The Index of Sustainable Economic Welfare is an economic indicator intended to replace the gross domestic product. Rather than simply adding together all expenditures like the gross domestic product, consumer expenditure is balanced by such factors as income distribution and cost associated with pollution and other unsustainable costs. It is similar to the genuine progress indicator.
The index of sustainable economic welfare (ISEW) is roughly defined by the following formula.
ISEW = personal consumption
+ public non-defensive expenditures
- private defensive expenditures
+ capital formation
+ services from domestic labour
- costs of environmental degradation
- depreciation of natural capital
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The index is based on the ideas presented by William Nordhaus and James Tobin in their measure of economic welfare. It was first developed in 1989 by Herman Daly and John B. Cobb. They later went on to add several other "costs" to the definition of ISEW. This later work formed the genuine progress indicator: see sustainability measurement.
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