Difficulties in the Measurement of National Income -TU NOTE

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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