According to Stone, author of Core Economics, national accounts ignore most nonmarket transactions (p. 422). Stone uses the example of a maid cleaning up a condo, which in turn causes GDP to rise. However, if someone performs their own cleaning for their condo, GDP is unaffected. The national accounts also fail to account for the environmental impact of economic activity. In addition, an article entitled “Limitations of National Income Accounting, listed the disadvantages of national income accounts which include errors in measurement, subcategories are misrepresented, and welfare is not measured.
The Black Market, a market where regulations and laws are not practiced when there are exchanges of goods and services, and underground activities are not included when computing GDP. The reason for this is because there is not a method in accurately being able to measure black market activity. Another measurement error is inflation. “It is adjusted according to base prices and various other things and the range of possible inflation can be as much as 1% to 15% in some places”(Limitations of National Income Accounting, 1).
The various subcategories are other categories that are viewed as being apart of consumption or government spending which is a vital part in the calculation of GDP. GDP figures leave out the following illegal drug sales, under-the-counter sales of goods to avoid income and sales taxes, work performed and paid for in cash, unreported sales, prostitution, loan sharking, extortion, and other illegal activities. There is a lot of discussion on what should and shouldn’t be included which may cause discrepancies to arise on the calculation of true GDP.
Welfare is also not included in the calculation of GDP but rather only market activity. “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”(Limitations of National Income Accounting, 1). Frictional unemployment is considered as a sign of an economy well being for unemployment that exits in a fast-growing economy with an expanding mobile, flexible and adaptable labor force of having choices.
This type of unemployment is beneficial to workers because it allows them to seek for jobs they want the most or jobs those best suits them. It also benefits companies, because it allows them to choose from among the best talent. The absence of frictional unemployment entails people to remain in the same jobs for life, creating a stagnant system that suppresses innovation and rusticates skills.
Frictional unemployment is important in the economy because it matches the demand for worker with supply and brings equilibrium into the labor market. Frictional employment arises from those candidates that are just leaving from colleges and those who are unemployed because they are changing jobs. Frictional unemployment is present because there is imperfect information in the labor market and workers have to search for employment suitable for them.