## Measuring Economic Welfare (pp. excerpt: ppea2020028)

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### Executive summary and measurement agenda
- Calls for a more people-focused approach and concerns about inequality, environmental impacts, and digitalization have put welfare at the top of the measurement agenda.
- Economic welfare is a narrower concept than well-being and sits within a broader system of measures of well-being.
- The SNA already contains many welfare-relevant indicators (income, consumption, prices, wealth) that largely depend on observable transactions and positions, avoiding uncertain imputation for many nonmarket well-being measures.
- The G20 Data Gaps Initiative (DGI) has fostered compiling household accounts and calls for distributions of household income, consumption, saving, and wealth.
- The IMF Statistical Forum (2018) highlighted measurement challenges from digitalization, including many free digital products and services whose welfare gains are difficult to measure and sometimes outside the scope of GDP.

### Definition of economic welfare
- Economic welfare: the part of well-being related to broadly-defined current and lifetime consumption and the resources that enable consumption (income, comprehensive wealth, households’ time endowment).
- Two approaches:
  - Current consumption approach: utility from market and near-market goods and services consumed by households, nonmarket goods and services produced for own consumption or by volunteers, leisure time, and aspects of environmental quality that directly affect households (e.g., pollution).
  - Sustainable consumption approach: the stream of consumption attainable in the future; real net disposable income measures sustainable consumption when the deflator is an index of consumption prices (Oulton, 2004).
- Inequality matters for aggregate economic welfare when marginal utility of consumption declines with consumption; social welfare indexes (e.g., Jones and Klenow, 2016) adjust for inequality (geometric mean of consumption distribution).

### SNA core and complementary indicators
- Core SNA welfare indicators: real household consumption, disposable income, wealth.
- Complementary indicators (selected list):
  - Distributions of income, consumption, and wealth.
  - Access to financial services and other services.
  - Net saving adjusted for depletion of natural resources.
  - Household nonmarket production and time use, including effects of digitalization.
  - Natural capital affecting sustainable consumption and human capital.
- Items affecting welfare but outside the GDP production boundary (examples listed): unpaid work, leisure, gender aspects of unpaid work, effects of digitalization on time budgets, life expectancy, quality-adjusted life years, renewable natural resources, carbon emissions, damage to property and health linked to environmental degradation or climate change, expenditures to protect against environmental externalities, unpaid production of open source software, households’ time use producing services enabled by digital inputs, and value of community-generated and user-generated content.

### Treatment of income in the SNA framework and compilation priorities
- SNA measures: (real) household consumption and disposable income; a measure of real net disposable income for the total economy is less used but relevant.
- Disposable income includes remittances; restricting welfare analysis to net national income can be misleading where remittances are major.
- Actual consumption and adjusted disposable income include imputations for in-kind transfers such as free education and free health care.
- Global compilation gaps (2017 survey):
  - "30 countries did not yet compile expenditure approach GDP in constant prices"
  - "more than 60 countries did not compile income approach accounts"
- Practical compilation steps:
  - If expenditure approach national accounts are unavailable, estimate final consumption expenditures from household surveys and commodity use analysis.
  - Derive disposable income of the total economy by combining GDP with net cross-border income and current transfers from balance of payments accounts.
- Dissemination recommendation: publish disposable income of the total economy where it differs significantly from national income.

### Distributional indicators in a national accounts framework
- Rationale: distributional indicators of income, consumption, and wealth are important for aggregate economic welfare and should be calculated within a national accounts framework for consistency with macro aggregates.
- Benefits of national-accounts-based distributions:
  - Standardized SNA income definitions for better international comparability.
  - Benchmarking to national accounts totals by income type to improve accuracy and correct survey under-reporting and non-participation by the rich (example: average coverage rates for property income in household surveys of around 30 percent in EU comparisons).
- Sensitivity and units:
  - Results sensitive to definitions (income concept, unit of analysis) and should be documented.
  - Equivalization example: weight of 1 to first household member, 0.5 to each additional adult, 0.3 to each child below 14; falling household sizes reduced growth of equivalized household income by 2 percentage points compared with unadjusted household disposable income (France, 2010–2018).
- Price heterogeneity:
  - Price changes experienced by households with different incomes can differ; deflators should be considered across income groups (example: U.S. bottom quintile inflation 1.87 percent vs top quintile 1.21 percent over 2004–2015, Jaravel, 2019).
- Compilation steps for distributions (Annex II five steps, summarized):
  - a. adjust national accounts totals to exclude income of households not covered in surveys and, if necessary, NPISH;
  - b. identify variables in household surveys and administrative records that map to SNA components;
  - c. correct for missing elements and reconcile micro totals to national accounts totals by income item;
  - d. group households into quintiles based on equivalized disposable income;
  - e. derive indicators for each group (income shares, etc.).
- Recommended distributional indicators and priorities:
  - Quintiles and decompositions by household types, medians, top decile and top 1 percent, Gini coefficients.
  - NSOs should have access to tax data to improve accuracy and measure after-tax distributions.
  - Proceed with distributional indicators for consumption even if income distribution data are unavailable.
  - Document definitions, alternative income definitions, and sources of uncertainty.
  - Future research: distributional effects of digitalization (mobile money, free video calls, other free digital services) on real consumption distribution.

### Central role of deflators in welfare measurement
- Nominal GDP does not measure welfare; price and volume indexes are required to measure changes in welfare.
- Prices used in GDP valuation reflect scarcity (marginal utility) and not necessarily importance for welfare.
- Technological changes that eliminate consumer costs reduce the GDP deflator and can raise measured real GDP; deflator adjustments resolve the paradox of nominal GDP falling.
- Deflator development priorities:
  - Develop deflators for final expenditures where missing.
  - Improve deflators with weaknesses (quality adjustments, digital economy, health care, government services).
  - Keep price index baskets, weights, and samples up-to-date; prompt inclusion of new products; annual updating of weights; representative outlet and variety samples.
  - Quality adjustments requiring uncertain assumptions may be included in complementary indicators rather than core official indexes.
- Deflator choice for income:
  - For income, residents’ purchasing patterns matter because income is fungible; deflators for real household income are usually price indexes for final consumption (or the CPI).
  - Using the GDP deflator for welfare measurement has undesirable effects:
    - Treats export prices as though paid by domestic residents.
    - Neglects import-induced price changes because negative weights on import prices can cancel those changes elsewhere in the GDP deflator.
  - The deflator for gross domestic final expenditures (prices paid by domestic residents for final consumption and investment) is well suited for measuring an economy’s real income.
- Examples of divergence (Australia, six years ending in 2018):
  - Gap of 4.4 percentage points between GDP deflator and final expenditures deflator.
  - A 6 percent increase in real GDP accompanied by an increase of just 1.6 percent in real gross domestic income (GDI).
  - The gap between real income growth at household and total economy levels was 1.4 percentage points in the same comparison.

