National income does not measure an increase in

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National Income does not measure an increase in leisure or work satisfaction or changes in product quality. National Income does not accurately reflect changes in environment like oil spills cleanup is measured as positive output but increased in pollution is not measured as negative. Per capital income is a more meaningful measure of living standards than total national income. There is a problem of double counting. However, problem of double counting could be avoided by utilizing the value added approach. Example: The wheat that is used to make bread is an "intermediate good". The value of the bread only is counted as part of GNP and we do not count the value of wheat sold to the miller and the value of flour sold to the baker. Problems of depreciation estimation as there are different methods of calculating or estimating depreciation.
Inclusion or exclusion of certain items in national income accounting can cause confusion:
Activity 4 State whether the following statements are true or false: 14.Government expenditure on transfer payments is included in national income calculation. 15.National income estimation doesn't consider the value of services of housewives.
Figure 2.1 Goods and services Consumer Expenditure Wages, rent, dividends Households Firms Factors for production Circular Flow of Income in a 2 Sector Model One of the most important insights about the aggregate economy is that it is a circular flow in which output and input are interrelated (Figure 2.1). Household's expenditures (consumption and saving) and firm's expenditures (wages, rents, etc.) are household's income. Source: The circular flow of income model is a model used to show the flow of income through an economy. Through showing the leakages in the economy and the injections, the different factors affecting the economic activities are apparent. Just like a leakage in a bucket leads to decrease in the level of water, a leakage in the economy leads to a decrease in economic activity. And just

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