Question

State with reason, whether you agree or disagree with the following statement:

There are many theoretical difficulties in the measurement of national income.

State with reasons whether you agree or disagree with the following statement:

The measurement of National Income involves too many theoretical difficulties.

Options

• Agree

• Disagree

Answer 1

I agree with the above statement.

Reason:

The various theoretical difficulties involved in the estimation of national income are as follows:

1. Illegal income:
   Illegal incomes, such as income from gambling, black marketing, theft, smuggling, etc., are not included in national income.
2. Changing price level:
   The changes in price levels also cause difficulties in calculating national income. E.g. If the price level falls, the national income may show a decreasing trend even when there is a rise in production.
3. Unpaid services:
   Only paid goods and services are taken into account while calculating national income. However, there are a number of unpaid services which are not considered in national income estimates.
4. Transfer payments:
   Whether the transfer payments (such as scholarships, grants, pensions, unemployment allowance, etc.) should be included in national income or not is a major concern. 
5. Valuation of government services:
   The government provides several public services. The calculation of these services at market price is difficult since the real value of these services is not known. 
6. Income of foreign firms:
   According to the IMF, the income of a foreign firm should be included in the national income of the country in which the firm actually undertakes the production activities.
7. Production for self-consumption:
   The products kept for self-consumption by farmers and other allied producers do not enter the market. Hence, it is not accounted for in the national income.