Economic Well-Being

The most common way to measure economic well-being is to determine the market value of goods that are consumed by an economic "agent" over a period of time. This raises a host of questions. First, what determines an agent? In general, there is a problem with determining individual well-being from household data. Second, what is the appropriate length of time to measure well-being? Economic well-being can be examined in the short term ("what is my economic well-being right now?") or a longer time horizon ("will my grandchild be able to afford college?"). Third, goods and services are not all that make up economic well-being. Leisure, or free time is a good example of a resource that presumably generates economic well-being on its own. Although it should not be assumed that households do not derive economic well-being from commodities besides goods and services, this discussion will focus on access to goods and services, which will be measured in monetary terms. This is because the proverbial slope could become quite slippery if we attempt to measure all nonpecuniary aspects of economic well-being. Nevertheless, our imperfect measure of well-being should be duly noted. Fourth, availability of resources can generate well-being even if they are not consumed. Having an abundance of savings that one never plans to consume, or that one gives to one's heirs, will no doubt provide economic well-being even though no consumption is observed. This fourth point suggests that instead of looking at consumption, we should measure well-being in terms of access to consumption. Fifth, measuring only flows of goods and services ignores our ability to increase that flow. Assuming that leisure time is a choice, the amount of goods you purchase is determined to a certain extent by your preferences. This means if we measure goods and services flows, we will underestimate the well-being of people who choose to purchase more free time. Furthermore, if people who consume more tend to work less (consume more leisure) we will underestimate inequality of economic well-being, but if people who consume more also tend to work harder for it, we will end up overestimating inequality.