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Difficulties in Measurement of National Income | National Income

Difficulties in Measurement of National Income


DIFFICULTIES IN MEASUREMENT OF NATIONAL INCOME

Measurement of national income is very essential for every nation as a very important indicator of the economic performance of an economy. However, there are many difficulties to measure accurate national income. Some of the important difficulties are as follows:


1. Double counting: 

It is one of the major problems in the calculation of national income. It refers to a commodity being included in the calculation of national income more than once. To solve this problem, only the value of final goods and services should be included in the national income accounting. The value of intermediate goods and services should be excluded from the calculation. The best way of avoiding double counting is the value-added method of calculating national income.


2. Calculation of depreciation: 

The depreciation is deducted from gross national product to calculate net national product and national income. But it is difficult to estimate accurate depreciation. The depreciation charge differs from product to product. Sometimes similar capital goods are treated differently by the different firms. It becomes further complicated if the value of capital assets changes every year.


3. Change in value of money (or price level): 

National income is measured in monetary terms. The value of money keeps on changing with time because of changes in the price level. This creates a problem to calculate national income because national income changes even without a change in output.


4. Illegal income: 

Income earned through illegal activities such as gambling, bribery, smuggling, etc. is not included in national income. By excluding such activities the national income is under-estimated.



5. Non-availability of reliable data: 

National income measurement requires correct and reliable data. But it is very difficult to get reliable data in order to calculate accurate national income. This difficulty is not only to the developing countries, but even developed countries are facing this problem.


6.Choice of method: 

It is also difficult to decide which method is to be used in the calculation of national income. The general view is to use product, income, and expenditure methods simultaneously depending upon the availability of statistical data.


7. Non-market activities: 

The national income calculation is based on the information of the market. But there are many activities, which do not appear in the market. These activities are not included in the calculation of national income. The most common example is household work done by housewife. The exclusion of such not-market activities makes the calculated national income less than the actual one.


8. Inclusion of services: 

There has been some debate about whether to include services in the counting of national income and if it counts as output. Marxian economists are of the belief that services should be excluded from national income, most other economists though are in agreement that services should be included.


9. Unreported income: 

Sometimes, people don't provide all the right information about their incomes to evade taxes so this obviously causes disparities in the counting of national income.


10. Intermediate goods: 

The basic concept of national income is to only include final goods, intermediate goods are never included, but in reality, it is very hard to draw a clear cut line as to what intermediate goods are. Many goods can be justified as intermediate as well as final goods depending on their use.


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