Business Economics

Chapter 15, Question #14- Limitations of National Income Accounts

National Income accounts served as a measurement of well being by per capita through income and it growth over time. It can serve a fundamental stats for macroeconomic analysis. National Income Accounts provides quantitative analysis for choosing and assessing different economic policies. They provided an objective statement for economic policy. Also, when national income accounts are combined with the labor force can be used to measure levels of growth in a economy. There are 3 ways to national income accounts are measured in an economy.

• The value of expenditures

•The value of inputs used in production

•The sum of value added at each level of production

The broadest and most widely used measure of national income is gross domestic product (GDP), the value of expenditures on final goods and services at market prices produced by domestic factors of production (labor, capital, materials) during the year.

However, there are limitations of the national income accounts. It does not take in considered certain things like errors in measurement, categories that are not represented or misrepresented, and welfare or government assistance is not include in the measurement.

• Errors in Measurement: Black Market and underground activities are not included when calculating GDP. This is because there is no way to accurately measure black market activity. In the United States, this is a relatively small percentage of the total GDP; however, in many other less developed countries, it can go as high as 70% of the country's total GDP. Another big measurement error is inflation. It is adjusted according to base prices and various other things and the range of possible inflation can be as much as 1% to 15% in some places.

• Subcategories that are Misrepresented: The various interpretations of what should be included in consumption or government spending plays a big part in the overall determination of...