The cost of natural capital consumption: Accounting for a sustainable world economy

The System for integrated Environmental and Economic Accounting (SEEA) has been criticized in this journal for ignoring the benefits of ecosystem services for human well-being. This paper argues that extended national accounts should not attempt measuring economic welfare. Rather, they could and should assess the environmental sustainability of economic activity as the cost of natural capital consumption. The global application of SEEA concepts and methods demonstrates the feasibility of international green accounting. For the world economy, sustainability costs run to about 3 trillion US$ or 6% of world GDP. Large variations at national and regional levels suggest that conventional economic indicators may significantly overstate economic progress in some parts of the world. Data gaps and lack of data comparability affect these first estimates. National and international statistical services should be more aggressive in greening the national accounts. More prudent and more sustainable economic policies might be the result.     

THE TREATMENT OF EDUCATION IN NATIONAL ACCOUNTING1

It is argued that the conventions of an accounting system, such as the S.N.A., are a matter of convenience. The treatment of education as a current expenditure, instead of as a form of capital formation, derives from the Keynesian system, and is not appropriate for dynamic problems of developing countries, where weaknesses in education are often the main “bottleneck” in the process of development. In such countries, expenditure on education clearly yields its benefits mainly in the longer run. To treat this as a consumption item biases policy in the direction of using financial resources for fixed capital rather than human investment, and may cause aid agencies to penalize countries which expand their educational systems. A similar problem arises on other expenditures such as health, but the case for treating them as investment is not so strong. To treat educational expenditure as part of capital formation logically requires two major changes. First education needs to be removed from private and public consumption, and for this purpose a fairly broad definition of what is education should be used. Secondly, the stock of educational capital should be valued. The valuation problems are, however, severe. Variations in cost components make historic cost of little value as a yardstick, and calculations of future returns are fraught with difficulties. Using replacement costs, which seems the best method, involves the construction of education profiles in physical terms which can then be valued by present or by standardised costs. The depreciation of human capital through mortality and retirement can be allowed for by applying national average rates to these physical profiles. Switching educational expenditure from current to capital accounts involves no serious practical problem. However, although there should logically be an allowance for depreciation on human capital, this is not recommended; single monetary measures of educational stock are not very meaningful, and this would involve changing the definition of “net” aggregates. Development of statistics of educational stocks and flows in physical terms—the beginnings of “demographic accounting” fully integrated with the rest of national accounting—is strongly advocated.     

The optimal linear alternative to price and quantity controls in the multifirm case

Linear control schedules in output have been shown superior in the one-firm case to either of the extreme controls—price or quantity; they optimally trade off the desirable characteristics of both extremes. When many firms are regulated, however, that superiority fades. Then total output affects expected benefits and can display a larger (or smaller) variance than the sum of individual firms' output variances (upon which expected costs depend) if costs are positively (negatively) correlated. Output variation must be discouraged (encouraged), therefore, and the linear schedule rotates toward the quantity (price) extreme. The better extreme might thereby become the best choice among all three alternatives.     

THE ROLE OF MICRODATA IN THE NATIONAL ECONOMIC AND SOCIAL ACCOUNTS*

Microdata sets—samples of data relating to individual reporting units—can provide a valuable extension of the national economic accounts as they presently exist, making it possible to meet many of the criticisms being leveled at the accounts over their failure to include much nontransactions information that is essential to the evaluation of economic and social performance. To serve this purpose, however, the microdata sets must be integrated with the aggregate accounts, and with one another. A microdata sets relating to any given sector should add up (with appropriate weighting) to the economic constructs for that sector in the national accounts, and the microdata set for one sector should be articulated as appropriate with those of other sectors. This paper discusses techniques for constructing such microdata sets, including necessary adjustments of the macro accounts, techniques of alignment of microdata with the macro accounts and the creation and development of synthetic microdata sets. Synthetic matching and other techniques of merging data sets are discussed. The paper concludes with a consideration of the methodological implication of the integration of microdata and national accounts.     

