future wellbeing. Accounting for changes in capi- tal stocks, requires that the value of the stock
change be included in the measure. Essentially, the depreciation or appreciation of capital stocks
must be included in the income measure.
1
Other more recent work related to national product related welfare measures considers how
relaxing certain assumptions in the underlying model of the economy, influences the Green NNP
expression and its appropriate measurement. The influences of technological change, population
growth, variable interest rates and future resource discoveries, have all been considered in the litera-
ture; however, in this paper we consider the influ- ence of uncertainty on the net income generated
by a small open economy.
This paper will discuss how fire and price risk can be incorporated into the resource accounting
framework and the implications for the measure- ment of regional net income. The analysis builds
on the resource accounting framework developed for a region of public forestland in northern Al-
berta in Haener and Adamowicz 1999.
The paper is organized as follows. Firstly, re- cent literature related to the incorporation of
uncertainty in national product related welfare measures, will be discussed. Secondly, the meth-
ods used to simulate the effects of fire and price risks on the future values of the case study re-
gion’s net income are outlined and the empirical results are presented. Next, the implications of
these simulations are discussed. The paper con- cludes with a brief summary, discussion of recom-
mendations and suggestions for future research.
2. Incorporating uncertainty in NR accounting
2
Most literature which examines the measure- ment of Green NNP assumes a closed economy.
Under this assumption Dasgupta and Ma¨ler 1991, Aronsson and Lo¨fgren 1993, 1995,
Aronsson et al. 1997, Hung 1993, Dasgupta 1995 have mathematically illustrated how differ-
ent types of uncertainty can be incorporated into national product related welfare measures. The
resulting welfare measures are often much more complicated than their deterministic counterparts.
The measurement of income in a small open economy, where interest rates, terms of trade and
prices are not likely to be constant over time, has been given less attention in the literature. There
are however,
notable exceptions,
including Asheim 1986 and Brekke 1997. Brekke 1997
suggests that ‘for a small open economy, income could be estimated through estimation of the na-
tional wealth’ p. 517. Using this approach, wealth can be computed for any production plan
and set of future prices if we assume the economy has access to perfect credit markets. Furthermore,
‘no assumption about preferences are needed to compute Hicksian income’ p. 518.
3
From the wealth estimate, maximum sustainable consump-
tion can be computed. Of most interest here is Brekke 1997’s consid-
eration of income measurement under uncer- tainty. Firstly, Brekke suggests that in the case of
uncertainty resource wealth should be defined as ‘the expected present value of future net revenues’
p. 521. The concept of sustainable consumption must also be extended. According to Brekke
1997, p. 521,’since future rents are uncertain, we cannot determine a consumption level that can be
sustained under all sets of circumstances’. Brekke 1997 suggests that a more reasonable sustain-
ability rule in these circumstances is one that
1
An implicit assumption underlying the Green NNP mea- sure is that of weak sustainability. Weak sustainability as-
sumes that natural and human-made capital are substitutes; therefore, depletion of natural capital can be counter-balanced
by investment in human-made capital. Strong sustainability, on the other hand, does not assume substitutability between
natural and human made capital; therefore, to remain on a sustainable path natural capital stocks must be non decreasing
Hanley et al., 1997. We focus solely on weak sustainability in this paper.
2
In this paper, we use the terms risk and uncertainty interchangeably. However, some people define risk as random-
ness with a known probability distribution and uncertainty as randomness with an unknown distribution Lutz and Munas-
ingnhe, 1994.
3
See Brekke 1997, p. 516 for Hicks’ definition of income.
requires that the expected value of income flows be non declining over time or in other words that
‘ expected future consumption should be at least as large as current consumption’ p. 521. If we
ignore uncertainty and use a deterministic income measure, we may make inaccurate conclusions
regarding sustainability. The reason being that there will be an inherent amount of variability in
income that results from risk.
Brekke 1997 compares the wealth-based in- come calculations described in his paper to other
approaches to measuring resource stock changes. The depreciation approach put forth by Repetto
et al. 1989 values the total change in stock in the current year at current prices. Brekke describes
why this approach is not consistent with the wealth approach. Another approach is El Serafy’s
user cost approach, which was derived to calcu- late the appropriate measure of income from non
renewable resource extraction. Brekke successfully argues that this approach is ‘a special case of the
wealth approach’ which assumes constant prices and production over time p. 523. In this paper,
we further illustrate the usefulness of the wealth approach when future risks to resource revenues
are significant. We also show how the deprecia- tion approach inadequately accounts for these
risks.
3. Importance of risk and uncertainty to forest income flows
