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Quality of Government and Living Standards: Adjusting for the Efficiency of Public Spending

Francesco Grigoli () and Eduardo Ley

No 2012/182, IMF Working Papers from International Monetary Fund

Abstract: It is generally acknowledged that the government’s output is difficult to define and its value is hard to measure. The practical solution, adopted by national accounts systems, is to equate output to input costs. However, several studies estimate significant inefficiencies in government activities (i.e., same output could be achieved with less inputs), implying that inputs are not a good approximation for outputs. If taken seriously, the next logical step is to purge from GDP the fraction of government inputs that is wasted. As differences in the quality of the public sector have a direct impact on citizens’ effective consumption of public and private goods and services, we must take them into account when computing a measure of living standards. We illustrate such a correction computing corrected per capita GDPs on the basis of two studies that estimate efficiency scores for several dimensions of government activities. We show that the correction could be significant, and rankings of living standards could be re-ordered as a result.

Keywords: WP; GDP; value; living standard; output; System of National Accounts; Efficiency; Living Standards; Public Sector; GDP loss; GDP-per-capita ranking; efficiency score; output value; input-output combination; Health care spending; Global (search for similar items in EconPapers)
Pages: 21
Date: 2012-07-01
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