### Digitalization: measurement issues and potential gaps
- Three possible sources of unmeasured welfare growth from digitalization (Table 3):
  - Digital products supplied by market producers.
  - Household nonmarket production enabled by digital products/information.
  - Online shopping and sharing-economy effects.
- Nonmarket production and GDP production boundary:
  - Household nonmarket production improvements from digitalization generate welfare growth beyond GDP because they are outside the GDP production boundary.
  - Welfare gains from innovations in market-produced inputs are conceptually part of GDP growth.
  - Examples of paid services replaced by free digital products: travel agents, film developing, SMS fees, postage, long-distance calling, open access courses.
  - Measures of household utilization (e.g., petabytes of data, time use) may serve as indicators of household production.
  - Byrne and Corrado (2019): expanding GDP production boundary to include household production utilizing internet and digital devices increases U.S. GDP growth over 2007–2017 by 0.44 percentage points.
  - Expanding the GDP production boundary is ruled out in practice because selective expansion would create inconsistencies and unsuitable GDP for policy uses.
- Digital products as market outputs — quality measurement:
  - Standard quality adjustments (hedonic regression) are used where applicable; truly novel new goods (e.g., smartphone) pose special valuation challenges.
  - Reinsdorf and Schreyer (2019) assumptions on overlooked quality improvements imply:
    - a 5 percentage point overstatement of the annual rate of price growth for most digital devices and services,
    - a 10 percentage point overstatement for telecom services,
    - a 2 percentage point overstatement for products with significant digital content such as automobiles.
  - Applying weights of the average OECD household consumption basket gives upper bounds for potential effect on annual growth rate of household consumption deflator of 0.4–0.5 percentage points.
- Valuing truly novel goods and consumer surplus:
  - Reservation price method: consumer surplus ≡ (p* – pNt) qNt / 2 under linear demand; p* estimation may require uncertain assumptions and belong in complementary indicators.
  - Reinsdorf and Schreyer (2019) calibration: free and low-cost digital replacements could reduce household consumption deflator growth by almost 0.2 percentage points (2005 weights) or 0.1 percentage point (2015 weights).
  - Nordhaus (1996) example: long-run lighting price index 5 percentage points lower than standard price index over 1850–1992.
- Free online platform services:
  - Free services are often captured indirectly in nominal GDP via cross-subsidized funder-paid prices.
  - Reservation-price and willingness-to-accept methods can yield large consumer-surplus estimates but are unsuitable for official GDP incorporation because:
    - Willingness-to-pay vs willingness-to-accept experiments diverge.
    - Unmeasured losses from disappearing competing services could offset gains.
    - Loss of privacy from data collection represents a cost that may offset some gains.
  - Brynjolfsson et al. (2019) findings cited:
    - Facebook alone increases average annual growth rate of an expanded GDP concept (“GDP-B”) in the US over 2003–2017 by 0.05 percentage points.
    - The combined median willingness-to-accept in the US for giving up Facebook, WhatsApp, online search engines, email, maps, and other free digital services totals more than $30,000 per user annually.
    - The implied adjustment to cumulative growth of real household consumption since free services first appeared could be 2 percentage points — but adding such a large imputation would change the character of national accounts and reduce their usefulness for key policy questions.
- Cross-subsidization and deflator weights:
  - Example: U.S. mobile operators bundled subsidized phones with marked-up telecom services; correcting weights and quality adjustment can reduce bundle deflator growth materially (Aizcorbe, Byrne and Sichel (2019) find reduced growth rate by 4 percentage points after corrections).
- Volunteer-produced content and omitted output:
  - Volunteer-produced digital content and open-source software are outside GDP boundaries; complementary indicators (revenue-based or time-cost-based valuations) give modest estimates (e.g., hypothetical advertising revenue for Wikipedia; Robbins et al. (2018) imply $4 billion US dollars for several open-source packages).
- E-commerce and sharing economy:
  - Scale: B2C e-commerce reached almost 3.9 trillion US dollars in global sales and over 1 trillion dollars in China (UNCTAD, 2019).
  - Possible CPI effects: if online share rises 2 percentage points per year and online sellers offer prices 5 percent lower, CPI effect is 0.1 percentage points.
  - Variety and convenience gains: Brynjolfsson, Hu and Smith (2009) — obscure titles in 2000 increased cumulative book price index reduction by 0.8 percentage points over five years; Dolfen et al. (2019) — variety gains as of 2017 > 1 percent of overall consumption; spreading over 22 years implies additional growth of real household consumption of about 0.05 percent per year; including gross time and money savings raises adjustment to 0.075 percentage points.
  - Variety gains can be framed as household nonmarket production improvements.

