National income accounting provides economists and statisticians with detailed information that can be used to track the health of an economy and to forecast future growth and development. The measure of national income allows us to compare output and the standard of living of one country with another, an increase in the National Income statistics usually an increase in standard of living. The measure of national income that we use to do this is known as Gross Domestic Product (GDP). GDP per capita (per person) is often used as a measure of a person’s welfare.
Countries with higher GDP may be more likely to also score highly on other measures of welfare, such as life expectancy. However, there are serious limitations to the usefulness of GDP as a measure of welfare. GDP ignores price changes, because a higher nominal GNP of a nation may not mean that the standard of living is better. If the prices increase at a high rate, the real GNP may even fall. GDP does not account for nonmarket production in the household. For example, meal preparation, cleaning, laundry, and child care.
GDP is increased when you hire someone to clean your home but not when a stay-at-home parent or self-employed consultant does it herself. This holds true for other do-it-yourself services, such as homemade haircuts, or household repairs. Black Market and underground activities, such as production and distribution of marijuana or gambling—can be significant sources of sustenance in economies but are not included when calculating GDP. This is because there is no way to accurately measure black market activity.
GDP ignores externalities or economic bads such as damage to the environment. By counting goods which increase utility but not deducting bads or accounting for the negative effects of higher production, such as more pollution, GDP is overstating economic welfare. GDP takes no account of the inputs used to produce the output. For example, if everyone worked for twice the number of hours, then GDP might roughly double, but this does not necessarily mean that workers are better off as they would have less leisure time.
Leisure is also a source of welfare and raises our standard of living. However, the monetary value is difficult to calculate. GDP doesn’t include Quality improvements. For instance, although computers today are less expensive and more powerful than computers from the past, GDP treats them as the same products by only accounting for the monetary value. The introduction of new products is also difficult to measure accurately and is not reflected in GDP despite the fact that it may increase the standard of living.
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. In conclusion, National income accounting is a powerful economic tool that informs average citizens about the direction of the economy, but it should be used with sophistication.