Limitations of national income accounts as a measure of living standards

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The National Income Account of any country is used as a system of book keeping whereby the government records the extent to which the country grows in economic terms within a specified time frame. The National Income account is used as a reflection of the standard of living of the people of the country and to depict how developed and economically advanced the country really is but it can be questioned to be the authentic measure to analyze the level of the standard of living of the people. This is due to various limitations of the account.

The first limitation that can be drawn is the fact that although the National Income Account measures the level of Gross Domestic Product (GDP) in a country, it does not account for the differences and the distribution of the income. It gives us an overall picture of the average earnings of the member citizen of the country but realistically speaking, there are various class divisions in any country and not everyone earns the same amount of money. There are also certain sources of income and some inflows of money that are not accounted for in the national income account such as the black markets which are not considered a legal form of business. This money is however not reflected in the official accounts which mean that this kind of income is not recorded and so we cannot be sure of the exact living standards of the people who earn money from these sources. There are other sources of income too that are not recorded as the official earnings such as the young students who might earn money by babysitting, free lancing or doing extra chores for people which pays them but this is not considered an official earnings and is not even recorded in any way. The account also ignores the externalities occurring. The costs and the benefits that people get or incur are ignored on the whole (Ruggles, 1956).

Lastly, the national income account ignores the inflation that might have occurred over the year. It simply shows the income and the GDP increase or decrease but that does not necessarily mean that the increase can be due to increase in standards of living, instead it might be reflecting the devaluation of money and increase in the rate of inflation.

Chapter 25, Question 7

Every open economy in the world engages in trade because no economy is self sufficient which calls for the need of specialization and competitive advantage. Countries engage in this process of exchange to offer what they produce best to other countries in return for something they have a competitive advantage. Similarly, the United States is also one of the world's most established economies that indulge in trade. It trades with other countries as well as the internal states.

This is because all the states of the United States have the same currency which eliminates the need for having an exchange rate to establish trade relations. Exchange rates have an integral role to play when engaging in trade because the country has to offer their own currency to buy the currency of the country they want to trade in and this brings about fluctuations in the currency's exchange system. Trade barriers such as quotas and restrictions will not exist simply because the capital and exchange will still be within their own country and this will help establish and assist the weaker states and in the end, result in the economic development of their own nation. This will help them compete with the other nations of the world and will also minimize the need for the country to import commodities from other nations. They will become increasingly self sufficient and can start exporting goods and services in order to establish their industries more.

The United States also has certain organizations that enable this free trade to take place and enable their trade relations to be made better. The states can work on effective trade relations among themselves and transfer technology, goods, services and other essentials to develop the United States and increase the exchange rate for the dollar because they will be supplying less of their own currency by importing less and the demand for their currency will increase the exchange rate as other countries will want to import from the United States and will demand the dollar and supply their currencies more as a result (Macchiarola, 1990).