Difficulties in Measurement of National Income (13 Reasons)

Difficulties in Measurement of National Income

Estimating national income is quite a complicated task. It is beset with difficulties of various kinds. These difficulties in the measurement of national income can be broadly classified into two categories: (a) conceptual difficulties, and (b) practical difficulties.

While conceptual problems are of general nature and appear in almost all countries, practical difficulties have particular relevance to under-developed countries.

Conceptual Difficulties In Measurement of National Income

Conceptual difficulties in the measurement of national income relate to the definitions of the concepts of national income. Some of the important conceptual difficulties are:

Inclusion of Services

There is a basic problem of what should be included in the output and, therefore, national income. The problem is associated with the inclusion of services is national income. There is a difference of opinion as to whether services should or should not be included in the national income.

Marxism economists believe that services should be excluded from national income, while others say that services should be included in national income. Both views prevail in actual practice. For example, in socialist countries, all services are excluded from the computation of national income. In the capitalist and other countries including Nepal, services are included in national income.

Identifying Intermediate Goods

As we know, national income comprises final goods and services only; intermediate goods are excluded from national income. However, in actual practice, it is difficult to make a clear-cut distribution between intermediate goods and final goods. Many goods can be intermediate as well as final goods depending upon their use.

For example, the flour used by a bakery is an intermediate good, while flour used by a household is a final good. Similarly, transport expenditure incurred by a person to reach his office is an intermediate cost, but if this expenditure is incurred by him to take his family on holidays it is an expenditure on final goods.

It is difficult to decide what part of the expenditure on transportation is intermediate cost and how much of this expenditure is of the nature of final expenditure. Any mistake in identifying cost may lead to overestimation or underestimation of national income.

Identifying Factor Incomes

There is also the problem of separating factor incomes from non-factor incomes. National income comprises only factor incomes, i.e. incomes paid in exchange for factor services like wage, rent, interest, etc. Non-factor incomes, i.e. payments received that look like factor income but are not actually factor payment, are not included in national income.

For example, interest payments on loans taken for consumption, payments received by selling old houses, old cars, sale of shares, etc., are non-factor incomes. Individuals and businesses mix the two types of incomes, and it is difficult in practice to separate the two.

Services of Housewives and Other Similar Services

National income largely includes those goods and services for which payment in money form is made. There are many services for which no payment is made in money form. One of these is the services of housewives in their own homes, such as cooking, looking after the household, and taking care of children. Similarly, men folks do many services for themselves or for their family members, such as shaving, gardening, and teaching their own children. No payment is made for these services and, therefore, they are not included in national income.

It is difficult to impute the value of these services because there is no statistically sound method of estimating their value and also because these services are performed out of love, affection, and regard which makes their valuation impossible. Therefore, the national income convention has followed an easy way out of excluding these services from national income. This method of overcoming this difficulty has led to some anomalies.

All these services can be performed by paid hands, such as maidservants, gardeners, tutors, etc. If they are performed by the hired person the national income will increase, though actual output is the same. By the same token, the national income of underdeveloped countries is underestimated because these unpaid services are relatively more important in these countries.

Imputing Unpaid Services

There are some goods and services performed in the market or others without involving any payment. For example, the government provides various free services to the people, such as general administration, police, etc. However, there is no record of such free services. Moreover, there is a standard method of imputing the value of these services. In practice, so ad hoc method is used for imputing their values.

Income of the Foreign Companies

It is a matter of controversy, whether the income of foreign firms should be included in national income or not. The only view is that the income which the foreign firms retain in the country should be included in national income, and the income which is repatriated abroad should not be included. This is the convention that is normally followed in the case of such incomes.

Valuation of Inventory Changes

Inventory valuation is a very difficult and cumbersome job. The problem of inventory valuation is how to take the valuation of stock of goods, whether the valuation should be done at the original cost or current prices. The practice, however, is that valuation is done at the current prices.

Estimation of Depreciation

Estimation of depreciation is also a very difficult task. Depreciation of a piece of capital can be estimated at its original cost (historic cost) or its replacement cost. However, the usual practice on the part of the firms is to base their depreciation provisions on the original cost of their assets.

Practical Difficulties In Measurement of National Income

Practical difficulties in the measurement of national income relate to partly difficulties associated with the under-developed stage of the country and parts of statistical nature. Some of the important practical difficulties are as follows:

Lack of Occupational Specialization

For national income calculation, producers must be classified into various specific occupations. But in developing countries like Nepal, the occupational classification of producers into a distinct group is almost impossible, particularly in the agricultural sector. A substantial amount of the working population undertakes more than one activity during a year. This makes the estimation of national income difficult.

For example, a small agriculturist may work in the agricultural sector during the cultivation period; in the cottage and household industry during the off-season, and may go to the urban area and may work as a casual worker or as a rickshaw puller. In such a case, it is very difficult to assign any particular occupation to him and allocate his income to a particular occupation.

Non-Monetized Sector

The large, unorganized, non-monetized sector of the developing economy like Nepal serves as the biggest bogey for national income calculation. The non-monetized sector refers to that part of the economy where goods and services are exchanged through barter without the use of money.

In the developing economy, agriculture is carried on a subsistence basis. A very large part of production does not come to the market for sale. It is partly kept by producers for their personal consumption and is partly exchanged for other goods. Such goods and services which do not enter the market need to be included in national income. At present, there is no objective method of estimating the value of such goods and services.

The absence of data about such goods and services makes the imputation more difficult. Therefore, estimates of national income have the stamp of guesswork and arbitrary imputations.

Inadequate Information

Regarding income and output, another difficulty that arises particularly in underdeveloped countries is that a very large number of producers in Nepal are not sure of the exact quantity and the value of output they produce. A very large part of production activity in these countries is unorganized consisting of small farmers, small shopkeepers, and small independent artisans. Most of the small producers do not keep account of their production and income. Under these circumstances, the estimates of output and income are simply guesswork.

Unreported Illegal income

Sometimes people distort facts and provide false information about their income to evade income tax and wealth tax. This leads to the generation of black money, i.e. income that is evaded from income tax, etc.

For example, a significant part of the Nepalese economy operates as a parallel or hidden economy, and the income generated there goes unreported income. Obviously, national income estimates to that extent have an element of underestimation.

Non-Availability of Reliable Statistical Data

The most important difficulty in the estimation of national income in a developing country like Nepal is the non-availability of reliable data. There are several gaps here, which are:

  • There is a dearth of agencies and statistical organizations, collecting national income data.
  • A large number of enumerators entrusted with the task of collecting data at the village level are semi-illiterate and untrained in the collection of data. They do not possess the requisite knowledge of collecting, classifying, and analyzing data.
  • Thirdly, there are also major gaps of data in respect of agriculture by-products, like fruits, vegetables, timber, and firewood, and price data on several products like livestock, and poultry products. Moreover, data in respect of consumption, savings, and investment expenditures are incomplete, inadequate, and deficient.

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