Another area inadequately handled in the national accounts involves the services generated by the natural environment—both the negative contribution of pollution and environmental deterioration, and the positive contribution of these services to well-being when conditions are improved. Air and water quality, for example, are linked to the productive capacity of a society, broadly defined, but the national accounts do not adequately measure the value of investment or disinvestment in these assets. Expenditures to improve air or water quality are counted as contributing to national output (provided such outlays are counted as final demand expenditures), but they are valued at the cost of the inputs used rather than as the value of the output produced. And, if a business increases its production, the value of that production is measured, but there is no offset in the accounts to reflect any adverse effect that the production process may have on nearby streams or on ambient air quality.

Environmental accounts have been developed at the Bureau of Economic Analysis (BEA) and elsewhere in order to better reflect, relative to the National Income and Product Accounts (NIPAs), interactions between the market economy and the natural environment. And such efforts as the System of Integrated Environment and Economic Accounting (SEEA) and the Environmental and Natural Resources Accounting Project (ENRAP) have in fact been used—by the Environmental Protection Agency, the U.S. Department of Agriculture, the state of California, and others—to develop data for various estimation and policy development purposes. Even developing countries as Indonesia and the Philippines have used environmental accounts to help set policy priorities. In these cases, the interest was less with the accounts per se, and more with obtaining comprehensive data. The accounting system permitted the generation of consistent data sets at relatively low costs.

More generally, the omission of many nonmarket activities from the national accounts may significantly distort policymakers’ sense of economic trends. A fuller accounting of national production might lead, for example, to different conclusions regarding the level of output today relative to some earlier period, or in the United States compared with another nation. This deficiency—that the NIPAs fail to consider the full complement of inputs and outputs, specifically those that are non-marketed—would be less important if marketed inputs and outputs were independent of non-marketed inputs and outputs, but they are not.

To take one frequently cited example, failing to account for the output produced within households may lead to misleading comparisons of economy-wide production, as conventionally measured. The female labor force participation rate in the United States has grown enormously since the early part of the 20th century. To the extent that the entry of women into paid employment has reduced the effort women devote to household production, the long-term trend in output, as measured by gross domestic product (GDP), may exaggerate the true growth in national output.2 Similarly, the lesser relative importance of home production in the United States as compared to many developing countries may exaggerate its national output relative to theirs. Perhaps less well


A complete answer to the question of how the growth in female labor force participation has affected the true growth in national output would depend not only on the shares of women performing market work versus unpaid household work, but also on the relative productivity of each sector. As is discussed later in the chapter, this argues for the importance of including outputs in addition to inputs in the design of any potential nonmarket accounts.

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