Problems in calculating National Income

Problems in calculating National Income

The measurement of national income encounters many problems. The problem of double-counting has already bee noted. Though there are some corrective measures, it is difficult to eliminate double-counting altogether. And there are many such problems and the following are some of them.

Black Money

In countries where level of illegal activities, illegal businesses and the level of corruption are very high, the circulation of black money is so high, it has created a 'parallel economy'. It means unreported economy which is equivalent to the size of officially estimated size of the economy. GDP does not take into account the 'parallel economy' as the transactions of black money are not registered. In India, black money is all-pervasive, affecting not only the economy but also the society at large. The black economy as percentage of GDP is estimated to have grown from about 3 percent in the mid-fifties to 40 per cent by 1995-96.

Non-Monetization

In most of the rural economy, considerable portion of transactions occurs informally and they are called as non-monetized economy. The presence of such non-monetary economy in developing countries keeps the GDP estimates at lower level than the actual.

Growing Service Sector

In recent years, the service sector is growing faster than that of the agricultural and industrial sectors. Many new services likebusiness process outsourcing (BPO) have come up. However, value addition in legal consultancy, health services, financial and business services and the service sector as a whole is not based on accurate reporting and hence under-estimated in national income measures.

Household Services

The national income analysis ignores domestic work, and housekeeping and social services. Most of such valuable work rendered by our women at home does not enter our national accounting.

Social Services

It ignores volunteer and unpaid social services. For example, the wonderful services of Mother Teresa is invaluable for millions of poor, destitute, orphans and the diseased but at the same time not included in our GDP.

Environmental Cost

National income estimation does not distinguish between environmental-friendly and environmental-hazardous industries. The cost of polluting industries is not included in the estimate.