At a glance
- Gross domestic product (GDP) measures the economic performance of an economy, but does not reflect social welfare.
- The national welfare index (NWI) includes overall 20 activities that raise and diminish welfare.
- The NWI reached its peak in 1999 and declined afterwards until 2005. An upward trend has been observed since 2013.
GDP indicates the economic performance of an economy and has been recognised as an internationally comparable statistical parameter. However, GDP is not a suitable measure of social welfare. The main criticisms include the fact that GDP does not take into account distribution of income and does not incorporate voluntary work and housework. Furthermore, it does not include costs through damage to the environment. Thus it does not show decreases in natural capital. So-called defensive expenses to combat crime, drug use or the subsequent costs of traffic accidents even tend to have a positive effect on the GDP.
The NWI has been developed as an indicator that takes account of such criticism. Based on consumption expenditure, it contains bonus and malus components, depending on whether they contribute to welfare or not. Greater income inequality lowers the value of the index. Environmental costs and consumption of non-renewable resources are examples of negative categories, voluntary work and housework for positive categories. The NWI has been increasingly used by the German Federal States (Diefenbacher et al. 2016, in German only).
Assessing the development
Since 1991 GDP increased more than 39 % while the NWI only increased by around 12 %. The GDP increase was continuous during that time, being only disrupted by the 2009 economic crisis.
The development of the NWI has shown four phases since 1991. Until 1999 a continuous increase parallel to GDP can be observed. This is followed by a disparity: While GDP continues to rise, the NWI falls. The main cause was the increasing income inequality. Until 2013 there are hardly any fluctuations, and since then there has been a positive trend. The NWI is still well below the GDP, but is now moving in the same direction.
The main component of the NWI consists of real consumption expenditure weighted by the distribution of income (Gini coefficient). While real consumption expenditure has been essentially stationary since 1991, income distribution has become more unequal. This is the main reason for the drop in the NWI. On the other hand, there has been a modest reduction in other welfare reducing components including environmental damage.
Differing reactions to the crash of 2009 can also be explained by the construction of the NWI. While value-added in the economy and hence GDP declined dramatically, none of the components of the NWI were significantly affected in 2009.
The NWI is the sum of 20 monetarily assessed components, the most important of which is real consumption expenditure weighted by the distribution of income (Gini coefficient). There are more welfare-enhancing components such as housework, volunteer work and expenditure for health and education that have a positive impact on the NWI, whereas negative activities are subtracted, such as environmental damage or crime.
A more detailed description of the calculation method is found at Diefenbacher et al. 2016 (in German only). Up-to-date information on the NWI are published by the Macroeconomic Policy Institute (IMK 2019, abstract in English) and at www.fest-nwi.de/en/home website.