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Limitations of National Income Accounts to Measure Standard of Living

Autor:   •  January 5, 2012  •  Essay  •  379 Words (2 Pages)  •  14,879 Views

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National Income Accounting refers to the accounting records that measure the national economy’s performance while National Income looks at a country’s total income. There are various forms of national income such as Gross Domestic Product (GDP), Gross National Product (GNP), Net National Product (NNP), National Income (NI), Disposal Income (DI) and Personal Income (PI) (Stone, 2008). In order to assess how fast an economy has grown, we must have a means of measuring the value of the nation’s output. The measure of national income that we use to do this is known as GDP. This measure takes into consideration only what is produced in the country with the resources of the country (Raymond, 2009). Standard of living is a measure of the material welfare of the inhabitants of a country and is measured by dividing the national output by the resident population. This is called real GDP per capita (Riley, 2006). National income statistics allow for comparisons of one’s country output to another, comparing economic growth of countries at a particular time and over a period of time, economic planning, and also in comparing the standard of living of one country with another. An increase in the National Income statistics usually means an increase in standard of living. However, there are some limitations in using these statistics as an indicator of standard of living. One limitation would be problems in measuring national output where there are instances of unrecorded items such as babysitting or where underground economies exist. As a result, GDP is understated. Another limitation is total GDP/GNP figures ignore the distribution of income. GDP does not take disparity in incomes between the rich and poor into account. GDP does not take into account the value of all assets in an economy. This is akin to ignoring a company's balance sheet, and judging it solely on the basis of its income statement. GDP counts work that produces no net change or


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