Adjusting Measures of Economic Output for Health: Is the Business Cycle Countercyclical?

42 Pages Posted: 25 Jun 2013 Last revised: 23 Apr 2016

See all articles by Mark Egan

Mark Egan

Harvard Business School; National Bureau of Economic Research (NBER)

Casey B. Mulligan

University of Chicago; National Bureau of Economic Research (NBER)

Tomas Philipson

University of Chicago; National Bureau of Economic Research (NBER)

Date Written: July 1, 2015

Abstract

Many national accounts of economic output and prosperity, such as gross domestic product (GDP) or net domestic product (NDP), offer an incomplete picture by ignoring, for example, the value of leisure, home production, and the value of health. Discussed shortcomings have focused on how unobserved dimensions affect GDP levels but not their cyclicality, which affects the measurement of the business cycle. This paper proposes new measures of the business cycle that incorporate monetized changes in health of the population. In particular, we incorporate in GDP the dollar value of mortality, treating it as depreciation in human capital analogous to how NDP measures treat depreciation of physical capital. We examine the macroeconomic fluctuations in the United States and globally during the past 50 years, taking into account how depreciation in health affects the cycle. Because mortality tends to be pro-cyclical, fluctuations in standard GDP measures are offset by monetized changes in health; booms are not as valuable as traditionally measured because of increased mortality, and recessions are not as bad because of reduced mortality. Consequently, we find that U.S. business cycle fluctuations appear milder than commonly measured and may even be reversed for the majority of "recessions" after accounting for the cyclicality of health. We find that adjusting for mortality reduces the measured U.S. business cycle volatility during the past 50 years by about 37% in the United States and 46% internationally. We discuss future research directions for more fully incorporating the cyclicality of unobserved health capital into standard output measurement.

Keywords: National Accounts, Health Economics, Macroeconomics

JEL Classification: E01, I1

Suggested Citation

Egan, Mark and Mulligan, Casey B. and Philipson, Tomas J., Adjusting Measures of Economic Output for Health: Is the Business Cycle Countercyclical? (July 1, 2015). Becker Friedman Institute for Research in Economics Working Paper No. 2016-02. Available at SSRN: https://ssrn.com/abstract=2284330 or http://dx.doi.org/10.2139/ssrn.2284330

Mark Egan (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Baker Library 365
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Casey B. Mulligan

University of Chicago ( email )

1126 East 59th Street
Chicago, IL 60637
United States
773-702-9017 (Phone)
773-702-8490 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tomas J. Philipson

University of Chicago ( email )

Graduate School of Business
1101 East 58th Street
Chicago, 60637

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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