Methods of Measuring National Income: Calculating and Analysing

Practical Difficulties Estimating National Income

Calculation of national income also faces difficulties? Is it hard to digest the fact? And if it does faces difficulties then what are they? And how do they occur let’s know more about them! But before that let us know what is national income exactly?

In a common , national income means the total value of goods and services produced annually in a country . in other words , the total amount of income accruing to a country from economic activities in a years time is known as national income . it includes payments made to all resources in the form of rent, wages , interest and profits.

Thus, national income is the aggregate monetary value of all final goods and services produced in the economy in a year.

In practice  a number of difficulties arise in the collection of required statistics in estimating national income some of those are –

  1. Problems of double counting – the greatest difficulty in calculating . it arises from the failure to distinguish properly. Between a final and a intermediate product . It so happens that 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 the final product.
  2. The existence of non-monetized sector – there is a large non-monetized sector in the developing economy like India. Agriculture , still being in the nature of subsistence farming in the developing countries as a major part of the output is consumed at the farm itself and a part of the production is partly exchanged for other goods and services . such production and consumption can not be calculate in national income.
  3. Lack of occupational specialization – there is the lack of occupational specialization which makes the calculation of national income by product method difficult . for instance besides the crop farmers in a developing country are engaged in supplementary occupation like dairy farming poultry farming cloth making etc. but income from such productive activities may not be revealed and thus is not included in the national income estimates .
  4. Inadequate an unreliable data – adequate and correct production and cost data are 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 national income of a country will not show at its actual. For estimating national income by income method data on unread incomes and on persons employed in the services 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 change 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 of a capital consumption is one more difficulty . depreciation refers to the wear and tears of the assets due to their process and use in the production . depreciation of capital assets will depend on technical life of the asset the intensity of its use , nature of the assets regular and careful maintenance etc. there are no uniform , common or accepted standard rates of depreciation  applicable to the various capital assets. In case of depreciation , one has to make many reasonable assumptions one has to make many reasonable assumptions which will involve an element of subjectivity . so as 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 products. Therefore, valuation of inventories requires careful assessment.
  8. Illiteracy and ignorance – majority of the small producers in developing countries are illiterate and ignorant an are not in position to keep any account of their productive activities. So they can not give information about the quantity or value of their output . hence the estimates of production and earned incomes are simply .

Sharoz Dawa

Co-founder & Developer at IAS Paper
I am a 20-year-old guy from Mumbai (Maharashtra) currently doing Software Engineering.I love helping people and providing free education.
Official Website http://www.sharozdawa.com

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