Difficulties in Measuring National Income

Difficulties in Measuring National Income

In India, a special conceptual problem is posed by the existence of a large, unorganised and non-monetised subsistence sector where the barter system still prevails for transacting goods and services. Here, a proper valuation of output is very difficult.

1. Transfer payments

Government makes payments in the form of pensions, unemployment allowance, subsidies, etc. These are government expenditure. But they are not included in the national income. Because they are paid without adding anything to the production processes.

During a year, Interest on national debt is also considered transfer payments because it is paid by the government to individuals and firms on their past savings without any productive work.

2. Difficulties in assessing depreciation allowance

The deduction of depreciation allowances, accidental damages, repair and replacement charges from the national income is not an easy task. It requires high degree of judgment to assess the depreciation allowance and other charges.

3. Unpaid services

A housewife renders a number of useful services like preparation of meals, serving, tailoring, mending, washing, cleaning, bringing up children, etc. She is not paid for them and her services are not directly included in national income. Such services performed by paid servants are included in national income. The reason for the exclusion of her services from national income is that the love and affection of a housewife in performing her domestic work cannot be measured in monetary terms. Similarly, there are a number of goods and services which are difficult to be assessed in money terms for the reason stated above, such as rendering services to their friends, painting, singing, dancing, etc.

4. Income from illegal activities

Income earned through illegal activities like gambling, smuggling, illicit extraction of liquor, etc., is not included in national income. Such activities have value and satisfy the wants of the people but they are not considered as productive from the point of view of society.

5.  Production for self-consumption and changing price

Farmers keep a large portion of food and other goods produced on the farm for self consumption. The problem is whether that part of the produce which is not sold in the market can be included in national income or not.

National income by product method is measured by the value of final goods and services at current market prices. But prices do not remain stable. They rise or fall. To solve this problem, economists calculate the real national income at a constant price level by the consumer price index.

6. Capital Gains

The problem also arises with regard to capital gains. Capital gains arise when a capital asset such as a house, other property, stocks or shares, etc. is sold at higher price than was paid for it at the time of purchase. Capital gains are excluded from national income.

7. Statistical problems

There are statistical problems, too. Great care is required to avoid double counting. Statistical data may not be perfectly reliable, when they are compiled from numerous sources. Skill and efficiency of the statistical staff and cooperation of people at large are also equally important in estimating national income.

The following are the some of the statistical problems:

1. Accurate and reliable data are not adequate, as farm output in the subsistence sector is not completely informed. In animal husbandry, there are no authentic production data available.

2. Different languages, customs, etc., also create problems in computing estimates.

3. People in India are indifferent to the official inquiries. They are in most cases non-cooperative also.

4. Most of the statistical staff are untrained and inefficient.

Therefore, national income estimates in our country are not very accurate or adequate. There is at least 10 per cent margin of error, i.e., national income is overestimated or underestimated by at least 10 per cent. That is why the GDP estimates for India varies from 2 trillion US dollar to 5 trillion US dollar.