The following points will highlight the nine major limitations of national income accounts.
1. First, national in curve figures are not accurate. This is inevitable because measuring the economic activity of an entire country can never be done precisely. People sometimes fail to fill in forms or they complete them inaccurately.
2. The ‘black economy’ distorts the figures. This is the name given to work that is not reported to the authorities.
3. 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 improving 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.
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4. The accounts only measure paid activities. They, therefore, 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.
In most countries of Africa and Asia, 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 GNP in these countries.
5. National income often rises in time of war, or the threat of war, because money is spent on weapons. This will push up GNP, but the people may be acutely short of goods to buy.
6. When making comparisons with the past, adjustments have to be made to allow for inflation. Hence it is important when looking at the figures to see whether they are in nominal terms, i.e., the actual figures not adjusted to remove the effects of inflation.
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The extent of inflation can be calculated fairly accurately over a short period, such as one year, but it is much more difficult to do so over a long period. One reason is that new products appear and existing ones become obsolete, so it is impossible to measure price rises accurately.
7. Another adjustment that has to be made when making comparisons with the past is that the figures have to be adjusted to allow for population changes. If national income has risen by 10%, but population has also risen by 10%, the average person is no better- off.
8. Many factors affect the quality of life but are excluded from 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 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.
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9. Finally, the figures say nothing about the distribution of income within a country. In some countries a small elite has a large share of the economic cake; in such countries figures showing a high average income per head may give the wrong impression of typical living standards.