OMTEX CLASSES: Explain practical difficulties involved in estimation of national income.

Explain practical difficulties involved in estimation of national income.

Difficulties in the measurement of National Income :
The calculation of the national income of a country is a task full of difficulties and complexities. The following difficulties generally arise while estimating national income.

i)        Theoretical difficulties

ii)       Practical difficulties.

i)       Theoretical difficulties :
         This is also known as conceptual difficulties.

1)      Transfer payments:

Individuals get pension, unemployment allowance, but whether these should be included in national income is difficult problem. On one hand, these earnings are a part of individual income and, on the other, they are government expenditure. Therefore, these transfer payments are ignored from national income.


2)      Income of foreign firms:    
         According to IMF view-point, income of a foreign firm, should be included in the national income of the country, where the firm actually undertakes production work. However, profits earned by foreign firms are credited to the parent concern.

3)      Unpaid services:
National income is always measured in money, but there are a number of goods and services which are difficult to be assessed in terms of money. For example, painting as ahobby. by an individual, the bringing up of children by the mother, these services are not included in national income as remuneration is not given to them.

Also services of housewives and the services provided out of love, affection; mercy, sympathy and charity are not included in national income, as they are not paid for. By excluding all such services from it, the national income will work out to be less than what it actually is.

4)      Incomes from illegal activities:
Income earned through illegal activities such as gambling, black marketing, theft, smuggling etc., is not included in national income. Such goods and services do have value and meet the needs of the consumers. Thus to that extent national income is underestimated.

5)      Treatment of government sector: Government provides a number of public services like defence, public administration, law and order etc. Measuring the market value of such government services is difficult; as the real value of these services is not known, therefore it has become a convention to treat all such services as final consumption. Hence, it is included in national income.

6)      Production for self consumption:
Goods produced for self consumption such as food grains, vegetables and other farm products do not enter in the market. But the value of such goods should be estimated at the rate of market price that have been marketed and should be included in national income.

7)      Changing price levels:
The difficulty of price changes arise in the national income estimate, when the price level in the country rises, the national income also shows an increase even though the production might have fallen and when price level falls., National Income may show a decrease even though production may have increased.

ii)      Practical difficulties / statistical:
In practice, a number of difficulties arise in the collection of required statistics in estimating national income, some of these are.

1)      Problem of double counting:
The greatest difficulty in calculating the national income is of double counting. It arises from the failure to distinguish properly, between a final and an intermediate product. It so happens, the national income would work out to be many times the actual. For example, flour used by a bakery is an intermediate product and that by a household the final product.

2)      Existence of non-monetized sector:
There is a large non-monetized sector, in-the developing economy like India. Agriculture, still being in the nature of subsistence farming in the developing countries, a major part of the output is consumed at the farm itself and a part of production is partly exchanged for other goods and services. Such production and consumption cannot be calculated in national income.

3)      Lack of occupational specialization:
There is the lack of occupational specialization, which makes the calculation of national income by product method difficult. For instance, besides the crop, farmers in a developing country are engaged in supplementary occupations like dairy farming, poultry farming, cloth making etc. But income from such productive activities may not be revealed and thus is not included in the national income estimates.

4)      Inadequate and unreliable data:
Adequate and correct production and cost data are not available in a developing country, such data relate to crops, fisheries, animal husbandry, forestry, the activities of petty shopkeepers, construction workers, small enterprises etc. That is why, national income of a country will not show at its actual.

For estimating national income by income method, data on unearned incomes and on persons employed in the service sector are not available. Data on consumption and investment expenditures of the rural and urban population are also not available for the estimation of national income. Moreover, there is no machinery for the collection of data in such countries.

5)      Capital gains or losses:
Capital gains or losses, which accrue to the property owners by increases or decreases in the market value of their capital assets or changes in demand, are not included in the gross national product, because these changes do not result from current economic activities.

6)      Depreciation:
The calculation of depreciation on capital consumption is one more difficulty. Depreciation refers to wear and tear of capital assets, due to their use in the process of production. Depreciation of capital assets will depend on technical life of the asset, the intensity of its use, nature of the asset, regular and careful maintenance etc. There are no uniform, common or accepted standard rates of depreciation applicable to the various capital assets. In case of depreciation, one has to make many reasonable assumptions, which involve an element of subjectivity. So it is difficult to make correct deductions for depreciation.

7)      Valuation of inventories:
Raw materials, intermediate goods, semi­finished and finished products in the stock of the producers are known as inventory. All inventory changes, whether negative or positive, are included in the gross national product. 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.

8)      Illiteracy and Ignorance:

Majority of the small producers in developing countries are illiterate and ignorant; and are not in a position to keep any account of their productive activities. So they cannot give information about the quantity or value of their output. Hence, the estimates of production and earned income are simply guesses.