COMPTABILITE NATIONALE A PRIX CONSTANTS ET A PRODUCTIVITE CONSTANTE

The problem of national accounting “at constant prices” is in fact a problem of comparability of time series, as changes in the price structure preclude any direct comparison of economic flows. If such accounts are established they will make it possible directly to compare the same flow at two different times in the economy as a whole, and this without leaving the influence of other flows out of account. This makes it possible both to synthesize and to undertake analytical comparisons. The accounts could then be used for the study of time series, for projections or for structural studies (e.g. the mechanisms underlying the changing pattern of income distrubution). The first part of this report sets out to study the main problems of compiling accounts at constant prices and to examine what conventions should be adopted. The second part of the report considers how productivity gains can be explicitly shown in the national accounts. The proposed study plan restores the symmetry between price and productivity. As in the accounts at constant prices, gap variables are introduced to measure productivity gains. These variables can be interpreted in terms of surplus; the concept of surplus used here, however, is not the one adopted for the accounts in constant prices, but its dual. Setting up an accounting system “at constant productivity” therefore makes it possible to complete the information provided by an accounting system “at constant prices.” These two systems can of course be integrated: this leads to the introduction of the concept of an accounting system “at constant prices and constant productivity.” Such an accounting system makes it possible to show, in the same accounting framework, the respective contributions of price changes and improved productivity to the gains realised by the different economic agents. It therefore gives a complete picture of “transfers” between the agents. At the same time, the data on price and productivity can be integrated with each other.     

A Partial Equilibrium Analysis of Trade with Decreasing Transport Costs

Decreasing transport costs are incorporated in the standard partial equilibrium analysis of trade by allowing the divergence—introduced by transport costs—between export and import price to decrease with the volume of trade. When the excess demand (supply) curve is steeper than the long run average cost curve for imports (exports), we observe that an import (export) tariff raises (lowers) the domestic price by an amount exceeding the tariff. Further, when the excess demand (Supply) curve is less steep than the long run average cost curve for imports (exports), the possibility exists that an import (export) tariff may lower (raise) the domestic price. These results lead to the important conclusion that tariffs cannot be used as measures of nominal protection across industries. [F10]     

Computer Price Indices and International Growth and Productivity Comparisons

Methodologies to derive price indices for information and communication technology (ICT) products vary between national statistical offices. This may lead to significant differences in measured price changes for these products and there has been concern about the international comparability of volume growth rates of GDP between several OECD countries. This article discusses the possible consequences for measures of economic growth of replacing one set of price indices by another one in the framework of national accounts. It is argued that the issue of ICT deflators cannot be dealt with in isolation and several other factors have to be taken into account, in particular whether ICT products are final or intermediate products, whether they are imported or domestically produced and whether national accounts are set up with fixed or chain weighted index numbers. Overall, results point to modest effects at the aggregate GDP level but may be more significant when it comes to component measures such as volume growth of investment, or of output in a particular industry.     

Ex post adaptations and hybrid contracts in software development services

We follow the recent literature on ex post adaptations in procurement and argue that highly volatile specifications result in multiple variations of fixed price (FP) and time and materials (T&M) contracts. Specifically, placing a cap on specification change in FP contracts prevents specification volatility, similar to the way that placing a cap on the price in T&M contracts prevents price escalation. We argue that these hybrid mechanisms are particularly important in software development contracting, a new critical business capability involving frequent and costly ex post adaptations to specification change. The level of completeness in these contractual archetypes is hypothesized to be determined by contracting costs and benefits, where costs are related to project uncertainty and benefits are related to the likelihood of vendor opportunism. We test this hypothesis with a unique data set of 270 software development contracts entered into by a leading international bank. The analysis confirms the existence of multiple hybrid contracts that mitigate both price escalation and specification volatility. It also shows that contracting costs and benefits explain more variance in contract choice when these hybrids are included, uncovering the detailed mechanisms used to curb opportunism when the vendor is less familiar to the client.     

