Question

Write any four practical difficulties in national income estimation.

Answer in detail:

Explain the practical or Statistical difficulties involved in the estimation of national income.

Write explanatory note:

Difficulties in the estimation of the National income.

Write the answer in 'one' or 'two' paragraphs:

What are the difficulties in the measurement of national income?

Explain the practical difficulties involved in the measurement of national income.

Answer 1

In practice, a number of difficulties arise in the collection of statistical data required for estimation of national income. Some of the practical difficulties are as follows:

1. Depreciation: Depreciation refers to wear and tear of capital assets due to their use in the process of production. There are no uniform, common or accepted standard rates of depreciation applicable to the various capital assets. Thus, it is difficult to make correct deductions for depreciation.
2. Illiteracy and Ignorance: Due to ignorance and illiteracy, small producers do not keep account of their production. As a result, they are unable to give accurate information about the quantity or value of their output.
3. Valuation of Inventories: Raw materials, intermediate goods, semi-finished and finished products in the stock of the producers are known as inventories. Any mistake in measuring the value of inventory will distort the value of the final production of the producer. Therefore, valuation of inventories requires careful assessment.
4. Inadequate And Unreliable Data: Adequate and correct data on production and cost data relating to crops, fisheries, animal husbandry, forestry, construction workers, small enterprises, etc., are not available in a developing country. Besides this, data on unearned incomes, consumption and investment expenditure of rural and urban populations are also not available. This does not reveal the actual size of national income. 
5. Difficulties in Classification of Working Population: In India, working population is not clearly defined. For instance, farmers in India are not engaged in agriculture round the year. Obviously, in the off season, they engage themselves in alternative occupations. In such a case, it is very difficult to identify their incomes from a particular occupation.
6. Existence of Non-Monetized Sector: In India, there is presence of non-monetized sector, especially in rural areas. Small farmers exchange a major part of their agricultural production for other goods and services (i.e., the barter system). It is excluded while counting national income.
7. Problem of Double Counting: The greatest difficulty in calculating national income is that of double counting. This difficulty arises because of the failure to properly distinguish between a final and an intermediate product. E.g., flour used by a bakery is an intermediate product and flour used by a household is a final product.
8. Capital Gains or Losses: Capital gains or capital losses, which accrue to the property owners by increase or decrease in the market value of their capital assets or changes in demand, are not included in the national income because these changes do not result from current economic activities.