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Monday, September 6, 2010

Beyond GDP Measures Don’t Make the US Look Better

My colleagues Chad Jones and Pete Klenow have computed a new measure of economic welfare which combines consumption, leisure, mortality, and even inequality. Their new measure is closely correlated with GDP per capita as the attached diagram from their paper suggests. But there are differences. For example, income per capita in France is only 70 percent of that in the United States, while the new welfare measure for France is 97 percent of that in the United States. The difference is mainly due to more leisure and less income inequality in France. The gains and losses of utility from different levels of income inequality are based on the Rawls abstract concept of the veil of ignorance in which each person enters a lottery each year determining what country he or she will live in--one with less or more income inequality. Chad and Pete have a whole section on “caveats” in their interesting paper.