What is Measurable Economic Welfare (MEW)?
Measurable Economic Welfare (MEW) was developed by William Nordhaus and James Tobin in 1972 to overcome some limitations of the Gross Domestic Product (GDP). MEW makes some changes to the GDP in order to ensure it reflects economic welfare. Factors that can increase citizens’ welfare/well-being are added to the GDP while factors that can reduce welfare are subtracted. The factors that can improve the well-being of the citizens which are ignored by the GDP include leisure time, underground economy output and unpaid work. Factors that are deducted because they reduce well-being include environmental damage.
MEW = GDP + Leisure + Unpaid work – Environmental damage
Why MEW is better than GDP
MEW goes beyond output
The Gross Domestic Product (GDP) focuses on output without considering many other things that can negatively or positively impact citizens’ welfare. For example, pollution from producing output is harmful to people’s health but it is excluded from GDP calculation.
MEW is superior to GDP in measuring welfare as it considers many non-marketed activities that affect the quality of life.
Sustainable and inclusive growth
MEW, as a measure of economic development, promotes consciousness about the environment or income distribution. It provides policymakers with a better understanding of how economic growth may impact welfare.
This makes the government to find ways to reduce the harmful consequences of their policies, thereby promoting sustainable and inclusive growth. Sustainable growth considers the impact of economic growth on the future generation, while inclusive growth ensures that every group within the society benefits from economic growth.
Influences the development of other measures of welfare
MEW serves as a theoretical basis for modern and generally acceptable welfare indicators that integrate economic, social, and environmental factors, such as the Human Development Index (HDI) and Genuine Progress Indicator (GPI).
Limitations of MEW
Measurement problem
Those adjustments required to make the GDP reflect welfare are difficult to value. There are no active markets for them. Estimates are relied upon. leading to the inaccuracy and unreliability of MEW. For example, how do we accurately measure leisure or environmental damage?
No objectivity
GDP must be adjusted for welfare-related factors such as pollution, environmental damage, volunteer work, social services, leisure and income distribution. What is actually included in calculating MEW differs because the perception of well-being is not the same from person to person.
Difficult to make comparison
Using MEW to compare welfare in one country with another is difficult, as assumptions and the specific factors included are not the same. There are no uniform standards that every nation must adhere to.
Data availability
This is a constraint, especially in developing countries where data on pollution, leisure etc., are not readily available. Consequently, MEW may be misleading.