Economic Report President

Box 2-3.—continuedhowever. Important aspects of environmental quality must first bemeasured in physical units, which then must somehow be translatedinto a common economic measure (dollars). There is littleagreement about how to value many aspects of environmentalquality, or even on methods for establishing such values. Forexample, setting a dollar value on the health and aesthetic benefitsof lowering air pollution raises a host of difficult philosophicaland technical issues.These problems have led most countries to abandon the quest toincorporate the environment formally into GDP. An alternativefavored by Eurostat, the statistical office of the European Union,is to report only physical measures of different aspects of environmentalquality. This approach makes no attempt to aggregatethese various estimates into a common unit of measure, and noattempt to estimate green GDP. Rather, separate accounts trackvarious measures of environmental quality individually.An intermediate approach, used by the United Nations Systemof Environmental and Economic Accounting and in prototypeaccounts developed by the United States, is a system of satelliteaccounts to account for certain important aspects of environmentalquality. These accounts, although developed to be consistentwith the system of national income accounts, are not restricted tothe same definitions and methods. This flexibility allows them tofocus on issues of particular interest and to be tailored to availableinformation. As information and methods of valuation improve,the system of satellite accounts would move closer to a unified setof economic and environmental accounts.The satellite accounts approach allows the system of nationalincome accounts to address two fundamentally different needs.There will always be a need for a frequently updated measure ofmarket-based goods and services for both government and the privatesector, which GDP fulfills. A broader measure of well-being isalso needed, even though it is likely to be less precise and availableless frequently, and this the satellite accounts can provide.Fortunately there is no need to choose between them.INFLATION: FLAT OR FALLING?The key to the longevity of this expansion has been low inflation.Direct measures of the strain on productive capacity, such as theunemployment rate and the capacity utilization rate, play a role indetermining whether the economy has reached the limits of its capacity.88