A model of intra-brand competition and related pricing policies for manufacturers

Casual observation suggests that retail price distributions develop for products sold by retail outlets that are not restricted in their pricing by the manufacturer. Manufacturers, however, often restrict retailers so as to promote a uniform retail price — manufacturer's suggested retail prices and minimum resale prices are examples of such policies. This paper examines retail competition under assumptions that imply, in the absence of manufacturer-imposed restrictions, the development of an equilibrium retail price distribution. It is then shown that, depending on the distribution of consumer search costs and on the dispersion of marginal retailing costs, the manufacturer may find certain vertical pricing restrictions (either uniform, minimum, or maximum prices) to be more profitable than simply choosing an optimal wholesale price schedule and allowing retailers to price as they wish.     

A cost–benefit analysis of hearing aids,including the benefits of reducing the symptoms of dementia

We carried out a CBA of hearing aids (HAs) in which we estimated the direct utility benefits, and included the indirect utility benefits working through a reduction in dementia symptoms. The benefits methodology involved using QALYs as the outcome measure and then applying the price of a QALY to convert the outcome measure into monetary terms. The price of a QALY was derived from an age-specific VSL estimate. The effects of HAs on utility were estimated from a fixed effects regression on a large national panel data set provided by NACC where we used a negative proxy for the QoL. We also used a fixed effects regression for the estimate of the indirect benefits involving HAs reducing dementia symptoms. We found that the total benefits, mainly coming from the direct benefits, were extremely large relative to the costs, with benefit–cost ratios over 30.     

THE ACCOUNTS AND THE COMPUTER

(1) The primary contribution from the computer's application to the national accounts may well be to erode the line between micro and macro analysis. Key macro totals in the accounts sum individual company reports. The computer permits us to develop distributions of these reports. Such distributions, regularly presented, would permit discovery of the first forerunners of change, would help distinguish, e.g., widespread strength in an export drive or a profits surge, from participation by a few major concerns that dominate the aggregate.
(2) The strikingly different parameters in cross section and time series studies (e.g., price elasticity of housing) will in some measure reflect incomparability between the micro data that enter into each. The computer makes possible the use of the wide array of micro data that really underly the accounts to develop consistent analyses of time series (of both aggregates and distributions) and cross section analyses.
(3) The inconsistencies now imbedded in the accounts but gilded over by the abilities of the estimators are well-known. Discussions of wage price policy rest on data for wages that have no necessary compatibility with data on profits, etc. But since 1,500 corporations account for at least half of U.S. net income, sales, and investment, the computer can test the consistency of reports made by different units in these firms to different agencies—a process totally out of the question before the computer.
(4) The potential that the computer offers for prompt revisions in the accounts; for revisions by systematic rule; for tests of sensitivity of the entire set of accounts to particular tailor-made adjustments, is clear.
(5) Company purchase orders and accounts are increasingly recorded on cards or tapes. From these we may derive input-output detail and process detail that are light years better than those now feasible from intermittent survey aggregates.     

COMMODITY BALANCES AND NATIONAL ACCOUNTS: A SAM PERSPECTIVE

This paper is concerned with the treatment of commodity and activity balances in a national accounts context. It makes use of a general method for reducing the size of a social accounting matrix (SAM) by apportioning the elements of one or more accounts to the rest. The national accounts are looked at in terms of their usefulness for policy analysis, not least analysis of the impact of price changes. The SNA convention of separately distinguishing activities and commodities is endorsed. However, in contrast to the SNA, it is argued that for analytic purposes commodity transactions should be recorded at market prices, with a separate account for each of the markets for a given commodity in which a distinct price prevails. The SNA SAM is shown to be a reduced form of the SAM resulting from this recommended treatment of commodity transactions, while a further round of reductions (apportionments) yields SAMs which are familiar from input-output analysis, in which activities and commodities are not separately distinguished. It is argued that no special effort would be required to produce SAMs in which commodity balances are recorded at market prices as recommended here (the necessary data are also required to produce the conventional SNA tableaux), and that all reduced form versions of such SAMs, including the SNA, are inferior as a basis for the analysis of price effects on the structure of production.     