### Key policy and statistical recommendations (summary and final conclusions)
- Overall conclusions:
  - The SNA welfare indicators are the starting point; complementary indicators are needed for distributional detail and items beyond the GDP production boundary (household time use and nonmarket activity, natural capital and environmental sustainability, human capital).
  - Many welfare effects of digitalization are conceptually beyond GDP or require very uncertain assumptions; guidelines for complementary indicators are being developed.
- Main statistical recommendations:
  - NSOs should prioritize filling data gaps on:
    - household consumption and disposable income,
    - real income of the total economy,
    - prices of final expenditure items,
    - household wealth.
  - Compile household sector accounts; use financial regulator data where full accounts are not yet compiled.
  - Use household expenditure surveys and commodity use analysis to estimate household final consumption expenditures when direct accounts are missing.
  - Ensure deflators reflect purchasing power appropriately; update product lists, weights, models, outlet samples and include feasible quality adjustments.
  - Make SNA welfare indicators prominent in NSO dissemination (dashboards recommended); disseminate disposable income of the total economy when it differs significantly from national income.
  - If publishing complementary net income measures adjusting for natural resource depletion, identify underlying assumptions.
- Distributional indicators recommendations:
  - Develop distributional indicators of household disposable income, final consumption, saving, and wealth within a national accounts framework.
  - Priorities: quintiles, medians, Gini coefficients, top decile and top 1 percent, breakdowns by demographic characteristics.
  - NSOs should have access to tax data to enhance accuracy and measure after-tax distributions.
  - Document alternative definitions and assumptions; publish distributional indicators based on alternative income definitions.
- Digitalization recommendations:
  - Estimates of welfare growth from free and innovative digital products that depend on very uncertain assumptions should be incorporated in complementary indicators, not in GDP.
  - NSOs should develop complementary indicators of digitalization effects drawing on internal research, outside experts, and academic work.
  - NSOs should prioritize improvements in compilation of deflators to capture welfare gains from new digital products, models and suppliers.
  - Create and disseminate a digital economy satellite account with data on size and composition of the digital economy, spending on digital products, and market shares of domestic and foreign e-commerce retailers.
  - Incorporate new digital products promptly into price-index and nominal-GDP compilation; include online and platform-based sources properly in outlet samples.
  - Design time use surveys to collect data on digitalization’s effects on time use and develop complementary indicators measuring welfare significance.
  - Further research needed on measurement implications for nominal GDP of platforms’ collection of users’ data.
- Final recommendation emphasis:
  - Use complementary indicators to capture welfare effects of digitalization that are outside GDP or cannot be quantified without uncertain assumptions.
  - Communicate and disseminate the welfare indicators already in the SNA to place them at the center of people-focused measurement.

*Prepared by Marshall Reinsdorf; Approved by Louis Marc Ducharme; March 9, 2020. Source: ppea2020028 (International Monetary Fund — Measuring Economic Welfare, selected excerpts).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Introduction: measurement agenda and scope
- Calls for a more people-focused approach and concerns about inequality, environmental impacts, and digitalization have put welfare at the top of the measurement agenda.
- The paper argues that economic welfare is a narrower concept than well-being and sits within a broader system of measures of well-being.
- The SNA already contains many welfare-relevant indicators (income, consumption, prices, wealth) that largely depend on observable transactions and positions, avoiding uncertain imputation needed for many nonmarket well-being measures.
- The G20 Data Gaps Initiative (DGI) has fostered compiling household accounts and calls for distributions of household income, consumption, saving, and wealth.
- The IMF Statistical Forum (2018) highlighted measurement challenges from digitalization, including many free digital products and services whose welfare gains are difficult to measure and sometimes outside the scope of GDP.

### Definition of economic welfare
- Economic welfare is the part of well-being related to broadly-defined current and lifetime consumption and the resources that enable consumption (income, comprehensive wealth, households’ time endowment).
- Two relevant approaches:
  - Current consumption approach: utility from market and near-market goods and services consumed by households, nonmarket goods and services produced for own consumption or by volunteers, leisure time, and aspects of environmental quality that directly affect households (e.g., pollution).
  - Sustainable consumption approach: the stream of consumption attainable in the future, bringing net saving, wealth, and certain environmental degradation effects into play; real net disposable income measures sustainable consumption.
- Real income is a measure of sustainable consumption only if the deflator is an index of consumption prices (Oulton, 2004).
- Inequality matters for aggregate economic welfare when marginal utility of consumption declines with consumption; social welfare indexes (e.g., Jones and Klenow, 2016) adjust for inequality (geometric mean of consumption distribution).

### Key findings on the SNA and economic welfare indicators
- The SNA indicators extend beyond GDP and include household disposable income, consumption, and wealth; these are central to measuring economic welfare.
- Priorities for statistical agencies (NSOs):
  - Fill data gaps involving SNA welfare indicators (consumption, income, wealth).
  - Improve quality of consumption price indexes (deflators).
  - Develop distributional indicators of income, consumption, and wealth within a national accounts framework.
- Definitions and assumptions can have big effects on distributional and welfare indicators and should be documented.
- Many SNA welfare indicators depend on transactions and positions that are, at least in principle, observable, reducing reliance on uncertain monetary imputations.

### Distributional indicators in a national accounts framework
- Rationale:
  - Distributional indicators of income, consumption, and wealth are important elements of aggregate economic welfare and should be calculated within a national accounts framework to ensure consistency with macro aggregates.
- Practical considerations:
  - Work on compiling household income, consumption, and wealth distributions has been fostered by the DGI.
  - Sensitivity of distributional results to definitions (e.g., income concept, unit of analysis) is significant and must be assessed and documented.
  - Price changes experienced by households with different incomes can differ; price movements and deflators should be considered across income groups.
- Recommendation themes (detailed recommendations appear in the main paper):
  - NSOs should compile distributional indicators linked to national accounts, be transparent about income definitions and units of analysis, and account for heterogeneity in household price experiences.

### Digitalization and welfare measurement
- Central points:
  - Concerns that free online platforms are missing from nominal GDP are incorrect.
  - Many welfare effects of digitalization require complementary indicators because:
    - Some effects are conceptually outside the GDP production boundary (nonmarket goods and aspects of well-being).
    - Some effects are impossible to quantify without making uncertain assumptions.
- Specific digitalization-related measurement issues:
  - Nonmarket production (unpaid household work, volunteer-produced content) and its treatment relative to the GDP production boundary.
  - Digital products supplied as outputs of market producers and their valuation in GDP.
  - Free services from online platforms: while welfare gains exist, they are not necessarily omitted from GDP levels as commonly feared; but welfare effects often need complementary indicators.
  - Nonmarket production for own consumption enabled by digitalization (e.g., households producing services for own use).
  - Volunteer-produced software and content and their measurement challenges.
  - E-commerce and sharing economy implications for existing SNA compilation practices.
- Recommendation themes:
  - Develop complementary indicators to capture welfare effects of digitalization that are conceptually outside GDP or require assumptions to value.
  - Clarify treatment of free digital services and nonmarket production in SNA guidance and dissemination.

