Adjustments to the National Income Accounts: A Theoretical Framework with Applications to Government Defensive Expenditure and Leisure

Abstract

The measurement of overall economic performance, as a guide to macroeconomic policy, makes use of the conventional measure of Gross National Product and its variants such as Gross Domestic Product and Net National Product. Critics argue that the system of national accounts should he revised because of (a) inadequacies in the measurement of economic performance, (b) inconsistencies in the treatment of income and wealth, and (c) failure to include important variables explaining economic activity. Furthermore, an increasing awareness of resources and environmental quality problems has led to considerable interest in making Gross National Product reflect more fully the cost of environmental deterioration. In view of the fact that international consensus has not been reached on how to incorporate the environment and leisure into the national accounts, it seems premature to radically change a well-established system of economic accounts. Thus, the objective of this study is to show how the environment and leisure can be analysed within the neoclassical framework of income accounts. The study concentrates on government defensive expenditures and hours of leisure. Government defensive expenditures are defined as outlays with which the government attempts to eliminate, mitigate, neutralise, and avoid the damages that the economic process of industrial societies have caused to living and environmental conditions. The study was conducted in three stages. The first stage was to test and determine the long-run relationships of government defensive expenditure to some selected macroeconomic variables. The results show that government defensive expenditure is positively cointegrated with private investment expenditure and government investment expenditure, but negatively cointegrated with government expenditure on goods and services. An impulse response analysis showed that only government expenditure on goods and services is inversely affected by an unexpected increases in government defensive expenditure initially. The second stage was to impute for the value of leisure. The five methods of imputation in the literature were applied and the results show that the conclusion depends upon the method which is selected. The third stage was an attempt to solve for the environmental productivity disturbances variable (εt ). The parameter (εt) has a value greater than zero but less than one, and captures the decrease in utility that individuals associate with environmental exploitation through increases in production. Finally, the value of (εt) for each period was determined, and an attempt was made to adjust the national accounts by integrating the environment and leisure.