Sunday, August 17, 2014

Median Household Consumption

In economics when we are trying to describe the various quality of life of different countries we use different types of metrics. Each of these metrics has their own benefits and their own flaws. The following are the ones that I think are the most important:
  1. GDP per capita PPP. The advantage is it is super easy to calculate. The flaw however is it doesn't take into account income distribution so the number could be very different from what the average household actually feels like.
  2. GNI per capita PPP. The same as GDP except it includes income earned by expatriates of that country and excludes income of expatriates within that country. Same advantages and disadvantages.
  3. Real Median Household Income PPP. The advantage to this over GDP per Capita is that it takes into account income inequality, and excludes non-workers. If we had two nations with 100,000 households and a GDP PPP of $1,000,000,000 but in one of them one person had an income of $900,000,000 we would have a very skewed society, and Real Median Household Income will show that this nation is really quite poor at a Income of around $1,000 versus a Household Income approaching $10,000 in a more equal society. This is important because it gives a more accurate picture than using GDP per Capita relative to the average family.
  4. Average Wage. This is the same as the last metric except that it subtracts taxes. This is the most accurate we currently have except it has one problem. Let's say we have two nations like the last example with 100,000 households and a GDP PPP of $1,000,000, but in this case they have perfect income equality meaning that each household earns $10,000, and both of these countries tax their residents at at an effective rate of 20% of their income, leaving disposable income of $8,000. But the issue with this comes into play where lets say in nation 1 the person in the middle gets back 75% of their taxes in the form of services from the government meaning their actual consumption is $9,500 while in the second country only 10% of their taxes go back to the citizen in the middle in the form of services from the government meaning their actual consumption is $8,200. This has a large effect on true consumption when we talk about corrupt nations, and why I think we should include this in a further analysis.
I call this metric Median Household Consumption because it is measuring not the disposable income of residents but their actual average consumption. This would be calculated by taking the Average Wage and then adding in the value of government spending that is seen by the average family.

This would significantly clarify the picture when comparing the United States to countries such as Sweden when it comes to issues like education as I explain in my critique of Average Wage. The median person could see a massive increase in their total consumption if there is an extremely progressive tax structure and strong welfare state versus what average wage will state.

We would then to calculate the median household consumption only need to look at how many government services the average person consumes over the course of a year and add that to average wage. It should also calculate the multiplier effect of spending (such as military) which effects the income of all people which is data we have and does impact everyone else in the economy to a certain degree because people working for the military (for example) spend their money stimulating demand in other sectors which effects wages. This will give us a more reliable estimate for the actual consumption of people in different countries than any other metric used to date, because for most economists the question is about how to improve the quality of life for all people at the end of the day, and we need the tools to tell us which country's government policies are working correctly.

We need this to be able to better evaluate policies so we can improve our world and have more fair and accurate comparisons between countries.

1 comment:

  1. So is this Median Household Consumption label your own idea? Is there some sort of Economic journal you could be posting to?