### Policy and statistical recommendations (summary)
- Prioritize filling data gaps for SNA welfare indicators: consumption, income, wealth, and deflators.
- Improve the quality of consumption price indexes used to deflate income and consumption measures.
- Develop distributional indicators of income, consumption, saving, and wealth within a national accounts framework, and document definitions and assumptions affecting results.
- Use complementary indicators to capture welfare effects of digitalization that are outside GDP or cannot be quantified without uncertain assumptions.
- Communicate and disseminate the welfare indicators already in the SNA to place them at the center of people-focused measurement.

*Prepared by Marshall Reinsdorf; Approved by Louis Marc Ducharme; March 9, 2020.*

### 15.      Surrounding a core group of economic welfare indicators in the SNA is a set of

### Measuring Economic Welfare (Section)

### SNA core and complementary indicators
- The SNA provides a core group of economic welfare indicators (real household consumption, disposable income, wealth) and complementary indicators that add detail and cover items beyond GDP.
- Complementary indicators include:
  - Distributions of income, consumption, and wealth.
  - Access to financial services and other services.
  - Net saving adjusted for depletion of natural resources.
  - Household nonmarket production and time use, including effects of digitalization.
  - Natural capital affecting sustainable consumption and human capital.
- Items outside the GDP production boundary that affect economic welfare (examples listed) include effects of digitalization on household nonmarket production and natural capital.
- Table 2 lists indicators beyond GDP scope: unpaid work, leisure, gender aspects of unpaid work, effects of digitalization on time budgets, life expectancy, quality-adjusted life years, renewable natural resources, carbon emissions, damage to property and health linked to environmental degradation or climate change, expenditures to protect against environmental externalities, unpaid production of open source software, households’ time use producing services enabled by digital inputs, and value of community-generated and user-generated content.

### Treatment of income and the SNA framework
- The SNA lists measures of (real) household consumption and disposable income, and a measure of real net disposable income for the total economy (less used).
- Disposable income includes remittances, which are a major income source for many economies; restricting welfare analysis to net national income can be misleading.
- Actual consumption and adjusted disposable income include imputations for in-kind transfers such as free education and free health care.
- The institutional sector accounts often lack key household data; a 2017 global survey found:
  - "30 countries did not yet compile expenditure approach GDP in constant prices"
  - "more than 60 countries did not compile income approach accounts"
- If expenditure approach national accounts are unavailable, a first step is estimating final consumption expenditures; disposable income of the total economy can be derived by combining GDP with net cross-border income and current transfers from balance of payments accounts.
- Dissemination of disposable income of the total economy would aid welfare analysis, particularly where remittances are significant.

### Distributional indicators and benefits of a national accounts framework
- Distributional indicators (income, consumption, wealth) are necessary to complete the welfare picture and to assess joint distributions of income and wealth.
- Micro household surveys exist, but integrating distributions in a national accounts framework offers:
  - Standardized, comprehensive SNA income definitions for better international comparability.
  - Benchmarking to national accounts totals by income type to improve accuracy.
  - Corrections for survey under-reporting and non-participation by the rich (example: average coverage rates for property income in household surveys of around 30 percent in EU comparisons).
- SDG relevance: indicators include consumption and income growth of the bottom two quintiles and frequency of income below half the median.
- Equivalization example used: weight of 1 to the first household member, 0.5 to each additional adult, and 0.3 to each child below 14; falling household sizes reduced growth of equivalized household income by 2 percentage points compared with unadjusted household disposable income (France, 2010–2018).

### Central role of deflators in welfare measurement
- Nominal GDP does not measure welfare; price and volume indexes are required to measure changes in welfare.
- Prices used in GDP valuation reflect scarcity (marginal utility) and not necessarily importance for welfare (example contrast: water vs diamonds).
- Technological changes that eliminate consumer costs (e.g., long-distance calls) reduce the GDP deflator and thus can raise measured real GDP; the paradox of nominal GDP falling is resolved by deflator adjustments and effects on other spending.
- Priorities for deflator development:
  - Develop deflators for final expenditures where missing.
  - Improve deflators with weaknesses (quality adjustments, digital economy, health care, government services).
  - Keep price index baskets, weights, and samples up-to-date; prompt inclusion of new products; annual updating of weights; representative outlet and variety samples.
- Quality adjustments requiring uncertain assumptions may be included in complementary indicators rather than the core official indexes.

### Deflation of income and choice of deflator
- For output or expenditures, deflator composition should match the aggregate; for income, residents’ purchasing patterns matter because income is fungible.
- Deflators for real household income are usually price indexes for final consumption (or the CPI), but SNA operational definition allows a special deflator for income from net exports.
- Using the GDP deflator as an all-purpose inflation measure has two undesirable effects for welfare measurement:
  - Treats export prices as though paid by domestic residents.
  - Neglects import-induced price changes because negative weights on import prices can cancel those changes elsewhere in the GDP deflator.
- The deflator for gross domestic final expenditures (prices paid by domestic residents for final consumption and investment) is well suited for measuring an economy’s real income.
- Examples of divergence:
  - Australia: gap of 4.4 percentage points between GDP deflator and final expenditures deflator over the six years ending in 2018.
  - Consequently, a 6 percent increase in real GDP was accompanied by an increase of just 1.6 percent in real gross domestic income (GDI) in Australia over that period.
  - The gap between real income growth at household and total economy levels was 1.4 percentage points in the same comparison.

### Data gaps, compilation priorities, and dissemination recommendations
- Common gaps: many SNA welfare indicators are not compiled or are compiled improperly.
- Priorities for filling gaps and improving measurement:
  - Compile household sector accounts; financial regulator data may allow a household financial account if full accounts are not yet compiled.
  - Use household expenditure surveys and commodity use analysis to estimate household final consumption expenditures when direct accounts are missing.
  - Ensure the deflator for national income measures purchasing power appropriately; update price indexes (product lists, weights, models, outlet samples) and include feasible quality adjustments.
  - Place SNA welfare indicators prominently in NSO data dissemination (dashboards recommended) to discourage equating GDP per capita and the GDP deflator with welfare.
  - Disseminate disposable income of the total economy when it differs significantly from national income.
  - If disseminating a complementary net income measure adjusting for depletion of natural resources, identify the underlying assumptions.

