Difficulties in the 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 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 housewives. 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 believe that services should be excluded from national income, most other economists though agree 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.
Difficulties of Measuring National Income in the Developing Countries
In developing countries like Nepal, there are some special problems, which make the calculation of national income difficult. Some of these difficulties are as follows:
1. Large non-monetized sector:
In developing countries like Nepal, there is an on-monetized sector. A large part of the production of the agriculture sector is not brought to the market for sale. It is either directly consumed by the producers or is exchanged for other goods.
2. Illiteracy:
In man developing countries like Nepal, more than 40% of people are illiterate. So, it is difficult for them to provide necessary information regarding their income and output.
3. Backward people:
In developing coun it's like Nepal, people are socially backward. They are superstitious and do not disclose their incomes easily and correctly.
4. Lack of occupational specialization:
In developing countries, people receive income partly from farming, partly from jobs, and partly from manual work in the industry. This makes the task of calculating national income very difficult.
5. Lack of efficient and trained manpower:
In developing countries, there is a lack of trained and efficient statistical staff which makes the calculation of accurate national income difficult.
Need or Importance of National Income Accounting
National income provides a comprehensive and detailed record of complex economic activities taking place within an economy and of the interaction between the different economics agents, and the groups of agents that take place on markets or elsewhere. The study of national income statistics is of vital importance for analyzing the actual performance of the economy and for preparing future policies. The growing importance of national income studies are as follows:
1. Indicator of the economic structure:
National income estimates are the important index of the economic structure of the economy. They tell us how income is earned and spent in the country. They provide knowledge about the relative importance of various sectors of the economy and their contribution to national income.
2. Indicator of economic welfare and international comparison:
National income figures are the indicator of the people's welfare of a country. With the help of these figures, we can have a comparative study of the standard of living of the people living in different countries as well as the people living in the same country at different times
3. Helpful to formulate economic policy and planning:
National income throws light on the level of aggregate economic activity in the economy. Its estimates are important tools for economic planning and policies. Based on these estimates, the government makes plans and policies for the development and growth of the country.
4. Inflationary and deflationary gaps:
National income estimates provide information about the existence of inflationary and deflationary gaps in the economy. They are also helpful in formulating anti-inflationary and anti-deflationary policies.
5. Basis of budgetary policies:
Modern governments prep e their budgets based on national data and make necessary changes in taxation and borrowing policies to avoid functions in national income.
6. Importance in defense and development:
National income estimates enable us to determine the proper allocation of national products between defense and the development of the economy. It tells us how much of the national income can be spared for war purposes.
7. Provision of depreciation:
The study of national income shows how national income is divided into consumption expenditure and investment expenditure. It further guides us to make provisions for reasonable depreciation to maintain the capital stock of the country. Inadequate depreciation allowance means living at the expense of capital, while excessive depreciation allowance leads to an unnecessary reduction in consumption.
8. Importance in developing countries:
National income data are particularly important for developing countries like Nepal. They throw light on the importance and backwardness of various sectors of the e-economy and help in formulating appropriate economic policies.
9. Basis of social accounting:
National income figures form the basis of social accounting or national income accounting. Social accounts are the systematic records and presentation of national income data. The objective of social accounting is to signify the interrelations among various constituents of national income statistics.
10. Importance in economics analysis:
National income estimates help us in analyzing the functioning, growth, d anatomy of the economy. They are important in analyzing (a) the growth of the economy, (b) the trend of various sectors, (c) the trends of factor shares, and (d) the trend of various macro variables, such as aggregate consumption, aggregate investment, and aggregate saving, etc.
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