Uses of National Income Accounting

1. To measure the level of economic activity in an economy or country.

   • Increase REAL output, indicates improving economic performance in an economy.
   • Falling REAL output, indicates a decline in the economic performance in an economy.

2. To determine the Standard of Living overtime, i.e. living within a country.

3. To compare the Standard of Living of people between & among countries.

4. To measure economic growth in a country.

   • Economic growth is defined as an increase in real GDP per capita in a country.

5. International Agencies such as the IMF (International Monetary Fund) use National Income Statistics to classify countries according to the different levels of development such as developed, developing or under-developed countries.

   • The classification can further be used to determine the need for aid and assistance for countries.

Why National Income is NOT Good Measure of Standard of Living

1. National Income figures DOES NOT take into account inflation or price changes. A better measure will be REAL GDP.

2. The National Income figures DOES NOT take into account population changes. A better measure will be GDP per capita or income per person.

3. The National Income figures fails to include substantial earnings made in the "black economy" or "hidden economy".

4. The National Income figure DOES NOT tell us about the components of Government Expenditure.

5. The National Income figures DOES NOT tell us about how income is distributed in an economy.

6. The National Income figures DOES NOT take into account negative externalities, for example: pollution.

Limitations of National Income as a measure of Economic Welfare/Standard of Living

• We tend to believe that a rise in National Income means that we are better off because more goods and services are being produced.
• However, there are some problems that arise in assuming that a country increases its welfare, when it increases National Income.
• These problems are called the limitation of National Income as a measure of economic welfare or standard of living.

1. The non-inclusion of the informal sector such as the underground economy and illegal activities.

• National Income is certainly not a perfect measure of the SOL of people bexasue quite often it fails to include substantial earnings made in the "black economy" or "underground economy", for example drugs & prostitution.
• As a result, the National Income figure is UNDER-ESTIMATED.

2. Non-payment for "Do-it-yourself" activities or non-marked activities.

• The National Income figure does not include non-marketed activities such as do-it-yourself activities, for example, babysitting, volutary work, housework, etc.
• As a result, the NI figure is UNDER-ESTIMATED.

3. The NI figure excludes negative externalities & environmental degredation.

• NI figure does not take into account negative externalities such as: pollution and environmental degredation
• As as result, the NI income figure is OVER-ESTIMATED.

4. The NI figure does not take into account the uneven distribution of Income and Wealth.

• A rise in NI may make just a few people better off without helping the majority of the population. In some countries, the middle east which produces oil, the NI per person is very high.

5. The National Income figures does not indicate government expenditure pattterns.

• The types of government expenditure affects the SOL of people.
• Expenditure on defence, for example, guns and ammunition, brings NO immediate improvements to SOL whereas expenditure on hospitals does.
• Thus an increase, in defense spending would show up as a large increase in NI but it would be misleading to use this as an improvement in SOL.

6. The National Income figure does not take into account the long hours of work.

• The NI figures may have increased because people are working longer hours, experiencing a great deal of fatigue and boredom. Life becomes monotonous and routine and such persons have no time for leisure.
• Despite the increase in NI, people's SOL may NOT have increased.
• Hence, NI is NOT a good measure of SOL.

7. The National income figure is a quantitative figure/measure, whereas, SOL is a qualitative measure.

• NI is a quantitative measure since it measures changes in the valur og output but NOT changes in the quality of life. Whereas, SOL is a quantitative measure.
• Thus, it is fundamentally incorrect to use a quantitative measure to determine the SOL of people.