Question

What is National Income? Discuss the theoretical or conceptual difficulties in the measurement of national income.

Answer 1

In general sense of the term 'National Income' refers to the total money value of all final goods and services produced in the country during a period of time, usually one year. It includes net income from abroad. But does not include depreciation.
$Definitions:$
(1) Alfred Marshall: According to Marshall, "The labour and capital of a country acting on its natural resources produces annually a certain net aggregate of commodities material and immaterial including services of all kind." It is the true net annual income or national dividend.
(2) A.C. Pigou : According to A.C. Pigou, "The national dividend is that part of the objective income of the community including of course income derived from abroad, which can be measured in money."
(3) Irving Fisher: According to Irving Fisher, the term "National dividend or income consists solely of services as received by ultimate consumers whether from their material or from their human environments. According to Fisher, the National Income of a country is determined not by its annual production but by its annual consumption."
(4) National Income Committee: According to National Income Committee, "A National Income estimate measures the volume of commodities and services turned out during a given period counted without duplication." Here the National Income is calculated without double counting.
DIFFICULTIES IN THE ESTIMATION/ CALCULATION OF NATIONAL INCOME:
National Income estimation is a difficult and complex task mainly because of statistical and conceptual difficulties. In country like India, we face many practical difficulties so there is either over estimation or under estimation of National Income.
(A) CONCEPTUAL DIFFICULTIES/ THEORETICAL DIFFICULTIES:
National Income is a very broad concept and it is very difficult to precisely define what exactly should be included and what should not be included while measuring National Income.
(1) Unpaid Services: Unpaid services like services of housewives are not included due to practical problem of getting exact value. But the same work when done by a paid maid servant is included in national income. So there is over estimation of National Income.
(2) Transfer Payments: Transfer payments like pension, unemployment allowance are ignored from national income. If they are included there will be over estimated of national income because these are income transferred from the government to people.
(3) Income of Foreign Firms: Income of a foreign firm should be included in the National Income of the country where the firm actually undertakes production work. But the profits earned by these firm are credited to the parent concerns.
(4) Income from Illegal Activities: There is underestimation of National Income as income from illegal activities such as gambling, black marketing, theft etc. are not included. When actually such goods and services do have value and meet the needs of the consumers.
(5) Production for Self Consumption: There is lot of guess work involved when it comes to estimating the value of goods kept for self consumption as they do not enter market.
(6) Difficult to Calculate Inventory Value: It is difficult to calculate the value of the stock of raw-materials, finished and semi-finished goods.
(7) Treatment of government sector: Government provides number of public service like defence public administer law and order etc. Measuring the market value of such service is difficult as the real value of these service is not known therefore it has become a convention to treat all such services as final consumption.
(8) Changing Price Levels: When there is inflation in the economy, the National Income will show a increase even though the production might have fallen and vice versa.