Discuss the limitations of national income accounting?

Expert Answers
pohnpei397 eNotes educator| Certified Educator

There are a number of limitations to national income accounting.  Let us look at a few of them. 

  • There are some kinds of economic activities that are not counted in national income.  One example of such omissions is the omission of the black market.  These are economic activities that are not conducted legally and in which proper records are not kept.  This can include illegal activities such as drug dealing.  It can also include legal activities such as child care which are paid for “off the books,” with the payments not being reported to the government.  Another example is unpaid work.  When a person cooks a meal for their own family, that activity is not counted even though it would be counted if the same meal were prepared by someone who was being paid to prepare it.
  • National income ignores quality of life.  National income accounting measures how much money is made in the economy, but it does not measure how happy people are.  Thus, national accounting purports to be a measure of well-off people are, but it ignores their actual welfare.
  • Externalities.  National income does not account for economic activities that have negative (or positive) consequences that cannot be measured monetarily.  For example, if a mine pollutes a waterway and destroys the quality of life for those downstream, national income only shows the money made by mining, not the devastation caused by that mining.

These are the main limitations to national income accounting.