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Limitations of National Income Accounting

Statistics collection and representation must be looked at carefully or an incorrect thesis may be misconstrued from the data given. The three main limitations to national income accounting are:

  • 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 GDP. Decisions are made about what is to be included where, but minor discrepancies will always arise.
  • Welfare is NOT Measured: GDP only measures the market activity and does not take welfare into account. The economic activity of a country could rise, while welfare could possibly have fallen. Different situations may occur that have a negative impact on the people which cause them to increase spending, therefore increasing the GDP.

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