KENYA METHODIST UNIVERSITY

NAME : JOYCE KAGURE MAKARA

ADM NO : BUS-1-6839-3/2011

SUBJECT :PRINCIPLES OF MACRO ECONOMICS

CODE : ECON 102

LECTURER : WARUGONGO

USES/IMPORTANCE OF NATIONAL INCOME STATISTICS The computation of national income is one of the very important statistics for a country. IT has several important uses and therefore there is a great need for their regular preparation. The following are some of the important uses of national income statistics: 1: National Income as a measure of economic growth - Estimates of national income at constant prices indicate economic growth of a country. 2:National Income as an indicator of success or failure of planning - If a country has adopted planning as a means of economic growth then national income data can help in assessing the achievements of planning. 3: Useful in estimating per capita income - Per capita income is obtained by dividing national income by total population of the country. 4: Useful in assessing the performances of different production sectors - Production units of a country are broadly classified into primary, secondary and tertiary sectors. These sectors generate factor incomes. The data on factor incomes generated by these sectors can be used to measure their relative contributions to national income. 5: Useful in measuring inequalities in the distribution of income - All individuals so not have the same income. It means national income is unequally distributed among people. The extent of inequality in a country can be measured from the national income data collected through the income distribution methods. 6: Useful in measuring standards of income - The expenditure method reveals consumption expenditure and investment expenditure. If the total consumption expenditure is divided by the total investment expenditure we get per capita consumption expenditure which indicates the average standard of living of the people of the country. 7: Makes international comparisons possible - We can compare the economies of any two countries on the basis of their national income data. 8: Budget formation- it is an effective tool for planning and control. It is prepared in the light of the information regarding consumption, saving, and investment which are all provided by the national income estimates. 9: National income accounts reflect the structural change in a growing economy

LIMITATIONS OF NATIONAL INCOME STATISTICS 1. Errors in Measurement: Black Market and underground activities are not included when calculating GDP. This is because there is no way to accurately measure black market activity.. 2. Subcategories that are Mis-represented: The various interpretations of what should be included in consumption or government spending plays a big part in the overall determination of GDP. Decisions are made about what is to be included where, but minor discrepancies will always arise. 3. Welfare is not measured: 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 GDP. 4. State services: a country with greater state intervention would have a lower GNP as state services are provided for at cost, thus countries with the same healthcare standard would have differing GNP's, 5. Per capita GDP is frequently used as a measure of welfare, both for indicating the rate of improvement over time and for comparisons across nations. Yet per capita GDP is an imperfect indicator of welfare of the representative individual. GDP does not account for nonmarket production in the household for example, meal preparation, cleaning, laundry, 6. Gray market and illegal activities such as production and distribution of marijuana or gambling can be significant sources of sustenance in economies but are not included. 7. Per capita income as an average measure can be a misleading image of the representative residents well-being if the distribution of income is very unequal. A better measure is the median income level and, for many analytic purposes, the income level by quintiles of the income distribution; however, such distributional measures cannot be directly obtained from GDP data and population and require separate surveys. 8. Another limit on per capita income as a measure of well-being is that it flies in the face of the way people think about having children. Most young couples see themselves as being better off when they have their first baby.