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Concept
Index of Sustainable Economic Welfare
Summary
The Index of Sustainable Economic Welfare (ISEW) is an economic indicator intended to replace the gross domestic product (GDP), which is the main macroeconomic indicator of System of National Accounts (SNA).
Rather than simply adding together all expenditures like the GDP, consumer spending is balanced by such factors as income distribution and cost associated with pollution and other unsustainable costs. The calculation excludes defence expenditures and considers a wider range of harmful effects of economic growth. It is similar to the genuine progress indicator (GPI).
The Index of Sustainable Economic Welfare (ISEW) is roughly defined by the following formula:
ISEW = personal consumption+ public non-defensive expenditures- private defensive expenditures+ capital formation+ services from domestic labour- costs of environmental degradation- depreciation of natural capital
GDP is misleading as an indicator or even as a proxy of the welfare of a nation, let alone as a measure of people's well-being, although the makers of economic policy commonly think to the contrary. This problem already became apparent in practical economic policies in most industrialised countries in the early 1970s. The most famous examples of this development are the MEW index developed by William Nordhaus and James Tobin in their Measure of Economic Welfare (MEW) in 1972, the Japanese Net National Welfare (NNW) indicator in 1973, the Economic Aspects of Welfare index (EAW) index of Zolatas in 1981, the ISEW indicator of Daly and Cobb in 1989 and the UN's human development index (HDI) in 1990. They are all based on neoclassical welfare economics and use as the starting point the System of National Accounts (SNA). The basic idea behind all these approaches is the inclusion of nonmarket commodities, positive and negative, to yield an aggregated macroindicator in monetary terms.
The EAW index, applied to the United States for the period from 1950 to 1977, showed that the economic aspects of social welfare are a diminishing function of economic growth in industrially mature, affluent societies.
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