National Income in Italy

From Wikiprogress.org

Why it’s important to measure progress in this dimension

National Income is an important dimension of Economy within the Global Project on Measuring the Progress of Societies and one of the key factors for Material Well-Being and, in turn, for Human Well-Being and progress of society. As almost every intermediate goal, it has different impacts, direct and indirect, on those that are defined final goals of progress in the Global Project. Moreover, depending on the definition given to such dimension, the impacts "direction" caused by variation in National Income on final goals of progress might be ambiguous as there could be both positive and negative associations.

The respective Wikiprogress's page provides, as first, these two definitions of National Income : "National income is a measure of the total value of the goods and services (output) produced by an economy over a period of time (normally a year). It also represents the total value of the primary incomes receivable within an economy less the total of the primary incomes payable by resident units (Glossary-OECD). The basic idea  is that the national income is simply the income of the whole nation".
However, according to Hicks: “we ought to define a man’s income as the maximum value which he can consume during a week, and still expect to be as well off at the end of the week as he was at the beginning” (Hicks, 1939, p. 172)^[1]. If we accept such definition, the first two ones are somehow conflicting: as clearly pointed out by Stiglitz’s Commission in its report^[2], income should not be confused with production, even at national level.
Nowadays, in Italy (but also in other developed andundeveloped countries) the reasons of such distinction appear to be even more evident than before: in a world of globalization, there may be large differences between the income of a country’s citizens and measures of domestic production. The former is clearly more relevant for measuring the well-being of citizens because it represents the capacity to acquire goods and services for consumption, to which, according to Nordhaus and Tobin (1972)^[3],  income refers as ultimate purporse of  production (that, by contrast, relates to the supply side of the economy).

Moreover, Hicks' definition looks more coherent than the other ones - at least the first one - also from a perspective of sustainable and equitable well-being and, in turn, more relevant for progress measurement: in particular, from a sustainability standpoint, putting in practice the Hicksian income should lead us to a measure of income that is “sustainable” by definition.

Different aspects of progress in National Income

In accordance to the Wikiprogress's page, there exist three methods to compute National Income:

1. Product or Output Method
2. Income Method
3. Expenditure Method
   

Under a theoretical framework with the circular flow of income, it can be find a relation between production, income and expenditure.

For a long time, the Gross Domestic Product (GDP) was considered a good measure of National Income as, in terms of GDP, all the three methods would lead to the same results. However, whether in a period of "closed" national economies the relation between production, income and expenditure could have been summarized in a single number (as GDP), in a world of globalized economy this relation doesn’t appear so strong any more: for example,in our days, National final consumption expenditure is substantially influenced by importations. Moreover, since some of the income generated by residents is sent abroad, and some residents receive income from abroad, GDP itself and the Gross National Product (GNP) might be quite different than in case of an autharchic nation.

Furthermore,gross measures like GDP/GNP do not take into account the value loss of capital goods, thus, net measures such as the Net National Product (NNP) or the Net Domestic Product (NDP) might be more appropriate: we cannot "consume" the entire GDP/GNP unless we get poorer, that is in contradiction with Hicks' definition. As matter of fact, NNP (or NDP) was traditionally considered the best measurement of the "Hicksian income", because it represented the maximum amount that a nation might spend, or "consume", over a year without nation getting poorer.

However, as it has been already noticed, in a world of globalization, there may be large differences between the income of a country’s citizens and measures of production (either domestic or national), but the former is clearly more relevant for measuring the citizens' well-being and so, Net National Disposable Income, a standard variable in national accounts, looks more appropriate.

In Italy the latter indicator has been calculated since 1980 by National Institute of Statistics (ISTAT), that regularly updates also the results of  some indicators mentioned above: GDP, NNP, and National final consumption expenditure.

Relationships between progress in National Income and progress in the other dimensions of the OECD framework

National Income is very important to measure progress, because has many relationships, direct and indirect, with other targets (final and intermediate) of the Global Project framework, even if the assessment of these relationships is not always easy to measure through the available statistics. In particular, national income measured as measured by GDP - at least until a certain point - has a strong positive correlation with the so called "primary well-being indicator": education, health, life expectation/mortality, capital investments, and the like.

