Limitations of Measuring National Income

Idea

Even before national income is used to draw conclusions, the act of measuring it is imperfect. These measurement limitations are distinct from the interpretive limitations that arise when income figures are read as a proxy for the standard of living.

Considerations

• Omissions. National income statistics miss output that is not recorded in markets: non-marketed activities such as volunteer work and housework, illegal activities such as unlicensed gambling, and unreported activities such as undeclared freelance work and the wider black economy. Because this output is real but uncounted, the statistics tend to understate actual output.

• Double counting. The expenditure and output methods require counting only final goods and services. Where intermediate goods cannot be cleanly separated from final goods — or earned income from transfer payments — the same output is counted twice, overstating national income.

• Unreliable or incomplete information. The data sources were not designed for national-income calculation. Income-tax returns, for instance, under-cover lower-income groups and are subject to under-reporting by those avoiding higher tax, so the underlying figures are themselves inaccurate.

These weaknesses bear on both uses of national income statistics — tracking economic performance and comparing living standards — and they compound when figures from economies with very different statistical capacity are set side by side.