2 pages/≈550 words
Mathematics & Economics
Explain the system of national income accounting (GDP), including how GDP is measured and why (Essay Sample)
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NATIONAL INCOME ACCOUNTING
Date of Submission
National income accounting
The national income accounting is defined as a system that has measurements that allows comparisons to be done among different economies and also performance of an economy is measured over duration. It measures the economy`s income and output on macroeconomic level. In an economy, there are different types of goods and services that are produced with differentiated quantities. The same different goods are of different value. The one and only way to account for the total output of the different values is via national income accounting. The most common measure that is widely used is the Gross Domestic Product (Atkinson, 2008).
Gross Domestic Product is the measure of value (market) of total goods and services that are produced annually within a nation`s borders. This does not include the transactions that are conducted illegally or are not transacted in the common legal markets like a household member performing a house chore. It takes into consideration the factor transactions that are measurable in terms of payment. Black market transactions are not accounted for. Due to the above exclusions, the GDP method can be said to understate the value of all gods that are produced. The final goods are accounted for and they are those that are available to the consumer. Counting at the same consumer level eliminates the instances of doing the double counting as the final value of goods that are sold to the consumers in many cases is a totaled value of all the intermediate values. Intermediate values are composed of the value of the goods that are used in the production. Production while being counted in the GDP is counted at the year of production and regardless whether it was sold or not. If sales of the particular good that was accounted for in the GDP is done in the following years, the GDP of the specific year that the sale is done will be reflection of the income earned at the particular time of sale but not value of the sold good. The used goods` value (goods used in production) is not accounted for as it is not a representation of the current year`s production (Seskin & Holdren, 2012).
The method applied when it comes to measuring the GDP of unsold goods is through measuring the changes in inventory. Increase in inventory is considered as investment while a decrease is consumption. However, there are various limitations of national`s income accounting. They lender the calculations not effective and include: One, errors in measurement, these are brought about by the existence of the black market and other background activities that are not accounted for. There is no actual way of accounting for black market. Second, some subcategories usually misrepresented due to problems in determining where to place what and how. Determination of what should be accounted for in consumption stage or as ...
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