It is self-evident that main positive direct links with other dimensions of Global Project framework for progress are with Economy: for example, the size of the economy and level of country’s economic performance; or the speed of the economic growth. There is mostly a positive association also with the other main dimension of this intermediate goal, that is National Wealth: on the one hand, national income positively affects the two "artificial" components of the National Wealth, that are represented by Human resources and Produced assets; on the other hand, national income might increase to the detriment of Natural capital, in particular, when it is based (as in many developing countries) on the exploitation of not-renewable natural resources.

Indeed, national income can seriously threaten the Ecosystem Condition domain: all the four dimensions accounting for the ecosystem have been negatively affected by the increase in the Economy sector, as it has been conducted so far. As matter of fact, the national income measurements mentioned above do not take into account the "depreciation" of natural (resource extraction and consumption, pollution, and so on), even if this is not an easy task at all: some indexes alternative to GDP - such as the Index of Sustainable Economic Welfare (ISEW)^[4], later revised and renamed the Genuine Progress Indicator (GPI)^[5], have tried to account for both current environmental issues and long-term sustainable use of natural ecosystems and resources, but there is not yet agreement on the methodology for such a kind of computations.

There are obviously very important links between national income and the dimensions of Human Well-being as well:

• material well-being, work and knowledge/understanding seem to reinforce one another (for example, improving knowledge and understanding, like the capacity of translating knowledge and understanding into innovation, can have an impact on growth and development of the Economy, that, in turn, might lead to more innovation and knowledge investments);
  
• freedom/self-determination, physical/mental health and leisure seem to be associated to national income in a more ambiguous way: until a certain point, it seems there is a robust positive correlation, then further improvements in national income do not substantially lead to better levels of these dimensions of human well-being. In particular, if national income increase because of the more time spent on working and, it turn, with less time for leisure, there could be negative side effects on both health in general and, in particular, on interpersonal relationships (that are "time-intensive" activities, that is they require much time).
  

Indeed, the relations with national income get even more blurred with the subjective elements of well-being, that can be found in intermediate goals as Culture and Governance (for example, some empirical researches show that "democracy" could be not necessary to improve the national income, but trust and security might be more important), and in the dimensions of the Human well-being (the scholastic example is given by the well known Easterlin Paradox)^[6].

Finally, for what concerns cross-cutting dimensions such as sustainability, we have already said that Hicks provides a defintion of "sustainable" income: however, it has been already noticed that accounting systems currently accounts for "sustainability" just (or mostly) in monetary-economic terms for what concerns man-made capital, since losses in natural capital are not included yet.

Another cross-cutting dimension as equity/inequality are found to be particularly relevant for "life satisfaction": from the perspective of living standards, what matters is that the distribution of income, consumption and wealth determines who enjoys access to the goods and services produced within a society. Since the most popular average measures of per-capita income and wealth give no indication of how the available resources are distributed across persons or households (similarly, average consumption gives no indication of how people effectively benefit from these resources), it is necessary to look at disposable income, consumption and wealth information for different groups to understand if the increase in national income is effectively beneficial in terms of progress: indeed, average income per capita can remain unchanged while the distribution of income becomes less equal and so, by negatively affecting many other dimensions of the Global Project framework.

References

1. ↑ Hicks, J. R. (1939), Value and Capital, Oxford: Clarendon
2. ↑ Report of the commission on the measurement of economic performance et social progress, CMEPSP, September, 14, 2009, PDF file, 3 235 Ko; http://www.stiglitz-sen-fitoussi.fr/documents/rapport_anglais.pdf
3. ↑ Nordhaus, W., & Tobin, J. (1972), Is Growth Obsolete?, NBER, Economic Growth, Research General Series No. 96F.
4. ↑ Daly, H. E., & Cobb, J. (1989), For the Common Good: Redirecting the Economy Toward Community, the Environment and a Sustainable Future, Boston: Beacon.
5. ↑ Redefining Progress: http://www.rprogress.org/index.ht
6. ↑ Easterlin, R. A. (1974), Does Economic Growth Improve the Human Lot?, in P. A. David, & M. W. Reder (Eds.), Economic Growth: Essays in Honor of Moses Abramovitz, New York: Academic Press, Inc.