Sustainable Economic Development

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Sustainable Economic Development
Monday, April 24
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Topics

• Gross Domestic Product (GDP)
• Integrated Economic and Environmental Satellite
  Accounts (IEESAs)
• Index of Sustainable Economic Welfare (ISEW)
• Sustainable Economic Development
• IPAT model

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How do we judge how well the economy is doing?

• The quantity and total value of final economic
  goods and services (Q) produced during a year

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Gross Domestic Product (GDP)

• GDP measures the money value of final goods and
  services produced in a year
• Flow of final Q from stock of K
• Expenditures on Q
• Inventories of Q
• Flow of unused new K from stock of K

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Final Goods and Services Include..

• Personal consumption expenditure by households
  (C)
• Private investment expenditures by households and
  firms (I)
• Government consumption and investment expenditure
  (G)
• Net exports exports minus imports (NX)

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Personal Consumption Expenditures (C)

• Durable goods
• Non-durable goods
• Services
• Dollar value of personal consumption goods and
  services purchased through the markets reported
  sales by firms

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Gross Private Investment (I)

• Business fixed investment
• Residential construction
• Inventory change
• Expenditures on real capital assets like
  factories, machines, houses (but not paper
  investments like stock purchases)

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Government Expenditure and Investment (G)

• Federal, state, local expenditures for goods and
  services
• Does not include transfer payments cash
  subsidies, interest payments, social security
  payments, etc.

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Net Exports (NX)

• Exports of domestically produced goods and
  services to other countries
• Imports of goods and services produced in other
  countries

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2005 GDP EstimateIn Billions of Current Dollars

• C 8745.7
• I 2105
• G 2362.9
• NX -726.5
• GDP 12,487.1

http//www.bea.gov/bea/dn/dpga.csv
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Measures of Economic Performance

• GDP growth
• percent increase in GDP
• GDP per capita
• GDP divided by population size
• Net Domestic Product (NDP)
• GDP minus depreciation of capital (only man-made
  capital)
• Better income measure

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2005 Estimates of Economic Performance

• GDP Growth from previous year
• 6.03
• GDP per capita
• 12487.1 billion divided by 298.5 million
  41,832.83 per person (in current dollars)
• NDP
• 10,913.1 billon (current dollars)

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GDP and NDP Understate Economic Well-being

• Excludes all non-market goods and services
• Environmental/Ecosystem services
• Home services
• Leisure
• New investments in natural capital (future
  services) excluded
• Wetland restoration
• Reforestation

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GDP Overstates Economic Well-being

• Includes defensive expenditures
• Does not deduct depreciation of any type of
  capital

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If a truckload of toxic chemicals spills
somewhere, the money spent cleaning it up is
added to the GDP. If nearby residents can no
longer use their wells for water, their
expenditures on bottled water are added to GDP.
If they become sick from exposure to the
substance, their medical costs are also added to
the official measure of well-being. Mike
Nickerson,
The Sustainability Project, Ontario,
1997
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To use the GDP as a measure of progress is to
assume that families and communities and the
natural habitat add nothing to economic
well-being, so that the nation can safely ignore
their contributions, and, in fact, their
destruction can be regarded as economic gain.
Clifford Cobb, Ted Halstead and Jonathan
Rowe, authors of The Genuine Progress Indicator,
1995.
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NDP Overstates Economic Well-being

• Includes defensive expenditures
• e.g. Flu epidemic, hurricanes, pollution control
  expenditures, war on terror
• Does not deduct depreciation of Natural, Social,
  or Human capital
• Ores, fossil fuel stock reduction
• Marine resources
• Loss of institutions (terrorism), skills, leisure

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Integrated Economic Environmental Satellite
Account

• IEESA to measure U.S. stocks of natural capital
  (i.e. natural resources and environmental assets)
  
• Aimed at keeping track of depreciation of natural
  capital (material and energy resources, waste
  assimilation capacity)
• Green GDP or Accounting for the Environment

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Integrated Economic Environmental Satellite
Account

• Allows GDP to remain comparable over time
• Does not measure flow of environmental goods and
  services.
• First phase looked at mineral resources
• No money authorized by Congress for calculating
  values for other natural capital since 1994.

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ISEW Index of Sustainable Economic Welfare

• Adds goods and services from all sources
• Deducts defensive expenditures
• Deducts depletion of natural capital

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Sustainable Communities Communities are a web of
interactions among the environment, the economy
and society.
http//www.sustainablemeasures.com/Indicators/What
Is.html
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Sustainable Economic Development

• Brundtland Commission Definition
• Development that meets the needs of the
  present generation without compromising the
  ability of future generations to meet their own
  needs

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Defining Sustainability

• Weak definition of sustainability
• Sustain total value of Q f(KN, KM, KH, KS) but
  allow substitution among different types of K
• Strong definition of sustainability
• Sustain total value of Q but allow substitution
  among different types of KN
• Sustain critical types of Kn (no close
  substitutes, cannot be replaced, and are critical
  to life support)
• Environmental sustainability
• Sustain all KN

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IPAT Model of Steady State Economy
I
P
T
A



Impact
Technology
Affluence
Population
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Measuring the IPAT Variables
Impact per unit of output
Output per Person
Number of people



Impact
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Reducing Impact
Impact per unit of output
Output per Person



Population
Impact
Impact per unit of output
Output per Person



Population
Impact
Output per Person
Impact per unit of output



Population
Impact
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Relationship between the Economy and the
Environment
Sun
Environment
Economy
Environment
Sun
Economy