Write explanatory answer:
Explain theoretical or conceptual difficulties of measuring national income.
Explain theoretical or conceptual difficulties of measuring national income.
Difficulties
in the measurement of National Income:
The calculation
of the national income of a country is a task full of difficulties and
complexities. The following difficulties generally arise while estimating
national income.
Theoretical difficulties:
These are also
known as conceptual difficulties.
1)
Transfer payments:
Individuals get
pension, unemployment allowance, but whether these should be included in
national income is difficult problem. On one hand, these earnings are a part of
individual income and, on the other, they are government expenditure.
Therefore, these transfer payments are ignored from national income.
2)
Income of foreign firms:
According
to IMF view-point, income of a foreign firm, should be included in the national
income of the country, where the firm actually undertakes production work.
However, profits earned by foreign firms are credited to the parent concern.
3)
Unpaid services:
National income
is always measured in money, but there are a number of goods and services which
are difficult to be assessed in terms of money. For example, painting as a hobby
by an individual, the bringing up of children by the mother, these services are
not included in national income as remuneration is not given to them.
Also services
of housewives and the services provided out of love, affection; mercy, sympathy
and charity are not included in national income, as they are not paid for. By
excluding all such services from it, the national income will work out to be
less than what it actually is.
4)
Incomes from illegal activities:
Income earned
through illegal activities such as gambling, black marketing, theft, smuggling
etc., is not included in national income. Such goods and services do have value
and meet the needs of the consumers. Thus to that extent national income is
underestimated.
5)
Treatment of government sector: Government
provides a number of public services like defence, public administration, law
and order etc. Measuring the market value of such government services is
difficult; as the real value of these services is not known, therefore it has
become a convention to treat all such services as final consumption. Hence, it
is included in national income.
6)
Production for self consumption:
Goods produced
for self consumption such as food grains, vegetables and other farm products do
not enter in the market. But the value of such goods should be estimated at the
rate of market price that have been marketed and should be included in national
income.
7)
Changing price levels:
The difficulty
of price changes arise in the national income estimate, when the price level in
the country rises, the national income also shows an increase even though the
production might have fallen and when price level falls., National Income may
show a decrease even though production may have increased.
Difficulties in the measurement of National Income:
The calculation of the national income of a country is a task full of difficulties and complexities. The following difficulties generally arise while estimating national income.
Theoretical difficulties:
These are also known as conceptual difficulties.
1) Transfer payments:
Individuals get pension, unemployment allowance, but whether these should be included in national income is difficult problem. On one hand, these earnings are a part of individual income and, on the other, they are government expenditure. Therefore, these transfer payments are ignored from national income.
2)
Income of foreign firms:
According to IMF view-point, income of a foreign firm, should be included in the national income of the country, where the firm actually undertakes production work. However, profits earned by foreign firms are credited to the parent concern.
3) Unpaid services:
National income is always measured in money, but there are a number of goods and services which are difficult to be assessed in terms of money. For example, painting as a hobby by an individual, the bringing up of children by the mother, these services are not included in national income as remuneration is not given to them.
Also services of housewives and the services provided out of love, affection; mercy, sympathy and charity are not included in national income, as they are not paid for. By excluding all such services from it, the national income will work out to be less than what it actually is.
4) Incomes from illegal activities:
Income earned through illegal activities such as gambling, black marketing, theft, smuggling etc., is not included in national income. Such goods and services do have value and meet the needs of the consumers. Thus to that extent national income is underestimated.
5) Treatment of government sector: Government provides a number of public services like defence, public administration, law and order etc. Measuring the market value of such government services is difficult; as the real value of these services is not known, therefore it has become a convention to treat all such services as final consumption. Hence, it is included in national income.
6) Production for self consumption:
Goods produced for self consumption such as food grains, vegetables and other farm products do not enter in the market. But the value of such goods should be estimated at the rate of market price that have been marketed and should be included in national income.
7) Changing price levels:
The difficulty of price changes arise in the national income estimate, when the price level in the country rises, the national income also shows an increase even though the production might have fallen and when price level falls., National Income may show a decrease even though production may have increased.
