Question

Answer in detail:

Explain the practical or Statistical difficulties involved in the estimation of national income.

Answer 1

There are three methods of measuring national income. But all these measures have several difficulties in giving the exact value of national income. There are many activities which create confusion in the mind of the estimators whether to include that activity in the national income.

Following are the practical or statistical difficulties in the measurement of national income:

i. Problem related to double counting: One of the major problems involved in the estimation of national income by the value added method is the problem of double counting. Double counting refers to a situation where the value of a good is taken into account (counted) more than once. Such a problem occurs because, for every producer, the commodity he sells is the final commodity. Thus, if the value of the good is taken into account every single time, it leads to the estimating of the value of the product more than once.
ii. Estimation regarding depreciation: During the process of production, along with the raw materials and inputs, various fixed assets such as machinery, tools etc. are also used. However, during the course of production the fixed assets undergo wear and tear. This wear and tear reduces the value of the fixed assets of business entities. Since depreciation is based on various assumptions, and is subjective in nature, it is difficult for an individual to correctly assess the deduction to be made for depreciation.
iii. Self consumption: At times, the producer or firm keeps a certain portion of the output for self consumption. Such a portion of production that is retained for self consumption should be included in the estimation of national income, but it is difficult to calculate such consumption and production.
iv. Data issues: There is a problem in the estimation of national income as the data is inadequate and unreliable. The following are the kinds of data that are not available:
a) In India, the production and cost data are not available.
b) The data on unearned income such as old age pensions, unemployment allowances etc are not available.
c) Data related to expenditure on consumption and investment by rural and urban households is not obtainable.
v. Windfall gains and capital gains: Windfall gains such as lotteries and capital gains are unearned income and are not included in the estimation of the national income. However, these activities very much add to the national product.
vi. Estimation of inventories: Inventory investment basically refers to the total value of the change in the stock during an accounting year. Since inventories, in the form of inventory investment, form a part of the gross national product, it is necessary to carefully estimate the value of inventories to get the correct estimation of national income.