Net national product as a welfare indicator

Abstract

Weitzman (1976) claimed that in the case of linear utility, NNP ia proportional to welfare, defined as the discounted value of future utility. We first demonstrate that this theory only applies to economies with stationary economic policy and no technical progress. Farthermore Weitzman's result does not generalize to the case of nonlinear utility. We also prove that only under the assumption of unchanged economic policy and with constant shadow value of investment is marginal changes in NNP a measure of marginal changes in welfare. Thus the theory gives no justification of attempts to maximize NNP growth. Finally we point out that levels or growth rates of NNP for different countries, is no indicator of relative welfare or the relative success of economic policy. In the last part of the paper we discuss national wealth as a potential welfare measure. We point out that in a small open economy, welfare will be an increasing function of national wealth. Unfortunately, this will no longer be true if we relax the assumption that the economy is small and open.