Question

Write an explanatory answer.

Explain the practical (statistical) difficulties involved in the estimation of national income.

Answer 1

In practice, a number of difficulties arise in the collection of required statistics in estimating national income; some of these are:

1. The problem of double counting: The greatest difficulty in calculating the national income is double counting. It arises from the failure to distinguish properly, between a final and an intermediate product. It so happens, the national income would work out to be many times the actual. For example, flour used by a bakery is an intermediate product and that by a household is the final product.
2. Existence of non-monetized sector: There is a large non-monetized sector, the developing economy like India. Agriculture, still being in the nature of subsistence farming in the developing countries, a major part of the output is consumed at the farm itself and a part of production is partly exchanged for other goods and services. Such production and consumption cannot be calculated in national income.
3. Lack of occupational specialization: There is a lack of occupational specialization, which makes the calculation of national income by product method difficult. For instance, besides the crops, farmers in a developing country are engaged in supplementary occupations like dairy farming, poultry farming, cloth making etc. However, income from such productive activities may not be revealed and thus is not included in the national income estimates.
4. Inadequate and unreliable data: Adequate and correct production and cost data are not available in a developing country; such data relate to crops, fisheries, animal husbandry, forestry, the activities of petty shopkeepers, construction workers, small enterprises etc. That is why, the national income of a country will not show at its actual. For estimating national income by income method, data on unearned incomes and on persons employed in the service sector are not available. Data on consumption and investment expenditures of the rural and urban population are also not available for the estimation of national income. Moreover, there is no machinery for the collection of data in such countries.
5. Capital gains or losses: Capital gains or losses, which accrue to the property owners by increases or decreases in the market value of their capital assets or changes in demand, are not included in the gross national product, because these changes do not result from current economic activities.
6. Depreciation: The calculation of depreciation on capital consumption is one more difficulty. Depreciation refers to the wear and tear of capital assets, due to their use in the process of production. Depreciation of capital assets will depend on the technical life of the asset, the intensity of its use, the nature of the asset, regular and careful maintenance etc. There are no uniform, common or accepted standard rates of depreciation applicable to the various capital assets. In the case of depreciation, one has to make many reasonable assumptions, which involve an element of subjectivity. So it is difficult to make correct deductions for depreciation.
7. Valuation of inventories: Raw materials, intermediate goods, semi ­finished and finished products in the stock of the producers are known as inventory. All inventory changes, whether negative or positive, are included in the gross national product. Any mistake in measuring the value of inventory, will distort the value of the final production of the producer. Therefore, the valuation of inventories requires careful assessment.
8. Illiteracy and Ignorance: The majority of the small producers in developing countries are illiterate and ignorant and are not in a position to keep any account of their productive activities. So they cannot give information about the quantity or value of their output. Hence, the estimates of production and earned income are simply guesses.