Uses and Limitations of National Income Estimates - SS2 Economics Lesson Note
National income estimates, also known as Gross Domestic Product (GDP), are a measure of the value of all final goods and services produced within a country's borders over a specific period. National income estimates can provide valuable insights into a country's economic performance, it should not be the sole indicator used to evaluate the overall well-being of a country or its citizens as there exists limitations to national income estimates.
Uses:
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Measure of economic growth: GDP is often used as a measure of economic growth, indicating how well an economy is performing over time.
Comparison across countries: GDP can be used to compare the economic performance of different countries, as it provides a standardized measure of economic activity.
Policy-making: National income estimates are used by governments to inform policy decisions related to economic development, fiscal policy, and social welfare.
Limitations:
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Limited scope: National income estimates do not provide a comprehensive view of an economy's well-being as they do not consider non-monetary factors such as environmental health, quality of life, and income distribution.
Inaccuracies in measurement: GDP is subject to inaccuracies in measurement as it relies on estimates, assumptions, and sampling errors. This can result in under or overestimating the actual economic activity.
Excludes informal economy: GDP does not account for the activities of the informal economy, which can be significant in developing countries where a large percentage of economic activity occurs outside of formal channels.
Ignores income distribution: GDP does not consider income distribution, meaning that a country with high GDP may still have a large income gap between the rich and poor.