National Economic Accounting: Past, Present, And Future

National Economic Accounting: Past, Present, and Future

During the 1990s, the United States departed sharply from the global trend in national economic accounting. A long list of nations, from Australia to Zimbabwe, had begun to supplement traditional measures of economic output with estimates of environmental impacts, such as natural resource depletion.1 But the United States refused to go along. Having once played a central role in setting world standards for national accounting, the U.S. appeared to have lost its leadership position. As one Commerce Department official complained, “They let us go to the meetings, but no one listens to what we have to say.”2

In fact, the Commerce Department had begun publishing data on the value of the nation’s mineral resources in 1994, and it had planned to broaden its environmental accounting initiative over subsequent years. But the project came to a sudden halt when Congress intervened, prohibiting the publication of mineral resource values and effectively banning all further environmental data- collection projects related to Gross Domestic Product (GDP).3 Representative Alan Mollohan of West Virginia, who sponsored the Congressional ban, argued that after measuring mineral depletion and air pollution, “somebody is going to say ... that the coal industry isn’t contributing anything to the country.”4

Facing what appeared to be an immovable barrier, the Commerce Department asked a prestigious advisory body, the National Research Council (NRC), to study the subject and suggest a course of action. Composed of leading scientists and economists and chaired by William D. Nordhaus, a professor of economics at Yale University, the NRC recommended new methods for calculating the economic impact of environmental pollution and natural resource use. Although it did not advocate the abandonment of GDP, the standard measure of economic activity, its final report did suggest that environmentally-adjusted GDP would constitute a superior measure of overall social welfare.

No nation had yet adopted as comprehensive a system of environmental accounting as the NRC recommended. But many had taken substantial steps in this direction, often following the new environmental valuation guidelines of the United Nations.* The big question for the United States – and the world – was whether this emerging global trend represented a fundamental improvement in

* The international standards for calculating GDP are laid out in the System of National Accounts (SNA), which is published by the United Nations, the Commission of the European Communities, the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD), and the World Bank. These organizations have also published guidelines on environmental accounting.

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703-026 National Economic Accounting

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the art of national economic accounting or merely a popular fad, which threatened to distract attention from the traditional economic variables that some analysts believed mattered most.

The Fundamentals of GDP Accounting

The traditional goal of national economic accounting has been to measure the value of output produced by a nation over a particular period of time (typically a year).* There are many challenges in doing this. Economists have long had to grapple with the problem of inflation, which makes it difficult to compare measures of output over time (see Appendix B). But perhaps the most fundamental challenge of all is to avoid counting the same output multiple times at different stages of production. In measuring the value of domestic coffee output, for example, it would be wrong to add up the sales of the raw coffee beans grown in Hawaii, the sales of the firms

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