THE MWALIMU NYERERE MEMORIAL ACADEMY

KARUME CAMPUS, ZANZIBAR

DEPERTMENT OF ECONOMICS STUDIES

NTA LEVEL 6: ORDINARY DIPLOMA IN ECONOMIC DEVELOPMENT

MODULE NAME: MACROECONOMICS

COURSE CODE: EST 06101

INSTRUCTOR NAME: MR. MAXIMILLIAN KAILANGANA

NATURE OF WORK: INDIVIDUAL ASSIGNMENT

PARTICIPANT;

NAME REGISTRATION NUMBER

MKONYI, GIBSON GODSON MNMA/ODZ.ED/0016/18

QUESTION: Explain limitations of calculating national income accounting.

SUBMISSION DATE: 06 January 2020.

 National income accounting refers to an accounting frame work in measuring current
economic activities. For example, national income accounting measures the revenues earned in
the nation's companies, wages paid, or tax revenues. Gross Domestic Product (GDP) is its
ultimate and most widely used result. In 2008, the United Nations Statistical Commission
adopted an updated system of national accounts that is an international standard for compiling
national statistics. According to the UN, "it consists of an integrated set of macroeconomic
accounts, balance sheets, and tables based on internationally agreed concepts, definitions, and
classifications and accounting rules."

The following are some of the limitations of calculating national income accounting, this
includes;

Errors in measurement: Black Market and underground activities are not included

when calculating Gross Domestic Product (GDP). This is because there is no way to accurately
measure black market activity. For example, in the United States, this is a relatively small
percentage of the total Gross Domestic Product (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.

The accounts only measure paid activities. In this conception it exclude do-it-yourself
activities and the work of housewives. If over a period of years there is a rise in such activities,
then this will not be shown in the official figures and comparisons over several years will be
inaccurate. For example, in most countries found in Africa and Asia continent, women collect
water and wood, people build their own houses and live off food that they have grown. If these
unpaid activities are not counted, then the figures will greatly underestimate the level of Gross
National Product (GNP) in these countries.

Many factors affect the quality of life but are excluded from Gross National Product
(GNP). Over the last few decades, people have come to enjoy more leisure, largely because they
work fewer days. The national accounts take no note of this. Similarly, the quality of many
products has improved— a modern TV is far superior to one made many years ago. On the other
hand, economic growth may be accompanied by increased pollution, overcrowded cities and a

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frenetic lifestyle—factors ignored by statisticians. The national income accounts measure some
of the quantitative factors affecting life, but they ignore many features of the quality of life.
Regardless the satisfaction we get from recreational activities and other uses of our leisure time
are also not included in Gross Domestic Product (GDP).

A rise in national income may not mean a rise in living standards. This is because the
rise may occur as a result of increased spending on items such as defence, which do not impro-
ving living standards. Similarly, an increase in national income may be accompanied by a rise in
undesirable externalities, such as pollution, or a fall in the quality of goods.

Subcategories that are misrepresented. The various interpretations of what should be

included in consumption or government spending plays a big part in the overall all determination
of Gross Domestic Product (GDP). Decisions are made about what is to be included where, but
minor discrepancies will always arise. For example, most roadside small traders, (retailers) as
also many business enterprises in the unorganized sectors (mainly sole proprietorship
organizations or single-owner firms) and self-employed persons do not keep proper records of
their incomes and expenses.

This is why it is difficult to include proprietor’s income (which is essentially a mixed income) in
the national income accounts of a country. However, in theory, such income is a part of national
income. The reason is that it is earned through market transactions.

Welfare is not measured: Gross Domestic Product (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 Gross
Domestic Product (GDP). 

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 Generally, national income accounting represents the process of working out measures
of a country’s income and production such as gross domestic product (GDP), gross national
income (GNI), net national product (NNP), disposable personal income, etc. No serious analysis
of an economy can be conducted if we do not have numbers about total production, employment,
inflation, etc. Reliable, relevant and recent numbers are critical in formulating fiscal and
monetary policies that would encourage growth while preserving stability and regardless the
formulation of initiative calculation of national income accounting.

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 REFERENCE.

Aghion, P. & Howitt, P.W. (1992). “A model of growth through creative destruction”
and Comparative Development,” American Economic Journal: Macroeconomics,
Approach to Development Planning.” North-Holland, Amsterdam.

André, V. (2008). "National accounting, history of," The New Palgrave Dictionary of

Economics,

2nd Edition. Abstract.
Joel, S. (2008). "Accounting and economics," The New Palgrave Dictionary of

Economics. Abstract.

Maddison, A. (2003). “The World Economy”. Historical Statistics. Paris, OECD. Maddison,
of Economic Growth, Springer, vol. 13(3), pages 217-235
T. P. Hill (2001). “Macroeconomic Data”. International Encyclopedia of the Social &
Behavioral

Sciences. pp. 9111–9117.

United Nations (2008), System of National Accounts 2008 SNA.