Question

State three difficulties in the estimation of national income by the income method.

Answer 1

Three key challenges are:

1. Estimating mixed incomes from the unincorporated sector is difficult due to the lack of reliable data.
2. According to national income accounting conventions, interest paid on national debt is excluded from national income, assuming that government borrowing is for unproductive purposes. However, in practice, a portion of such borrowing is used for productive activities and should ideally be included.
3. Income estimates are usually based on income tax records. This makes the income method less effective in underdeveloped countries, where only a small fraction of income earners file tax returns.