Difficulties in the Measurement National Income

Difficulties in the Measurement National Income –

There are many difficulties in measuring national income of a country correctly. The difficulties are of two types in nature conceptual and statistical. Some of these difficulties/problems are –

(1) Non-monetary Transactions –

The first problem is related to the non-monetary transactions such as the services of the housewives to the members of their families and firm output consumed at home.

The general agreement, on this point, is to exclude the services of the housewives while to include the value of farm output consumed at home in the estimate of national income. And this gives rise to certain anomalies.

For example, if a man employs a maid servant for household work, payment to her will appear as a positive item in national income. But, if that man marries the maid servant, she would be performing the same services as before but without payments. In this case the value of national income would go down by the real amount of goods and services performed remains the same as before.

(2) Government activities in the national income accounts –

The general viewpoint is that the administrative functions of the government like defense, justice and administration, they gives rise to final consumption of such services by the community as a whole so that contribution of general activities will be equal to the amount of wages and salaries paid by the government. As regards capital formation by the government, this is treated as par with capital formation by private firms.

(3) Income generated by foreign firms –

The third problem is related to the income arising out of the activities of the foreign firms in the country. Should their income form a part of national income of the country in which they are located or should it belong to the national income of the country owning the firms ?

On this point, the IMF viewpoint is that production and income arising from a foreign firm should be ascribed to the country in which production takes place. However, profits earned by foreign companies are credited to the parent country.

In Case (Special Case) of Developing Countries –

(1) Due to the lack of proper/complete knowledge many producers have no idea of the quantity and value of their output and also they do not keep regular accounts. This creates problem of incomplete information.

(2) There is a lack of differentiation in economic functioning in the developing countries. An individual may receive income partly from partly from manual work (seasonal work), farm ownership, by selling products or by rendering services etc.

(3) Production in agricultural and industrial sectors in developing countries is unorganized and scattered which is very difficult to estimate. In India, agriculture, cottage industries and indigenous banking are some of the sectors which are unorganized and scattered. The output produced by self employed agriculturists, small producers and owners of household firms in unorganized sectors is also very difficult to estimate.

(4) The greatest difficulty in the measurement of national income in the developing countries is general lack of adequate statistical data. Inadequacy, non-availability and unreliability of statistics are the core problem in estimating the national income. Even the statistical information regarding the firms in the organized sector is sketchy and unreliable. There is no accurate information available regarding the consumption, investment and savings of either rural or urban population.