Today, we will be covering some of the Limitations of National Income statistics. We have discussed here national Income Statistics as well as some of the problems faced by when measuring national income.
It has already been established that national income figures do have several important uses. National income figures have got to be used or interpreted with a lot of care otherwise wrong judgements would be frequently made. Most of the limitations of national income statistics are not unrelated to the problems encountered in compiling these figures.
Below we have some of the limitations of National Income statistics;
1- Many errors are often made when estimating national income figures. These errors may occur as a result of double counting, the unrecorded output of the black economy or of the non-monetized economy, arbitrary definitions etc. It follows very logically that national income figures may not faithfully serve their traditional functions because of the many errors inherent in their calculations.
2- We have got to treat national income figures with care when it comes to appreciating living standards within and between countries. Although they provide an imprecise measure of the standard of living, per capita income statistics are used by international bodies and governments to determine which countries are in real need of economic aid and other forms of assistance.
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3- Changes in the level of prices make money national income a misleading indicator of economic growth. This is because money income may increase or decrease while real output may not have changed
4- The quality of goods and services may and usually does change over time. A 2002 radio or car is much superior to a similar product of 1920. This is equally true of millions of other products but unfortunately, national income figures do not fully reflect these changes in quality.
5- External benefits and costs are not usually incorporated in national income figures. External benefits in terms of say roads and a cleaner environment would go to improve social welfare just as external costs like pollution would go to reduce social welfare. Leisure is another example of an omitted item. For instance, a shorter working week would go to reduce national income although it may likely make people happier and hence improve social welfare. These omissions, therefore, make national income statistics not very reliable.
6- National income does not measure illegal production, even though many of such goods and services are sold on the market and generate factor incomes. The production and distribution of soft and hard drugs “banga ete” are increasingly important nowadays.
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