An Income-Net Worth Approach to Measuring Economic Welfare
The American Economic Review, Vol. 58, No. 5, pp. 1315-1329, December 1968
16 Pages Posted: 2 Jun 2011
Date Written: Dec 1968
Economists and public policy-makers alike have long been concerned with the relative and absolute economic welfare of various segments of the population. This interest reflects an underlying concern both about the equity of the existing distribution and about our ability to explain and forecast more effectively the behavior of producers and consumers.' But given the many possible dimensions of a comprehensive measure of economic welfare, the single-dimensional, money-income measure so commonly used leaves much to be desired. The concern of this paper is with the development of an approach for measuring current economic welfare which is operationally feasible and broader in scope than the traditional money-income measure. The measure proposed is based on a combination of current income and current net worth (assets minus liabilities). These are made commensurable by converting net worth into an annuity value, which is added to current income. While this proposed measure stops well short of an "ideal" measure, we show that even this change leads to policy prescriptions rather different from those generated by the current income measure of economic welfare.
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