*Source: ppea2020028 - 15.      Surrounding a core group of economic welfare indicators in the SNA is a set of*

### 37.      Many NSOs are developing distributional indicators for income, consumption, and

### ppea2020028 - 37.      Many NSOs are developing distributional indicators for income, consumption, and

### Distributional indicators: scope and data sources
- Many NSOs are developing distributional indicators for income, consumption, and wealth as measured in national accounts; some have released official statistics.
- The OECD Expert Group on Disparities in a National Accounts Framework (EGDNA) has fostered this work.
- Indicators include decompositions by income quintile, main source of income, family composition, and age.
- Items analyzed: household disposable income, final consumption, saving, and wealth.
- Annex II summarizes the five steps for compiling distributional indicators for income.
- Differences in concepts and coverage must be adjusted for when using household survey data and tax data to distribute the totals in the national accounts for each type of income.
- Academic contributions:
  - The World Inequality Database (WID) contains distributions of pre-tax net national income for more than 60 countries.
  - WID-based analyses show within-country inequality rose over 1990–2016.
  - A combined world income distribution estimate (with PPPs) yields the “elephant curve”: the global 1 percent captured 27 percent of overall income growth over 1980–2016.

### Consumption and alternative indicators
- Survey data on household consumption may be available even if income data are lacking.
- The World Bank’s Global Consumption Database draws on consumption surveys from many countries.
- Most countries conduct periodic household expenditure surveys for CPI weights.
- Distributional statistics on consumption provide insights into inequality and poverty.
- A useful statistic that does not require micro data on income: labor’s share of total income from production or of GDP (see Box 2).

### Box 2 — Labor Share of Income (key points)
- Labor’s share of income from production, or value added, can be calculated from income approach national accounts, avoiding the need for micro data.
- Many studies have found that labor’s share of GDP has declined; corrections for distortions may reverse that finding (Cette, Koehl and Philippon, 2019).
- Compensation of employees is often used as the measure of labor income; this omits the labor component of mixed income (income of unincorporated businesses).
- Mixed income may come from self-employment, gig economy work, or informal employment.
- NSOs could improve labor share estimates by better measuring self-employment income and treating family members’ income in family businesses as compensation rather than profits.
- Capital income adjustments: deduct expenses for depreciation and property taxes; consider omitting rental income, since fast-rising rental income may reflect real estate prices.

### Sensitivity of results to income definition and unit of analysis
- The SNA contains multiple income concepts (economy vs. household sector; before vs. after current transfers).
- Net national income (WID concept) includes retained earnings of corporations—important for stockholder wealth—but retained earnings are assigned to the economy of residence of the corporation, not the stockholders.
- Disposable household income should be emphasized in dissemination, as it reflects resources households can consume or save.
- To show tax and transfer effects, disseminate household income before taxes and transfers as well.
- Clearly identify the income concept when disseminating distributional indicators to avoid miscomparisons.
- Empirical notes:
  - Household income before taxes and transfers (labeled “balance of primary incomes” in the SNA) exhibits more inequality than household disposable income (Figure 5).
  - Consumption is more equally distributed than income: adjusted disposable income of the bottom quintile normalized by the population average is centered around 0.5, while consumption for the bottom quintile is centered around 0.7 (Figures 6 and 7).
- Unit of analysis matters:
  - WID uses income per adult individual; EGDNA uses equivalized household income.
  - Equivalized income is widely used and generally well suited for welfare growth analysis.
  - Average household size has fallen in most advanced economies, slowing growth of equivalized household income (Nolan et al, 2019).
- International comparability:
  - An international standard on quintile definition could improve comparability.
  - Australia divides quintiles by numbers of individuals; Canada and the Netherlands use numbers of households. Australia’s definition brings more households into the bottom quintile, contributing to a comparatively high-income share of that quintile.

### Price changes experienced by households with different incomes
- Analyses often apply the same deflator across the income distribution, but inflation can vary between quintiles.
- Example: U.S. price indexes based on mixes of products by quintile show an inflation rate of 1.87 percent over 2004–2015 for the bottom quintile and 1.21 percent for the top quintile (Jaravel, 2019).
- A study found the bottom quintile had faster income growth than the next three quintiles when income included government transfers and the same deflator was applied to everyone (Congressional Budget Office, 2018).
- Due to high inflation in health care prices, transfers for health care made nominal income of the bottom quintile grow relatively quickly; a deflator reflecting greater importance of health care in the bottom quintile’s basket would imply slower real income growth for that quintile.

### Recommendations on distributional indicators
- Develop distributional indicators of household disposable income, final consumption, saving, and wealth in a national accounts framework to fill information gaps and improve accuracy and international comparability relative to survey-only indicators.
- Priorities: quintiles and decompositions by household types, medians, top decile and top 1 percent to understand concentration, and Gini coefficients for standard inequality measurement.
- If household income and consumption are not yet published in national accounts, develop these measures as steps toward distributional indicators.
- Proceed with distributional indicators for consumption even if income distribution data are unavailable.
- NSOs should have access to tax data with sufficient detail to identify different types of income included in the SNA to enhance accuracy and measure after-tax distributions.
- Explore opportunities to improve the quality and availability of survey data on household income, consumption, and wealth.
- Documentation should state definitions and assumptions, disseminate distributional indicators based on alternative income definitions, and discuss underlying assumptions and sources of uncertainty.
- Future research should examine distributional effects of digitalization (e.g., mobile money, free video calls, other free digital services) on real consumption distribution.

