NATIONAL INCOME ACCOUNTINGGROUP MEMBERS :AVANEL MCKENZIEKEZRON HECTOR

THE LIMITATIONS OF USING NATIONAL INCOME

ACCOUNTS AS A MEASURE OF ECONOMIC WELL-BEING

NON MONETARY TRANSACTIONSThe first problem in National

Income accounting relates to the treatment of non-monetary transactions such as the services of housewives to the members

of the families.

EXAMPLEIf a man hires a maid for household work, payment to her will appear as a positive item in the national income. But, if the man marries to the maid, she would performing the same job as before but without any extra payments. In this case, the national income will decrease as her services performed remains the same as before.

THE UNDERGROUND ECONOMY

This consists of illegal and uncleared transactions where the goods and services are themselves illegal such as drugs, gambling, smuggling, and prostitution. Since, these incomes are not included in the national income, the national income seems to be less than the actual amount as they are not included in the accounting.

FAILURE TO CONSIDER THE DISTRIBUTION OF INCOME

Per capita income data does not take into account how the GDP is distributed amongst

the population. If GDP per capita data is to be used then its distribution must also be taken into account. The Gini Coefficient is used to

measure how evenly income is distributed. The closer the Gini coefficient is to 100% the more

uneven the income distribution.

FAILURE TO CONSIDER THE EFFECT OF INFLATION

GDP per capita over time, must recognize that output and incomes measures can increase for many reasons other than the country producing more goodsReal GDP per capita would be a better indicator as this is a measure of the physical value of goods and services produced.A simple calculation using the consumer price index or GDP deflator allows you to convert nominal income figures into real income figures.Real GDP = Nominal GDP x 100 GDP Deflator

FAILURE TO INCLUDE ENVIRONMENTAL DEGRADATION

Increasing national income and growth may occur at the expense of the environment. Rapidly growing economies may result in negative externalities. An agricultural sector that increases productivity by intensive use of pesticides and fertilizers or deforestation may reduce future land fertility and worsen the level of poverty for future generations.

FAILURE TO CONSIDER THE TYPES OF GOODS PRODUCED

GDP includes all goods and services produced. Much production is not concerned with producing goods and services that reduce poverty or raise current living standards. Increases in the production of capital goods and military goods will raise GDP per capita however may well reduce living standards as the opportunity cost of such production is the consumer goods foregone.

THE USES OF NATIONAL INCOME

STATISTICS

National Income :-• A measure of Economic Growth• An indicator of success or failure of planning• Useful in estimating per capita income (dividing

national income by total population of the country)• Useful in assessing the performance of different

production sectors• Useful in measuring inequalities in the distribution

of income• Useful in measuring standards of income (standard

of living)• Makes international comparisons possible