Learning Outcome: 

After successfully completing this lesson, you will know how to measure well-being using absorption as a metric.

How are You Doing?

We are asked this question all the time. Most of us reply "OK" without thinking. But an economist is more likely to pause and ask themselves "How is my absorption today?"

For economists, the concept of absorption is a metric for measuring well-being.  Absorption is defined as the nominal value of consumption. It is based on the assumption of non-satiety - a  principle in microeconomics that means consumers are always better off if they can consume more. (Many will disagree with this principle but it underlies the current state of our measures of productivity and well-being.) 

In the UNI-CGE model, absorption is calculated as the sum of the quantities of commodities consumed by private households, government and investors, multiplied by the commodity price (Figure 1). It is a nominal meaure - that is, it uses current prices to value consumption goods.  

Figure 1.

Absorption is a consumption measure, so it includes the composite (combined domestic and imported varieties) commodities purchased by households (C), government (G) and investors (I). It excludes exports because this share of domestic output is consumed in foreign markets.

ABSORPTION = C + I + G - Exports

The concept differs from GDP, which is a measure of domestic production. GDP is calculated as the composite commodities purchased by C, I and G plus exports. Imports are subtracted from the GDP measure because they are produced by foreign countries.  

GDP = C + I + G + Exports - Imports   

A Change in Absorption

After a model experiment, you must choose which results are the most important to convey to your target audience. The change in absorption is often the the bottom line in a CGE analysis.  A change in absorption answers the question "Are we better off or worse off after a shock occurs?"  If the change in absorption - the variable TABS in the UNI-CGE model - is positive, you can answer "We're better off."     

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