### Welfare and digitalization — measurement issues and potential gaps
- Productivity growth slowed in advanced economies around the time online platforms, e-commerce, and smartphones became widespread; rapid uptake suggests substantial welfare gains but growth statistics indicated stagnation, prompting mismeasurement concerns.
- The Economist (2016) argued that some innovation was not measured in GDP because of sharing economy, free items, benefits of new goods, and volunteer-produced content/software omissions; some hypotheses also imply CPI overestimation.
- Table 3 identifies three possible sources of unmeasured welfare growth from digitalization: digital products supplied by market producers, household nonmarket production enabled by digital products/information, and online shopping/sharing economy effects. Domestic consumption differs from domestic production because of imports and exports—corrections to consumption could offset GDP after correcting imports.

### Nonmarket production and GDP production boundary
- Households combine time with market inputs to produce consumed outcomes; digitalization may have improved households’ nonmarket production, generating welfare growth beyond GDP.
- Welfare growth from changes in household nonmarket production is beyond GDP; welfare gains due to innovations in market-produced inputs are conceptually part of GDP growth.
- Examples: replacement of paid services by free digital products (travel agents, film developing, SMS fees, postage, long-distance calling) and open access courses reduce household money costs.
- Measures of household utilization (e.g., petabytes of data, time use) may serve as indicators of household production.
- Byrne and Corrado (2019): expanding GDP production boundary to include household production utilizing internet and digital devices increases U.S. GDP growth over 2007–2017 by 0.44 percentage points.
- Expanding the GDP production boundary is ruled out because selective expansion would create inconsistencies; general change would impute large output and income leading to unsuitable GDP for policy on income, employment, and government finances.

### Digital products supplied as market outputs — quality measurement
- Quality changes in new models and varieties are challenging to measure; hedonic regression techniques can be used for quality adjustments.
- Reinsdorf and Schreyer (2019) assume overlooked quality improvements cause:
  - a 5 percentage point overstatement of the annual rate of price growth for most digital devices and services,
  - a 10 percentage point overstatement for telecom services,
  - a 2 percentage point overstatement for products with significant digital content such as automobiles.
- Applying weights of the average OECD household consumption basket gives upper bounds for the potential effect on the annual growth rate of the household consumption deflator of 0.4–0.5 percentage points.

*International Monetary Fund — Measuring Economic Welfare (excerpt).*

### 60.      Standard techniques for adjusting for quality differences (such as hedonic regressions

### ppea2020028 - 60.      Standard techniques for adjusting for quality differences (such as hedonic regressions

### Valuing truly novel new goods and consumer surplus
- Standard techniques for quality adjustment (e.g., hedonic regressions or production cost of the new feature) cannot be used for truly novel new goods such as the smartphone.
- Approaches that estimate the money value of time savings, improved outcomes, and new uses of leisure time may be hard to implement.
- Reservation price approach:
  - Define reservation price p* as the price just high enough to drive demand for the new good to zero.
  - Suppose new good N appears in period t at price pNt with quantity purchased qNt.
  - Treat p* as the good’s hypothetical price in period t–1.
  - If the demand curve is linear, consumer surplus from the new good = (p* – pNt) qNt / 2.
  - If estimating p* requires uncertain assumptions, the impact of incorporating the reservation price in CPI or the GDP deflator should be shown in a complementary indicator.
- When a new good reduces the money cost of achieving the same outcome, the expense avoided can be used to bound welfare effects; the lower bound uses spending patterns before the outcome became free.
  - Reinsdorf and Schreyer (2019) calibrate plausible bounds for free and low-cost digital replacements: based on 2005 average OECD consumption basket weights, the household consumption deflator’s growth rate could be reduced by almost 0.2 percentage points (or by 0.1 percentage point using 2015 weights).
  - Nordhaus (1996) constructs a long-run index of the price of light using the cost of producing a lumen; the average annual growth rate of this index over 1850–1992 is 5 percentage points lower than a standard price index treating each lighting technology as a different good.

### Free services of online platforms and measurement implications
- Free platform services (e.g., Google, Facebook) are central to measurement debates; they are captured indirectly in nominal GDP when subsidized by marked-up items.
- Platforms often exhibit two-sided structures: a funder side (e.g., advertisers) and a subsidized free side; funders recoup costs in prices of items sold to them.
- Welfare gains from free services:
  - Reservation price may be positive even for free services.
  - Conventional reservation-price methods cannot be applied; consumer surplus estimates use willingness-to-accept experiments (payments users would accept to stop using services).
  - Brynjolfsson et al. (2019) adjust an expanded GDP concept (“GDP-B”) using consumer surplus estimates:
    - Facebook alone increases average annual growth rate of GDP-B in the US over 2003–2017 by 0.05 percentage points.
    - The combined median willingness-to-accept in the US for giving up Facebook, WhatsApp, online search engines, email, maps, and other free digital services totals more than $30,000 per user annually.
    - The implied adjustment to cumulative growth of real household consumption since free services first appeared could be 2 percentage points — but adding such a large imputation would change the character of national accounts and reduce their usefulness for key policy questions.
- Box 3 summary (selected points):
  - Free items often form part of cross-subsidized bundles; where subsidized items help sell other profitable items, measured output is not systematically undermeasured.
  - Negative net operating surplus would indicate missing output; most major platforms do not exhibit this.
  - Timing lags and omitted intangible investment (e.g., user data, investment to build network effects) are potential minor measurement problems.
- Reasons consumer-surplus estimates from free services are unsuitable for official GDP incorporation:
  - Willingness-to-pay vs willingness-to-accept experiments give divergent results (e.g., Facebook).
  - Unmeasured losses from disappearing competing services could offset gains.
  - Loss of privacy from data collection represents a cost that may offset some measured gains.

### Cross-subsidization, price indexes, and deflator weights
- Cross-subsidized pricing can affect measurement of price and volume growth through deflator weights.
  - Example: U.S. mobile operators bundled subsidized phones with marked-up telecom services.
  - Correcting weights and adjusting phone price index for quality change can materially change the bundle deflator: Aizcorbe, Byrne and Sichel (2019) find reduced growth rate of the deflator for the bundle by 4 percentage points after corrections.
  - Further research needed on cost-based weights as replacements for weights based on subsidized prices.

