Explain the practical difficulties involved in the measurement of national income.
National Income is one of the important subject matter of macro economics. The total income of the nation is called national income. In real terms, national income is the flow of goods and services produced in an economy during a year.
The various practical or statistical difficulties in the measurement of national income are as follows:
- Problem-related to double counting: One of the major problems involved in the estimation of national income by the value-added method is the problem of double counting. Double counting refers to a situation where the value of a good is taken into account (counted) more than once. Such a problem occurs because, for every producer, the commodity he sells is the final commodity. Thus, if the value of the good is taken into account every single time, it leads to estimating the value of the product more than once.
- Estimation regarding depreciation: During the process of production, along with the raw materials and inputs, various fixed assets such as machinery, tools, etc. are also used. However, during the course of production, the fixed assets undergo wear and tear. This wear and tear reduce the value of the fixed assets of business entities. Since depreciation is based on various assumptions and is subjective in nature, it is difficult for an individual to correctly assess the deduction to be made for depreciation.
- Self-consumption: At times, the producer or firm keeps a certain portion of the output for self-consumption. Such a portion of production that is retained for self-consumption should be included in the estimation of national income, but it is difficult to calculate such consumption and production.
- Windfall gains and capital gains: Windfall gains such as lotteries and capital gains are unearned income and are not included in the estimation of the national income. However, these activities very much add to the national product.
- 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, the valuation of inventories requires careful assessment.
- 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.