What are the Difficulties in the Measurement of National Income?

DIFFICULTIES   IN    THE    MEASUREMENT   OF    NATIONAL INCOME

The correct estimation of national income is by no means an easy task.   Difficulties   of   various   kinds   are   generally   faced   in   the measurement of  national  income. These difficulties may be classified into two categories:

(i)      Conceptual difficulties or Theoretical difficulties, and

(ii)     Practical difficulties.

While   the  theoretical  difficulties  a   ear  in   almost  all countries the practical  difficulties  are  generally’  witnessed  in  the  underdeveloped countries.

Conceptual difficulties. These difficulties relate to the various concepts of  national income. Some of the important conceptual difficulties are as follows:

(i)      Determination  of  intermediate  and  final  goods.  The national income of  a  country  consists of only  final  goods  and  services. Final goods refer to those goods which are readily available for consumption. Final goods are required for their own sake. While estimating the national income, it is always not possible to make a clear distinction between  intermediate goods and final goods. For example, cotton used at a surgical Clinic is the final  product for a  doctor,  but  if  the  same cotton is used by the cotton milt to manufacture  cloth, it will be treated as intermediate product. To stretch this example further, if this  cloth  manufactured by Delhi Cloth Mills is used by Wings or Liberty company to  manufacture ready-made  garments,  this  cloth  will  be  regarded  as  an  inter- mediate product.

(ii)     Services without remuneration. In our daily life we observe a father teaching his son, a mother taking  care  of  her  child,  a  housewife looking   after  the  household affairs,   and  so on. No   factor payment  is  made for these  services,  and  therefore, they do not form part of the national income. But  if  the  same  services  are provided by a tutor, a baby-keeper and a house-maid, respectively, factor  payments  shall   have  to  be  made.  So,  in  the  changed circumstance the  same  services will be included  in the national income.

(iii)    Transfer payments. Transfer payments refer to those payments for which e receive has not to perform any economic’ activity. Pocket allowance given to a son, by his father, or the  pension paid  by the  government  to  the  retired  employees,  are  a  few  examples of   transfer   payments. Transfer      payments     are  the   sources  of income  for  the  households and  the  business firms,  but these do not form part of the national income.

(iv)    Pricing  of  products.  Valuation  of  the  final  products  for  the purposes   of                national        income  estimation is a difficult task. We know  that  the  prices  change  every  month,  every  week,  and  in certain cases from day to day; therefore, which price should be chosen to ascertain  the money value of the products, is really a tough choice. Besides, we find different typed of prices existing in the market, e.g., wholesale price, retail price, ,etc.

Practical difficulties. Different types of  practical difficulties arise  in the  estimation  of  national, income. More important difficulties are as follows:

(i)      Non-monetised  sector.  A   large   part  of   the   underdeveloped countries   consists                  of            non-  monetised  sector,  Nan-monetised sector  refers  to  that  part  of  the  economy  where  the  exchange transactions are not performed in money or in order words, barter system of  exchange prevails in the non-monellsed sector. Goods which  do not enter  into the  monetary  sector are  thus excluded from the national income.

(ii)     Lack of occupational specialisation. It means that a person performs a        number    of           economic  activities        at  one   and  the  same  time. Consequently, an individual has different sources of earnings at one and the same time. Far example, a teacher teaches in the school and also takes private tuitions in extra time, or a farm-laborer works on the farm and also works in a factory in the off season,  and  so  on. It  becomes  impossible  to  trace  out,  the  main  source  of  earning of         an  individual  in   such  cases.  In  the  absence  of  adequate information  about  the  source  of  income,  a  large  part  of  income remains excluded from the national income.

(iii)    Non-availability of reliable data. This difficulty arises mainly in the underdeveloped  countries where majority of people are living in the world of dark letters. Illiterate people neither understand the importance  of  the  income-data,  nor  can  they  maintain  proper records  in  this respect. Sometimes, the producers, in order to evade income tax, deliberately distort information relating to their incomes.  Sometimes,  the  enumerators  do  not  possess  requisite knowledge  of collecting,  classifying       and      analysing   the   data. Enumerators and investigators vitiate investigations by suing their personal bias  and  prejudices. National  income  estimation  based upon inadequate and inaccurate statistics need not be dependable.

(iv)    Goods  for  self-consumption.  Producers  of  final  goods  retain  a part of their produce for self- consumption. Far example, a farmer retains  a  part  of  the  total  crap  far  personal  consumption,  or  a weaver retains a part of the produced cloth far self-consumption, and  the   like.  Goods  which,  are  retained  by  the  producer  for personal  consumption  do  not  fetch,      money    price, and    are therefore excluded from the national income.

(v)     Double  counting.  Many  goods  and  services  appear  mare  than once in the national  income estimation. It is not always possible to make a clear distinction between intermediate  goods and final goads.        Likewise,        whether       the             durable      goods      like  building, furniture,  machines,  etc.,  should form  part  of  a  year’s  national income or should be continuously included in the national income till these are finally consumed. We ‘can further take the example of goods and services which satisfy communal wants The government constructs roads, parks, hospitals, bridges, etc., far the welfare of the  masses,  but  different  people  derive  different  utilities  from these  services.  How  to  make allowance for such services in the national income is again a difficult problem.