TREATMENT OF SUBSIDIES IN NATIONAL ACCOUNTS*

This document contains a critical analysis of some aspects of the treatment of subsidies in the present system of national accounts (United Nations SNA and the ESA, i.e. the European System of Integrated Economic Accounts) as background to the current discussion of their revision. One of the conventions used is that subsidies are recorded as a resource in the accounts of the market producer units which actually receive them. Should this rule of the receiver be applied in every case? The paper suggests that it would be preferable to attribute subsidies to the beneficiary in those cases where a subsidy received by one unit is the counterpart of a reduction in price which he grants to another unit which buys something from him (and which is the real beneficiary), so long as the discount is only granted to specific categories of purchasers. Recording in the accounts of the beneficiary results in a better distribution in the branch accounts and moreover greater stability of the national accounts in the face of minor institutional changes. The problem of allocation arises also for transfers designed to cover social risks or needs (illness, invalidism, old age, maternity). For this category of “social” goods and services for which general government wholly or partially assumes the costs to households, the transfer is treated either as a subsidy to collective consumption or a social benefit. The institutional arrangements, which vary from country to country, product to product and over time, give rise to profoundly different recording in the accounts. In order to restrict these differences, improve comparability between countries, permit analysis of trends over time, make the accounts less sensitive to different institutional arrangements and obtain a figure for household consumption which does not depend on the particular way in which the costs of such consumption is borne, the present document suggests that consumption subsidies should be treated as individual consumption expenditure of general government.     

THE CONCEPT OF MACROECONOMIC COST AND ITS UTILITY

The proposed "Variable Domestic Cost" includes all net payments by sectors belonging to the productive system (enterprises, credit institutions and government) to all other sectors (households, private non-profit organizations and the rest of the world). Compared with the rate of growth of demand, represented by Gross Domestic Marketable Product at current prices, the rate of growth of VDC per unit produced forms the "profitability function of the nation." Profitability is positively related to the rate of economic growth and to the price/cost relation. A relative deceleration of unit VDC stimulates economic growth, which enlarges the positive difference between price and cost, and that, in turn, accelerates economic growth. Inversely, a relative acceleration of unit VDC brakes economic growth, while a slowdown in production raises unit costs and depresses prices. The resulting fall in profitability stops economic growth.
The main explanatory variables of demand are World trade, monetary and fiscal policy and import prices. The main components of VDC are enterprises' wage costs, social benefits minus social contributions and the government wage bill minus direct taxes payable by households. The fact that in West Germany all these unit costs were increasing more slowly than in France explains why Geman economic growth, much slower than French before 1975, outpaced it after that year, achieving a lower rate of inflation, a larger positive balance of trade and a higher appreciation of the national currency.
The concept of VDC is a useful contribution to the theories of inflation and of economic fluctuations and provides a possible explanation of structural unemployment. Maintaining VDC at a lowest possible level should be considered a major object of economic policy.     

Are costs really sticky? Evidence from publicly listed companies in the UAE

This article measures the degree of adjustment between operating revenues and costs for publicly listed companies in the United Arab Emirates (UAE). Traditional cost models assume that variable costs change proportionally in response to an upward or downward fluctuation in demand. However, in recent years, such an assumption has been questioned by a variety of papers from the economics and accounting fields. Typically, cost stickiness is defined as costs decreasing by less than 1% when sales decrease by 1%, while reacting closer to the proportion of change when sales increase. This study, unlike the vast majority of the literature, did not find cost stickiness in the UAE after using panel data regression analysis. The main explanation is that UAE has mostly expatriate labour force that does not have the typical benefits of employment protection legislation (EPL) available in other national jurisdictions. EPL is a main reason that costs adjustments during decreasing sales is curbed due to the associated costs of firing employees.     