### Nonmarket production, volunteer-produced content, and omitted output
- Digitalization can improve household nonmarket production technologies (e.g., digital maps, online instructions, telework, online classes), allowing time and money savings — representing output-saving innovation.
- Volunteer-produced digital content and software (wikis, blogs, product reviews, open-source software) lie outside GDP boundaries:
  - Complementary indicators for free software (as investment) and volunteer-generated content could improve understanding of digital-era growth.
  - Revenue-based or time-cost-based valuations give relatively modest estimates that may not capture full welfare impact (e.g., hypothetical advertising revenue for Wikipedia; Robbins et al. (2018) imply $4 billion US dollars for several open-source packages).

### E-commerce, sharing economy, and welfare effects
- Scale and features:
  - B2C e-commerce reached almost 3.9 trillion US dollars in global sales and over 1 trillion dollars in China (UNCTAD, 2019).
  - Welfare gains from e-commerce: lower prices, increased variety, time savings; offsetting welfare losses may arise from lost variety/convenience if physical stores close.
- Prices may be lower online:
  - Substitution to online sellers can be hard to capture in CPI; if main characteristics match, CPI may treat online item as continuation of offline item.
  - Plausible scale for CPI overstatement: if online share rises at 2 percentage points per year and online sellers offer prices 5 percent lower, the effect is 0.1 percentage points.
- Sharing economy substitution (ridesharing, home sharing) can reduce average prices; CPI unlikely to reflect this change in average price paid.
- Enhanced variety and convenience:
  - Procedure for variety gains assumes inverse relationship between quality-adjusted prices and expenditure shares; key substitution parameter indicates substitutability.
  - Example calculations:
    - With substitution parameter of 4, new varieties’ net market share divided by 3 approximates price-index adjustment.
    - Brynjolfsson, Hu and Smith (2009): in 2000 obscure titles available only after online bookstores accounted for 2.4 percent of total book sales; consumer surplus from these reduces cumulative growth of the book price index over five years by 0.8 percentage points.
    - Dolfen et al. (2019): using substitution parameter of 4.3, variety gains from online shopping as of 2017 amount to over 1 percent of overall consumption; spreading this gain over 22 years implies additional growth of real household consumption of about 0.05 percent per year.
    - Including gross time savings and money savings increases the adjustment to growth rate of household consumption to 0.075 percentage points.
  - Variety gains can be viewed as household nonmarket production improvements (households spend time searching; better information shifts search responsibility to market producers).

### Key recommendations
- Create and disseminate a digital economy satellite account with data on size and composition of the digital economy, spending on digital products, and market shares of domestic and foreign e-commerce retailers to better understand welfare effects and ensure digital economy capture in GDP.
- Incorporate new digital products promptly into compilation methods for price indexes and nominal GDP; adjust for quality changes when possible.
  - Quality adjustments that require uncertain assumptions should be included in complementary indicators.
  - CPI compilers should ensure online and platform-based sources are properly represented in outlet samples and sample updating procedures.
- Design time use surveys to collect data on digitalization’s effects on time use and to develop complementary indicators measuring the welfare significance of these effects.
- Further research is needed on effects on cost-of-living indexes and economic welfare of household nonmarket production enabled by new digital products, free digital services, and online access to information.

*International Monetary Fund — “Measuring Economic Welfare” (excerpt, pp. 28–33).*

### 83.      Further research is needed on measurement of the information assets generated by

### 83.      Further research is needed on measurement of the information assets generated by

### FINAL CONCLUSIONS AND RECOMMENDATIONS — A. Indicators of Economic Welfare in the SNA

- Conclusion (84–86):
  - Measuring growth remains important, but attention is increasingly shifting to people’s welfare and well-being.
  - Well-being encompasses happiness, collectively consumed environmental amenities, and trust along with economic welfare.
  - Economic welfare is a narrower concept: broadly-defined consumption, income, wealth, prices paid by domestic purchasers, and environmental sustainability.
  - The welfare indicators of the SNA are the starting point for measuring economic welfare.
  - Complementary indicators are needed to provide additional detail on distribution of income, consumption and wealth, and to cover items beyond the GDP production boundary (household time use and nonmarket activity, natural capital and environmental sustainability, human capital).
  - Many welfare effects of digitalization are conceptually beyond GDP or require very uncertain assumptions; guidelines for new complementary indicators are being developed by international expert groups for inclusion in next-generation international standards for macroeconomic statistics.

- Main Recommendation (87):
  - NSOs can make important progress by filling data gaps on:
    - household consumption and disposable income,
    - real income of the total economy,
    - prices of final expenditure items,
    - household wealth.
  - Data gaps may include measures of real national and disposable income of the total economy deflated by a price index for gross final domestic expenditures.

### B. Distributional Indicators

- Conclusions (88–89):
  - Distributional indicators of household income, consumption, and wealth as measured in national accounts would fill important information gaps on economic welfare at the household level.
  - Policy priorities of inclusive growth require indicators of income and consumption of the bottom quintiles and data on demographic groups (women, the elderly, youth, minorities).
  - Distributional statistics should represent the typical household experience (medians) and summarize inequality (Gini coefficients).
  - Different definitions of income and wealth can give very different pictures of inequality; results may be sensitive to debatable assumptions.
  - Comparing distributions based on different definitions may help understand redistributive effects of taxes and transfers; comparisons across years or places that allow the income definition to vary are unlikely to be meaningful.
  - A full understanding may require consideration of the joint distribution of income and wealth.

- Main Recommendation (90):
  - NSOs should develop distributional indicators of household income, consumption and wealth, including:
    - quintiles of the income distribution,
    - medians,
    - Gini coefficients,
    - breakdowns by demographic characteristics.
  - To enhance accuracy of income distribution estimates and effects of taxes on disposable income, NSOs should have access to tax data on households.
  - Income distribution indicators should include alternative definitions of income to illuminate effects of taxes and transfers.

