Difficulties in the Measurement of National Income

Advertisements

Topics

Notes

Difficulties in the Measurement of National Income:

A) Theoretical Difficulties or Conceptual Difficulties :
1) Transfer payments :
Individuals get pension, unemployment allowance etc. but whether these transfer payments should be included in national income or not, is a major problem. On one hand they are a part of individual income and on the other hand, they are part of Government expenditure. 
Hence, these transfer payments are not included in national income.
2) Illegal income :
Illegal incomes like income from gambling, black marketing, theft, smuggling etc. are not included in national income.
3) Unpaid services :
For the purpose of calculating national income, only paid goods and services are considered. However, there are a number of unpaid services which are not accounted for in the calculation of national income. For example, services of housewives and the services provided out of love, affection, mercy, sympathy, charity etc. are not included in national income.
4) Production for self consumption :
The products kept for self- consumption by the farmers and other allied producers do not 
enter the market. Hence, it is not accounted for in the national Income.
5) Income of foreign firms :
According to IMF, income of a foreign firm, should be included in the national income of the 
country, where the firm actually undertakes the production work.
6) Valuation of Government Services : 
Government provides a number of public services such as law and order, defence, public administration, education, health services etc. The calculation of these services at market price is difficult, as the real value of these services is not known. Therefore, it is difficult to calculate national Income.
7) Changing price level :
Difficulties in calculating national income also arise due to changes in price levels. For example, when the price level rises, the national income may show an increase even though the production may have decreased. Also, when the price level falls, the national income may show a decrease even though there may be an increase in production.

B) Practical Difficulties or Statistical Difficulties : 

1) Problem of double counting :
The greatest difficulty in calculating national income is of double counting. It arises from the failure to distinguish properly, between a final and an intermediate product. For example, flour used by a bakery is an intermediate product and that by a household is final product. 
2) Existence of non-monetized sector :
In India, especially in rural areas, there exists the non-monetized sector. Agriculture, still being in the nature of subsistence farming, a major part of production is partly exchanged for other goods and services. It is excluded while counting national income.
3) Inadequate and unreliable data :
Adequate and correct data on production and cost data relating to crops, fisheries, animal 
husbandry, forestry, construction workers, small enterprises etc., are not available in a developing country. Besides this, data on unearned incomes, consumption and investment expenditure of rural and urban population are also not available. This does not reveal the actual size of national income. 
4) Depreciation :
Depreciation refers to wear and tear of capital assets, due to their use in the process of production. There are no uniform, common or accepted standard rates of depreciation applicable to the various capital assets. Thus, it is difficult to make correct deductions for depreciation.
5) Capital gains or losses :
Capital gains or capital losses, which accrue to the property owners by increase or decrease in the market value of their capital assets or changes in demand, are not included in the national income because these changes do not result from current economic activities.
6) Illiteracy and ignorance :
Due to ignorance and illiteracy, small producers do not keep an account of their production. So they cannot give information about the quantity or value of their output.
7) Difficulties in the classification of working population :
In India, working population is not clearly defined. For instance, farmers in India are not engaged in agriculture round the year. Obviously, in the off season, they engage themselves in alternative occupations. In such a case, it is very difficult to identify their incomes from 
a particular occupation.
8) Valuation of inventories :
Raw materials, intermediate goods, semi-finished and finished products in the stock of the 
producers are known as inventories. Any mistake in measuring the value of inventory, 
will distort the value of the final production of the producer. Therefore, valuation of inventories requires careful assessment.

If you would like to contribute notes or other learning material, please submit them using the button below.
Advertisements
Share
Notifications



      Forgot password?
Use app×