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Use and Problems of Measuring National Income Data

November 24, 2010 by Hajara Saleeth in Economics

Use of National Income Data

  • As a measurement of standard of living of people- The GNP and GDP statistics are used to measure the standard of living where a higher per capita GDP would indicate higher standard of living in a country. Per capita GDP is calculated by dividing the total GDP figure by the population of the country.
  • Comparison level of economic activities over time- The GDP figure is used to view the development overtime and it gives a basis to compare the level of output of the nation from year to another.
  • Compare the level of economic activities between countries- The GDP figure is commonly used by economist to compare the economic status of countries.
  • National income figures are used to assess the sectoral contribution of the economy. In other word national income data are used to calculate the contribution from each sector to the economy.
  • National Income data are used to do economic planning for future economic periods with the assumption that future will carry trends from past.
  • National Income data are used to calculate the total taxable capacity of the economy.
  • To analyze the distribution of income national income data will be useful.

Problems of Measuring National Income

  • No common unit of measurement- In some countries they use their domestic currency to measure the national income where as some countries use US dollars to measure national income. Since there are no standard unit of measurement it leads to inconsistency.
  • Problem of double counting- This is where the output of one production process become input to another process leading to double counting the value of the good. To avoid this problem the added value at each production process is used to calculate the national income figure.
  • Non marketed goods such as service of a housewife are not counted in national income calculation.
  • When second hand goods are sold the value of the product is double counted.
  • Black economy- The goods and services produced and sold in black economy in illegal manner are not counted in the national income calculation.
  • Services of volunteers and self provided services are not accounted for when calculating national income.
  • The government can easily manipulate the national income figures.
  • There is no common method of calculation and different countries use different methods and policies in calculating national income.
  • When it comes to expenditure method, defense expenses could lead to higher government expenditure if there is a war in the country misleading user by giving a high national income figure.

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