Difficulties in Measuring National Income in a Developing Country

National income figures denote the economic progress of an economy. They also enable to analyze and understand the significance of  each sector in an economy. They also reveal the trends in the concentration of economic power and inequalities between the rich all the poor. There three methods for calculating national income. These are production method, income method and expenditure method. There are many involved in measuring national income. They are mentioned as below:

Difficulties in Measuring National Income

1. Non-monetized sector : Goods and services which are sold and bought in non-monetized sector are not included in national income. Non-monetized sector is prevalent in several under developed countries. Major portion of transaction of goods and services take place in this sector. Such transactions are not recognized and registered by the state authorities. Mere calculation of the value of goods and services in monetized sector is useless in measuring national income figures.

2. Exclusion of free services : Free services like wife’s services to the family, maintenance of libraries, parks and reading rooms etc by the government are not included in the calculation of national income. This leads to several peculiar problems. 1) National Income figures does not include some important services meant for the public welfare. 2) The nature of services of several persons in several fields can’t be decided easily. If a teacher gives coaching to his children, it is considered a free service. If the same teacher works in a high school, his services are considered remunerative or economic in nature. As a teacher in a school, his services are included in national income figures.

3. Statistical data : Another problem of national income estimates refers to the availability of accurate statistical data and information. Especially in underdeveloped counties, statistician who supervise the calculation of National income figures face several problems in securing correct and accurate information about the output, savings, investment, consumption, income and expenditure of individuals in different spheres.

4. Double counting : Double counting is another problem faced in measuring national income figures. Great care should be taken for avoiding double counting of a commodity. A particular commodity should be counted only once at a particular state.

5. Transfer earnings: income received by individuals productive work like pensions, unemployment relief funds etc. come under the category of transfer earnings. Such transfer earnings are excluded from national income.

6. Income of foreign companies : Another problem relates to the inclusion of income of foreign companies in measuring national income. According to the opinion of International Monetary Fund Experts, Foreign Companies’ income has to be included in the national income of those countries where production is organized. But the profits obtained by the branches of foreign companies should be included in the national income of foreign countries.

7. Unproductive activities : The governments of modern states have been spending large amounts on some free services like parks, libraries, recreation, cultural activities, old-age pensions, orphan houses, child care centers, Maternity homes etc. Is it a right step to include such services in National Income? This is a problem which we have to consider. Since these services yield no income, some considered that they have to be excluded in national income. But many experts are of the view that all Government expenditure should be included in measuring national income.

8. Difficulties of Comparison : Difficulties arise while comparing national income figures of one Country with that of another. This is so because the mature of methods adopted for calculating the national income differ from country to country.

9. Problems due to changes in Market prices : Gross national income figures increase due to an increase in the market prices of goods and services. But the real national product remains the same. Sometimes it falls due to inflationary effects. So this problem arising due to the fluctuations in market prices has to be solved while calculating national income. For this national income estimates are to be made on the basis of constant prices during a year.

10. Special difficulties in under developed countries : Several difficulties are faced in calculating national income in developing countries

• National income estimates may not reveal the real output of these countries due to the dominant role of non-monetized sector in these countries.
• Comprehensive information is not available as the illiterate and uneducated persons does not mention the exact size of Output produced by them.
• Occupational specialization is not found among the individuals in these countries. Individuals get income from different sources. So their income can’t be estimated.
• Collection and presentation of statistical data is a complex task due to the lack adequate a) expert statistician, b) statistical organization, c) Literacy and education, d) big entrepreneur.
• The statistical data figures are not reliable.