1
Question
State with reasons whether you agree or disagree with the following statements:
There are many conceptual or theoretical difficulties in the measurement of national income.
There are many conceptual or theoretical difficulties in the measurement of national income.
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Solution
Yes, I agree with the above statement. There are many conceptual or theoretical difficulties in the measurement of national income. The following are the theoretical difficulties in the measurement of national income:
i. Transfer earnings: There is a problem regarding the inclusion of transfer earnings such as old age pensions, unemployment allowance etc in the national income. On one hand, these earnings form a part of the individual income and are also the expenditure of the government. On the other, these earnings are not related to any production activity in an economy.
ii. Income from illegal activities: National income is underestimated if income from illegal activities such as theft, gambling etc. is not included in the estimation of national income. Such services also command a value and satisfy consumer needs.
iii. Production for self consumption: At times, the producer/ firm keeps a certain portion of the output for self consumption. Such a portion of production that is retained for self consumption should also be included in the estimation of the national income. But it is very difficult to ascertain the value of these goods, as these goods do not enter the market.
iv. Unpaid services: Some of the services, like services of housewives, mercy, etc., cannot be measured in monetary terms. For the same reason, these are not included in national income. But these services very much affect the productivity of the country, thus posing theoretical difficulties.
v. Income earned by foreign firms: There is a problem regarding the inclusion of the income earned by foreign firms in the national income. For instance, an MNC operates in different countries of the world. It affects the GDP of all those countries in which it is present. So its production is included in the GDP of the respective countries. But any profit earned by that country is credited to the parent country.
i. Transfer earnings: There is a problem regarding the inclusion of transfer earnings such as old age pensions, unemployment allowance etc in the national income. On one hand, these earnings form a part of the individual income and are also the expenditure of the government. On the other, these earnings are not related to any production activity in an economy.
ii. Income from illegal activities: National income is underestimated if income from illegal activities such as theft, gambling etc. is not included in the estimation of national income. Such services also command a value and satisfy consumer needs.
iii. Production for self consumption: At times, the producer/ firm keeps a certain portion of the output for self consumption. Such a portion of production that is retained for self consumption should also be included in the estimation of the national income. But it is very difficult to ascertain the value of these goods, as these goods do not enter the market.
iv. Unpaid services: Some of the services, like services of housewives, mercy, etc., cannot be measured in monetary terms. For the same reason, these are not included in national income. But these services very much affect the productivity of the country, thus posing theoretical difficulties.
v. Income earned by foreign firms: There is a problem regarding the inclusion of the income earned by foreign firms in the national income. For instance, an MNC operates in different countries of the world. It affects the GDP of all those countries in which it is present. So its production is included in the GDP of the respective countries. But any profit earned by that country is credited to the parent country.
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