Question

What are the difficulties involved in the measurement of national income?

Answer 1

Difficulties in Measuring National Income:

1. In India, a special conceptual problem is posed by the existence of a large, unorganised, and non-monetised subsistence sector where the barter system still prevails for transacting goods and services.
2. Here, a proper valuation of output is very difficult.

Transfer payments:

1. Government makes payments in the form of pensions, unemployment allowance, subsidies, etc. These are government expenditures.
2. But they are not included in the national income.
3. Because they are paid without adding anything to the production processes.
4. During a year, Interest on the national debt is also considered transfer payments because it is paid by the government to individuals and firms on their past savings without any productive work.

Difficulties in assessing depreciation allowance:

1. The deduction of depreciation allowances, accidental damages, repair, and replacement charges from the national income is not an easy task.
2. It requires a high degree of judgment to assess the depreciation allowance and other charges.
   Unpaid services:
3. A housewife renders a number of useful services like preparation of meals, serving, tailoring, mending, washing, cleaning, bringing up children, etc.
4. She is not paid for them and her services are not directly included in national income.

Income from illegal activities:

1. Income earned through illegal activities like gambling, smuggling, illicit extraction of liquor, etc., is not included in national income.
2. Such activities have value and satisfy the wants of the people but they are not considered as productive from the point of view of society.

Production for self-consumption and changing price:

1. Farmers keep a large portion of food and other goods produced on the farm for self-consumption.
2. The problem is whether that part of the product which is not sold in the market can be included in national income or not.

Capital Gains:

1. The problem also arises with regard to capital gains.
2. Capital gains arise when a capital asset such as a house, other property, stocks or shares, etc. is sold at a higher price than was paid for it at the time of purchase.
3. Capital gains are excluded from national income.

Statistical problems:

1. There are statistical problems, too. Great care is required to avoid double counting. Statistical data may not be perfectly reliable when they are compiled from numerous sources.
2. Skill and efficiency of the statistical staff and cooperation of people at large are also equally important in estimating national income.