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National Income Accounts and The Environment: Definitions & Limitations

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  • 0:06 National Income Accounts
  • 1:21 GDP
  • 2:22 Limitations
  • 4:19 Lesson Summary
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Lesson Transcript
Instructor: Rebecca Gillaspy

Dr. Gillaspy has taught health science at University of Phoenix and Ashford University and has a degree from Palmer College of Chiropractic.

National income accounts are a measurement of economic activity within a nation. However, they have limitations. Learn how national income accounts fail to take into consideration important factors such as environmental degradation.

National Income Accounts

If countries were given report cards to evaluate how they were doing, the top grade would likely be for the country's level of economic activity. However, if this were the only component that we looked at, then our evaluation of that nation's overall well-being would be woefully incomplete.

Let me explain. You couldn't look at a man with a high-paying job and assume that he has the perfect life. Other factors, such as his general health, his level of education and varying social elements would also need to be evaluated.

The same can be said for a nation. A nation must consider not only its economic activity but also the health of its citizens, access to education and social and political aspects. But even this list is incomplete because it leaves out one important factor, and that is the environment. The health of a country's environment and how that country manages its natural resources for sustainability are important considerations that are often overlooked.

In this lesson, we will look at national income accounts, which are measurements of a country's level of economic activity and progress, and how this accounting system falls short when it comes to environmental considerations.

Gross Domestic Product (GDP)

National income accounting was first conceptualized in the 1930s, and its development is credited to Simon Kuznets, who was the 1971 Nobel Prize winner for his work in national income accounting. The original purpose of national income accounting was to provide policymakers with useful information about the economic activity of a nation. It was not meant to be a statement of the nation's overall well-being, even though it is often evaluated in this way.

The most widely used measure of national income is Gross Domestic Product, or GDP, which is the market value of all final goods and services produced by a country in a year. GDP measures only the economic aspects of a country's welfare. It does not measure other factors that are important to overall well-being, such as social or environmental aspects. Despite this fact, the GDP is often given a high level of importance when developing public policy.

Limitations of National Income Accounts

GDP divided by the number of people in the country is the per capita GDP. This is an easy term to recall if you remember that 'per' means 'for each' and 'capita' refers to 'head,' so 'per capita' literally means counting 'each head' or each 'person.'

By evaluating per capita GDP, we get more detailed insights into how a country is doing economically. We also get a clearer picture of some of the limitations of national income accounts when evaluating overall well-being. For example, if per capita GDP goes up, but its rise is due to the fact that people are forced to work longer hours, this does not indicate that the citizens of the country are better off. So we see that national income accounts fall short of providing a broad measurement of the society's well-being.

And if the GDP is the most important focus for a nation, policymakers may overlook the importance of environmental protection. The result could be that environmental destruction and the depletion of natural resources may be allowed to happen to boost GDP and create a better showing economically. For example, if a developing country rapidly cuts down forests to sell the timbers or expand agriculture, the national income accounts will record the value of the timbers and agricultural products in the plus column of that nation's GDP.

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