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:
• Conceptual difficulties or Theoretical difficulties
• Practical difficulties
A. Conceptual Difficulties: These difficulties relate to the various concepts of national income. Some of the important conceptual difficulties are as follows:
• 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 inter-mediate 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 intermediate product.
• 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.
• 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.
• 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. Which of these prices should be used to valuate the money value of products is a, difficult task.
• Income of the foreign companies: It is again a matter of controversy, whether the income of the foreign firms should be included in the national income or not. It is suggested that the income which the foreign firms retain in the country must form part the national income while the income which they send abroad should not be included in the national income.
B. Practical Difficulties: Different types of practical difficulties arise in the estimation of national, income. More important difficulties are as follows:
• Non-monetized sector. A large part of the underdeveloped countries consists of non-monetized sector, Nan-monetized 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-monetized sector. Goods which do not enter into the monetary sector are thus excluded from the national income.
• Lack of Occupational Specialization: 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.
• 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 analyzing 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.
• 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.
• 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.
Thus we find that almost all the countries of the world, irrespective of then economic and social structure, face innumerable difficulties in the estimation of national income. Though it is impossible to remove all these difficulties completely, countries, however, mal-workhard to develop a well-knit system of income expenditure data to make the
national income estimates more dependable.