Income, Wealth and Sustainable Welfare in Representative-Agent Economies

Abstract

In a finite-horizon general equilibrium model national income is the value of output at supporting prices and a perturbation increases welfare if and only if it raises national income. National income therefore serves as both a welfare measure and a cost-benefit criterion. We construct a measure with these properties for an infinite horizon representative agent model (following suggestions by Fisher and by Samuelson), and relate it to a debate about how to measure welfare in a dynamic model, how to measure green national income, and how to measure sustainability. Our measure has all the right properties - it measures national income, provides an if and only if welfare increase criterion (thus integrating national income accounting and cost-benefit analysis), and acts as a good indicator of sustainability. It is observable and has been measured for a number of countries. Our index is a Fisherian wealth measure and our results represent the completion of a research agenda set out by Samuelson in 1961.