### C. Digitalization

- Findings and conclusions (91–92):
  - The accuracy and adequacy of SNA welfare indicators is challenged by free and innovative products in the digital economy.
  - Free online services, smartphone capabilities, and digital access to information enable outcomes achieved for free or at reduced time cost.
  - E-commerce and the sharing economy have expanded household access to variety and reduced time costs.
  - Estimating money value of these effects often requires uncertain assumptions; some effects are conceptually beyond GDP.
  - Complementary indicators are needed for a complete picture of welfare effects of digitalization.
  - The value of free services supplied by online platforms is generally well-captured in nominal GDP as part of prices paid by funders of the platform.
  - Effects on welfare growth may be missed by price and volume indexes for household consumption.
  - “Further research is also needed on the measurement implications for nominal GDP of platforms’ collection of users’ data.” (paragraph 92)

- Main Recommendation (93):
  - Estimates of welfare growth from free and innovative digital products that depend on very uncertain assumptions should be incorporated in complementary indicators rather than in GDP.
  - NSOs should develop complementary indicators that provide a complete, though uncertain, picture of effects of digitalization on welfare growth through:
    - their own research capabilities,
    - collaboration with outside experts,
    - drawing on existing academic research on welfare and digitalization.
  - NSOs should prioritize improvements in compilation of deflators to allow welfare gains from new digital products, models and suppliers to be captured in household consumption growth.

*International Monetary Fund — MEASURING ECONOMIC WELFARE (excerpts paragraphs 83–93 and Recommendations)*

### 240. https://www.sciencedirect.com/science/article/abs/pii/0304400978900153

### 240. https://www.sciencedirect.com/science/article/abs/pii/0304400978900153

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- Nordhaus, William, 1996, “Do Real-Output and Real-Wage Measures Capture Reality? The History of Lighting Suggests Not”, in The Economics of New Goods, Timothy Bresnahan and Robert Gordon, eds. Chicago: University of Chicago Press for NBER, 27–20. http://www.nber.org/chapters/c6064
- Nordhaus, William and James Tobin, 1973, Is Growth Obsolete?, in The Measurement of Economic and Social Performance, Studies in Income and Wealth, Vol. 38, Milton Moss, ed., 509–564, New York: Columbia University Press for the NBER. http://www.nber.org/chapters/c3621.pdf
- OECD, 2017, How's Life? 2017: Measuring Well-being, OECD Publishing, Paris. http://dx.doi.org/10.1787/how_life-2017-en
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- Oulton, Nicholas, 2004, Productivity versus Welfare; or GDP versus Weitzman’s NDP, Review of Income and Wealth Vol. 50, (September): 329–355.
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### Simplified Current Accounts for the Total Economy (Annex I: Sequence of Accounts of the SNA)
- Production account
  - Key Resources: Market and near-market output valued at basic prices
  - Key Uses: Intermediate consumption; Consumption of fixed capital (depreciation)—relevant for net domestic product
  - Balancing Item(s): Gross (net) domestic product
- Generation of income account
  - Key Resources: Gross (net) domestic product
  - Key Uses: Compensation of employees; Taxes on products and imports less subsidies; Other taxes on production; Gross (net) operating surplus (of corporations/quasi-corporations); Mixed income (Net mixed income)
- Allocation of primary income account
  - Key Resources: Gross (net) operating surplus; Gross (net) mixed income; Compensation of employees; Taxes on products and imports less subsidies; Other taxes on production
  - Key Uses: Property income received; Property income paid
  - Balancing Item(s): Gross (net) national income
- Secondary distribution of income account
  - Key Resources: Net national income
  - Key Uses: Current transfers received; Current transfers paid
  - Balancing Item(s): Net disposable income
- Use of disposable income account
  - Key Resources: Net disposable income or Adjusted disposable income
  - Key Uses: Final consumption expenditure or Actual final consumption
  - Balancing Item(s): Net saving

### Changes in Wealth and Balance Sheet (Annex I continued)
- Changes in Wealth Account
  - Key Resources / Changes in net worth/liabilities: Net saving; Net capital transfers received
  - Key Uses / Changes in assets: Gross (net) fixed capital formation; Change in inventories; Net acquisitions of valuables and non-produced assets
  - Balancing Item(s): Net lending or borrowing
- Financial account
  - Key Resources: Net incurrence of financial liabilities (by type of instrument); Change in accounts payable
  - Key Uses: Net acquisition of financial assets (by type of instrument); Change in accounts receivable
  - Balancing Item(s): Net lending or borrowing
- Other changes in volume of assets
  - Items: Economic appearance of assets; Economic disappearance of non-produced assets; Disaster losses; Uncompensated seizures; Reclassifications; Change in net worth due to other changes in volume of assets
- Revaluations (holding gains and losses)
  - Items: Change in net worth due to holding gains and losses
- Balance sheet
  - Liabilities: Payables; Financial liabilities
  - Assets: Nonfinancial assets; Financial assets
  - Balancing Item(s): Net worth

### Compiling Household Income Distributions in a National Accounts Framework (Annex II)
- Overview: The process of correcting for conceptual and statistical differences and constructing income quintiles in a national accounts framework can be broken into five steps (Zwijnenburg, Bournot and Giovannelli, 2017). For the distribution of household adjusted disposable income, the steps are:
  - a. adjust the national accounts totals to exclude income received by households who are not covered in surveys and, if necessary, nonprofit institutions serving households;
  - b. identify variables from household surveys and administrative records such as tax data that can be matched to household adjusted disposable income components in the national accounts;
  - c. correct for missing elements (e.g., income that the SNA imputes), allocate the gap between the micro data total and the relevant national accounts total for each income item, and combine the various income items to arrive at overall disposable income;
  - d. group the households into quintiles based on equivalized disposable income; and
  - e. derive indicators for each group, such as the income share received by each quintile.
- Practical reconciliation issues:
  - Property income and social benefits often show large gaps between survey data and national accounts estimates.
  - If available, data on taxes or other administrative records may help to reconcile the micro data with the national accounts benchmarks.
  - Any remaining gap must then be allocated over the distribution.
  - A Pareto distribution is often used to model the upper tail of the distribution if no information is available on the income of the rich.

*International Monetary Fund — Measuring Economic Welfare (selected pages and annexes as presented in the source content).*

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_Source: https://www.imf.org/-/media/files/publications/pp/2020/english/ppea2020028.pdf_