Difficulties in the Measurement of National Income

There are a number of difficulties in the measurement of national income of a country. The following are the important difficulties of national income analysis: 

• 1. National income is always measured in terms of money, but, there are certain goods and services whose money measurement is not possible. For example: the services performed by housewife for her family, voluntary services performed with a charitable object, etc. such items are excluded from the national income figures. This leads to an underestimate of the national income. 

• 2. Income obtained from illegal activities is not included in the national income and their exclusion results in an under-valuation of the national income. 

• 3. It is difficult, to obtain accurate statistics. This is the reason, why there is big differences between the national income statistics collected by the different institutions. 

• 4. The collection of depreciation on capital consumption, presents another formidable difficulty. There are no accepted standard rates of depreciation applicable the various categories of capital goods. Thus, the national income estimate will not be correct. 

• 5. The difficulty of avoiding double counting in the national income. To avoid this difficulty, final goods and services are to be included in the national income, but it is not an easy task. 

• 6. The difficulty of price changes arises in the national income estimate. When the general price index increases, the national income will also increase, even if the national output is reduced. Similarly, if general price index decreases, the national income will also decrease, although, there may be an increase in national output. Therefore, due to price changes, we may not find an accurate estimate of national income. 

• 7. The prevalence of non-monetized transactions in underdeveloped countries creates an important problem in the measurement of national income. A considerable part of the output does not come into the market at all. In agriculture, a major part of output is consumed by the farmer themselves which reduces the national income figure to a great extent. 

• 8. Due to illiteracy, most of the producers in less developed countries have no idea of the quantity and value of their output and do not keep regular accounts, which, creates difficulties in national income measurement.

Notes provided by Prof. Sujatha Devi B (St. Philomina's College)