winner. :)

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