The Wealth of Nations Index (WNI) measures the annual stream of economic benefits per citizen of each EU member state and the United Kingdom. The best-known international benchmark of well-being, the Gross Domestic Product (GDP) per capita, works on a similar principle. The difference between these two measurements is the approach to public spending. GDP treats expenditure on final goods equally, regardless of their source. When calculating GDP, one Polish zloty spent by a private person is equivalent to a zloty spent by the public sector. Therefore, it does not matter whether the allocation of resources is decided on by the government or private citizens.

The approach used in the creation of the WNI is quite different. Private expenditure is calculated in the same way as when calculating GDP. Government spending, on the other hand, is evaluated on the basis of its results, not monetary value. The assessment of a proverbial dollar spent by the government depends on the quality of the public services it had been allocated to.

Private expenditure

Private expenditure should be understood as that part of the economy in which these are the citizens who decide about the allocation of resources. It equals the total GDP minus public expenditure with the exclusion of transfers, i.e., public expenditure that transfers purchasing power from one group of citizens to another). In other words, it is GDP decreased by government consumption spending and government investment. According to the so-called principle of revealed preferences, while shaping the WNI, it was assumed that the expenditure of private entities is optimal. Optimal as in every Polish zloty spent by citizens satisfies their needs to the highest possible degree. For this reason, private expenditure is included in the WNI proportionally to their per capita amount. They are then adjusted for disparity in purchasing power between individual countries. This procedure realigns the amount of said expenditure, taking into account the differences in the level of prices between countries. In “expensive” countries, i.e., with high living costs, less goods and services can be purchased for 1 PLN of private spending than in “cheap” countries. In short, the level of private spending per capitaafter purchasing power adjustment is a measure of the real economic benefits that come from decisions on fund allocation in the economy made by citizens.

Public expenditure

Public expenditure should be understood as expenses made by the government in a sense similar to that of national accounts. They include government consumption expenditure (final goods and services rendered to citizens) and government investment. The WNI measures the benefits of public spending by applying a specific indicator to the quality of public spending. It evaluates the quality of public services in seven areas that correspond loosely to OECD’s key categories described in the Classifications of the Functions of Government (COFOG). The performance of each country in all of these areas was assessed by aggregating existing indices or quality measures for each function. A complete list of the seven areas with the measures used to assess them is provided below.
1National defenceGlobal Firepower Index
Global Peace Index
2Internal securityGlobal Peace Index
Numbeo Crime Index
3Infrastructure and public transportGlobal Competitiveness Index, podkategoria Infrastructure
Logistics Performance Index, podkategoria Infrastructure
4EnvironmentEnvironmental Performance Index, podkategoria Environmental Health
Numbeo Pollution Index
5HealthcareSTC Health Index
Numbeo Helthcare Index
6Primary and secondary educationPISA (średni wynik w trzech badanych kategoriach)
Global Innovation Index, podkategoria Education
7Higher educationQS World University Rankings
Academic Ranking of World Universities
Times Higher Education World University Rankings

The individual results from all areas were aggregated, obtaining a public expenditure quality index for EU countries, ranging from 0 to 100. As some measures are not calculated for the smallest EU countries, the WNI does not include Cyprus, Luxembourg or Malta.

Index value

The WNI value is the sum of the public expenditure component and the private expenditure component. The former is directly proportional to per capita private expenditure adjusted for purchasing power. The latter is proportional to the product of average public expenditure in the European Union and the quality indicator of public expenditure described above. This second component is additionally multiplied by a factor called the public spending bonus. In order to obtain a more appropriate assessment of the importance of public spending, and to avoid the pro-liberal bias of the WNI, the contribution of public expenditure to the indicator is multiplied by the factor (1 + bonus). It increases the potential value of public expenditure in relation to the value of private expenditure. This means that 1 zloty spent by the government in an optimal manner (in which the public spending quality indicator is at its maximum value) is included in the WNI as (1 + bonus) zlotys (e.g., in case of the bonus value suggested by WEI, i.e., 50%, it will be 1 zloty 50 grosz). This solution corresponds to the optimistic assumption that governments spend money in those segments of the economy where a market regime would perform worse than resources allocated by the state. Most importantly, regardless of the interpretation, the described move gives an advantage to the public sector, even though it may squandered by providing citizens with low-quality public services.

To summarise, the Wealth of Nations Index is thus calculated as:

Private expenditure per capita, adjusted for purchasing power + Average public expenditure in the EU per capita x Public expenditure quality indicator x (1 + bonus)

Adjusting the index

Warsaw Enterprise Institute (WEI) provides users with the ability to customise the Wealth of Nations Index to their preferences. The parameters of WNI recommended by WEI can be changed using an online tool. This applies to both the weight of each of the seven public spending areas as well as the size of the public spending bonus.