The following points highlight the top uses of national income data. The uses are: 1. Population 2. Composition of output 3. Distribution of income 4. Different national currencies 5. Statistical limitations.
Use # 1. Population:
A higher national income clearly does not mean a higher standard of living if the extra income is shared among more people. The standard of living depends on the average real income per head or per capital — that is, real national income divided by the population.
Use # 2. Composition of Output:
In ancient Egypt productive resources were wasted on building pyramids. Similarly, a modern society may use a large part of its resources for military purposes that contribute little to the welfare of the people. Moreover, societies differ in their needs.
For example, a cold country has to use a portion of its productive capacity just to keep warm. At a particular time much of a countries output may be used to repair damages due to floods or earthquakes. Thus, the output that is available for satisfying other needs will fall.
Use # 3. Distribution of Income:
The wealth of a country may belong to only a small number of very rich people and so a high national income can conceal widespread poverty. Living standards within a society depend partly on how wealth and income are shared among the people.
Use # 4. Different National Currencies:
In order to compare the national income of different countries, it is necessary to covert the figures into the same currency. For instance, the United States’s figures are in dollars whereas Britain’s figures are in pounds sterling. To compare them, we must either change the former into pounds of the latter into dollars. This is done by using the exchange rate at which pounds can be changed into dollars.
For example, at a rate of £1 to $2, a UK national income of, say, £100 billion would be expressed as $200 billion. If the USA national income is then $400 billion, it would be taken as double that of the UK. But this assumes that £1 can actually buy the same amount of goods in Britain as it could if changed into $2 and spent in the United States. However, in reality currency exchange rates are rarely such an accurate reflection of prices. International comparisons of this kind can therefore be misleading.
Use # 5. Statistical limitations:
Methods of calculation and reliability of national statistics inevitably vary, particularly between countries at different stages of economic development. Thus, the welfare of people in a less developed farming community may be underrated by national income figures because production is based largely on family self-sufficiency and not measurable in money terms. Even in advanced economies the measurements can be misleading because they take no account of non-monetary exercises such as the do-it-yourself activities of Indian households.