Traditional Measures of Economic Well-Being

Economists have constructed a vast array of indicators to measure the financial health of countries, and under pressure from the IMF and other international agencies, many developing countries have had their arms twisted to get them to join this international accounting standard. The principal measures are:

1. Gross Domestic Product (GDP): This is a measure of the value of products & services produced by an economy. Importantly, it includes imports and exports, as well as other unrequited transfers. In as much as its a measure of costs, it fails to measure the utility or productivity of any investment. Often this measure is expressed in terms of GDP per capita. Given the aging of many populations, its likley that immigration will play a part in reducing the deficit in some countries.
2. Real Wealth: There is no official measure of real or nominal wealth as such, merely the capitalisation and market indices which represent the performance of various asset markets like property, equities and commodities. Any asset index also has its limitations since assets are subject to pricing bubbles reflecting easy monetary conditions which are never sustained. Clearly consideration of real worth should focus on net wealth and values under neutral or comparative monetary settings. The best measure however is Purchasing Power Parity (PPP).
3. National Savings Rates: This purports to measure the extent to which households and corporations save income and refer expenditure. Traditionally Anglophile markets have performed poorly by this measure because they are asset-rich, and the fiscal tax regime in their countries favours debt-financing rather than trusting governments with personal savings. Notwithstanding that Australia now has a compulsory superannuation scheme.
4. Exchange rates: It is a myth that exchange rates reflect national prosperity. Investors buy currencies for a range of returns, though most often its to gain exposure to a country experiencing strong economic growth, or during times of contraction, higher yields on their investment. In as much as higher yields are required to defend higher risks, a currency might become 'stretched' in the short term. Higher rates of inflation will erode the nominal interest rates in the various markets, requiring an even higher inflation premium to offset any depreciation in the currency.
5. Domestic Demand: Domestic demand whether reflecting retail/household sales or capital investment are often treated as a positive sign, but in fact its more important what the quality of that expenditure is like. Public spending is often mis-directed into schemes that offer minimal return, and thus add to costs.