A 1998 paper by William Nordhaus presents a critique of standard economic metrics, arguing that measures of real output and real wages may not fully capture the actual improvements in living standards. The paper uses the historical development of lighting technology to demonstrate how these traditional measures can misrepresent reality.

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William Nordhaus is an American economist renowned for his work on the economics of climate change, for which he was a co-recipient of the 2018 Nobel Memorial Prize in Economic Sciences. He is a pioneer in developing integrated assessment models (IAMs), such as his Dynamic Integrated Climate-Economy (DICE) model, which integrate insights from economics and physical sciences to analyze climate change policies. Nordhaus is also known for his critique of the 2006 Stern Review, where he argued against its use of a very low discount rate, and for his research questioning the accuracy of standard economic growth measurements, using the history of lighting as a key example.

William Nordhaus

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Microeconomics Open access e-text https://core-econ.org/the-economy/.

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CORE Econ - The Economy 2.0: Microeconomics

Nordhaus's Critique of Real Output and Wage Measures Using the History of Lighting

Several economists, notably William Nordhaus, challenged the Stern Review for its use of a low discount rate, advocating for a higher rate of 4.3%. [2] Nordhaus contended that Stern's rate gives excessive weight to impacts in the distant future. [2, 8] He concluded that applying a higher, more conventional discount rate would cause the review's 'dramatic results'—its urgent policy recommendations—to 'disappear'. [2, 12]

Criticism of the Stern Review's Low Discount Rate

The Dynamic Integrated Climate-Economy (DICE) model, developed by William Nordhaus, is an integrated assessment model that represents the interplay between economic activity and climate change. It is used to analyze the costs and benefits of different climate policies by weighing the costs of emissions reductions against the damages caused by climate change, helping to determine optimal strategies for mitigating global warming.

Dynamic Integrated Climate-Economy (DICE) Model

In 2018, William Nordhaus was jointly awarded the Nobel Memorial Prize in Economic Sciences with Paul Romer. Nordhaus was recognized 'for integrating climate change into long-run macroeconomic analysis,' specifically for his pioneering work in developing integrated assessment models that combine insights from physics, chemistry, and economics to evaluate climate change policies.

William Nordhaus's 2018 Nobel Memorial Prize in Economic Sciences

Integrated Assessment Models (IAMs) are computerized models that integrate knowledge from multiple disciplines, such as economics, climate science, and energy systems, to analyze complex environmental problems like climate change. They are used to understand the interactions between human activities and the Earth's systems and to evaluate the costs and benefits of various policy interventions.

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