PROBLEMS OF A CENSUS OF NATIONAL WEALTH

This paper is essentially a summary of the book Measuring the Nation's Wealth (Volume 29, Studies in Income and Wealth, New York: National Bureau of Economic Research, 1964), which is the report of study directed by the author. The purpose o f the study was to assess the problems and possibilities of conducting a national census of real wealth as a basis for continuing wealth and balance sheet estimates for the U.S. economy, by major sector.
It is stressed that the balance sheets and wealth estimates should be designed as a consistent part of an integrated system of national income accounts. Thus, valuation (at market prices and/or depreciated replacement costs), sectoring, and type-of-asset detail in the basic data and derived estimates should be compatible with the flow estimates contained in the economic accounts. Consistency of stock and flow estimates facilitates analysis of inter-relationships, and is helpful in the estimation process.
It is recommended that in the U.S. asset data by broad categories be collected as part of the recurring economic censuses and other reporting systems, but that detail on fixed reproducible assets (construction and equipment) at cost, by year or period of acquisition, be obtained from a small sample of respondents in each industry. The detail would be useful in its own right, and also permit revaluation of the assets by use of price indexes and depreciation rates to a current depreciated replacement cost basis. Where feasible, respondent estimates of market values would also be obtained.
The proposal is thus a compromise between the Japanese 1955 sample survey of assets, and the detailed wealth inventory of the U.S.S.R. which was begun in 1959. Preliminary work is now underway in the U.S. federal statistical agencies to expand collection of asset data, and to prepare comprehensive wealth estimates in the framework of the national income accounts.     

The Public Finances of the United Kingdom: a re-interpretation

This paper presents evidence concerning the distributive activities of the UK state with regards to labour. A methodology is developed which assesses both the costs and the benefits of the UK state to labour. Applying such a methodology to the UK national accounts demonstrates that the taxes paid by labour exceed the benefits of social spending received by labour. Thus, there has been a net transfer of resources from labour to other social sectors. It can therefore be argued that the UK state both horizontally re-circulates income within labour and transfers resources vertically from wages and consumption to profits, investment and the state.     

CONSUMER SERVICES PROVIDED BY BUSINESS THROUGH ADVERTISING-SUPPORTED MEDIA IN THE UNITED STATES

The purpose of this paper is to examine and attempt to solve a longstanding “puzzle” in national economic accounting. Radio and television broadcasting are services clearly designed for and used by consumers but not purchased by them and, consequently, not counted in personal consumption expenditures (PCE); the costs of broadcasting (and a part of the costs of newspaper and magazine publication) are not counted in final product but are counted as intermediate expenses in the manufacture and distribution of advertised products. An important result of this treatment is that an increase in broadcasting services will not increase real product, but will be reflected as price increases in advertised goods. Are consumer services provided by advertisers properly handled in the conventional accounts? How should they be valued? If their value is to be added to PCE, where does the offsetting income originate? The paper argues that the puzzle is resolved by recognizing the nonmarket exchange between the consumer and the broadcaster; the consumer provides the reception and display of audiovisual advertisements in his home in return for broadcast entertainment. The exchange rate-e.g. 501/2 minutes of entertainment for 91 minutes of commercial messages in “prime time”-is established in the United States by the National Association of Broadcasters. Similar exchanges occur between consumers and radio broadcasters, newspaper and magazine publishers. This concept is used as the basis for a new treatment shown in abbreviated sample accounts. Estimates for the U.S. in 1976 are included.     

Irreversibilities and the timing of environmental policy

The standard framework in which economists evaluate environmental policies is cost–benefit analysis, so policy debates usually focus on the expected flows of costs and benefits, or on the choice of discount rate. But this can be misleading when there is uncertainty over future outcomes, when there are irreversibilities, and when policy adoption can be delayed. This paper shows how two kinds of uncertainty — over the future costs and benefits of reduced environmental degradation, and over the evolution of an ecosystem — interact with two kinds of irreversibilities — sunk costs associated with an environmental regulation, and sunk benefits of avoided environmental degradation — to affect optimal policy timing and design.