IntroductionThe following is my macroeconomic assignment on question 1. My assignment will describe the strengths and limitations of national income accounting as measures of economic activity.
Macroeconomics is the study of the economy as a whole rather than how individual households or firms interact with one another which relates to microeconomics.Main SectionBackgroundNational income accounting is a term that refers to measuring the health of an economy, the economic activity, and the forecasted growth and development during a particular time period. Activities such as domestic revenue, wages to foreign and domestic employees, sales, and income taxes are all included. The most common way of measuring national income accounting is through Gross Domestic Product (GDP).GDP is the market value of all final goods and services produced within a country in a given period of time.
GDP is made up of 4 components of expenditure: consumption, investment, government purchases and net exports. GDP can be measured in 2 ways;Nominal GDP – this is the production of goods and services valued at current pricesReal GDP – this is the production of goods and services valued at constant prices i.e. the amount produced excluding price changes.There are 3 ways of measuring GDP, each of which theoretically should give the same answer.
the output method (all value added by each producer)the income method (all income generated)the expenditure method (all spending on final demand)In Ireland, we use the income and expenditure method. GDP isn’t the only measurement of national income accounting. Other measures used are;Gross National Product (GNP) – this is defined as the value of all goods and services produced by a country’s productive factors regardless of geographical location.Net National Income (NNI) at market rate – this is GNP figures adjusted for depreciation.Net National Product (NNP) at market rate – This is NNI minus indirect taxes plus subsidiesGross National Income (GNI) or Modified (GNI) – is defined as GNI less the effects of the profits of re-domiciled companies and the depreciation of intellectual property products and aircraft leasing companies.StrengthsSo what are the strengths of these methods for measuring economic activity?Well, it is the best way to judge whether the economy of a country is doing well. While no one measure is perfect, it a vital component and a good indicator of the state of the economy.
It can be a useful indicator when comparing the wealth of countries. It can also show how a country has progressed over an extended period of time. It is great at highlighting historical periods of boom and recessions within countries and is a good indicator of future trends in the economy.It enables policymakers to make vital decisions which affect all citizens of the state. It allows them to have an overall picture of the state of the economy.
It tells them whether the economy is contracting or expanding, whether it needs a boost or restraint, and if a threat such as a recession or inflation looms on the horizon.In Ireland, national accounts are produced by the Central Statistics Office (CSO), which has statistical independence from government and any other organisation. This means that the Government cannot legally influence the data or request prior access before the official release of this data. The CSO also publishes their dissemination and release schedule in advance, so that the public know exactly when the various sets of data are released. They also release the methodology with each release. This shows that the figures are credible and haven’t been altered for a political cause.The national account figures also break down in detail various economic indicators of the economy.
It shows us which industries are performing better than others, their growth rates, even down to salary costs. The amount of Government income and expenditure (capital and current), where the income came from (income tax, vat, corporation tax etc) and on the expenditure side (social welfare payments, government salaries, pensions etc). The amount of EU subsidies and taxes. The amount of savings (personal, companies etc). It also shows where people are spending their income, and how much. It will show us are we spending more money on alcohol compared to previous years, or are we paying the majority of our income on rent/mortgage repayments. It will also show us our net balance of international payments.
While there was an issue that the GDP figures excluded trade through the black economy, however, this has changed within the European Union (EU) since 2014. All EU countries are required to calculate the black economy within their GDP figures.LimitationsSo what are the limitations of these methods for measuring economic activity?Well, they sometimes can be very misleading.
They do not take into account externalities, this is a spillover of an economic transaction, where prices do not reflect the full cost or benefit of production or consumption of a product or services. An example would be the negative effects of farming on the environment.Another omission from national accounting is the non-monetary transactions within the economy.
For example, if you hire a painter to decorate your house, this monetary transaction is included in the national accounts, however, if an individual decides to paint his or her own house, then this would be excluded, as there is no monetary value for this work.Another area not covered in the national accounts is non-markable goods and services. The state provides services to the economy like education and healthcare, these services while contributing to the economy are not priced by market forces and therefore excluded in the national accounts.National accounts is not necessarily a good indicator of economic well being of the residents of a country. While a high GDP per person may afford a government to spend more money for health and social improvements to its residents, it doesn’t count the additional leisure activities that people might partake, like walking or the negative effects that people working extra hours in work might have in reducing the time a person has in partaking in these leisure activities.
Question marks have remained over the reliability of national accounts from some countries. This, unfortunately, gives a bad name to all statistical agencies. While it is well known that Greece has falsified their GDP figures, the obvious example was when they falsified their economic data due to political pressure to gain entry to the EU. Argentina is another country who for years had been falsifying their GDP figures. It will take a long time for them to gain the trust of their people and international organizations. While closer to home, the UK statistical agency has had a major problem gaining trust from the UK citizens after political interference from UK Governments. The level who believed that official figures are produced without political interference was only 17% (see table 1 below, UK Office for National Statistics 2009). In Ireland, we have had our own problems, mainly due to the presence of big multinational companies based within the country.
In 2015, the CSO published GDP growth rate figures of 26%. This was referred to as “leprechaun economics” at the time. The GDP figures were dramatically overinflated – because it is driven primarily by the activities of Ireland’s multinational and aircraft-leasing sectors. This has led some economist to give greater relevance to GNP figures. This has also lead the CSO to introduce a modified Gross National Income (GNI*) figure.
ConclusionDespite its deficiencies, national income accounting is still the most common measure used by economists to measure economic activity. It is still the most accurate measure there is, given the complexities of the modern economy.