Difficulties in Measuring National Income

Various difficulties are encountered in the accurate measurement/calculation of national income and its various concepts. Some of these difficulties are related to theoretical concepts, while others are related to practical and statistical aspects. Compared to developed countries, the accurate measurement/calculation of national income or its various concepts is even more difficult in less developed or developing countries.

Here, the major problems encountered in the accurate measurement/calculation of national income and its various concepts, focusing on less developed or developing countries, are presented in a summarized form below:

(a) Non-Monetary Transactions: Not all goods and services produced in a country are bought and sold through the medium of money. Especially in the rural areas of developing countries, where monetization is still incomplete, barter exchange of goods is found. Similarly, the services of housewives running the household are not given a monetary value. However, only monetary transactions and goods and services with monetary value are included in the measurement of national income and its various concepts. Therefore, barter transactions and non-monetary activities create difficulties in the accurate measurement/calculation of national income.

(b) Problem of Double Counting: When measuring/calculating national income and its various concepts, only final goods are included, i.e., intermediate goods are not included because the value of intermediate goods is already included in the value of final goods. Intermediate goods are goods used in the production of final goods. However, it is difficult to distinguish between final goods and intermediate goods because the same good can be a final good or an intermediate good depending on its use. 

For example, sugarcane can be taken. If a consumer buys sugarcane and consumes it, it is a final good. If a sugar factory uses sugarcane for sugar production, then in this situation, sugarcane is an intermediate good. If the full value of both the sugarcane produced by the farmer and the sugar produced by the sugar factory is included when calculating national product or income, there will be double counting of sugarcane because the value of the intermediate good sugarcane is already included in the value of the final good sugar. 

Therefore, when calculating national income and its various concepts, there is a possibility of double or multiple counting of some goods and services. In this situation, the value of national income appears higher than the reality.

(c) Illegal and Unrecorded Activities: Illegal and unrecorded activities include narcotics, gambling, prostitution, smuggling, and tax evasion, etc. Such activities are prohibited according to the laws of the country. Therefore, goods and services produced under such activities, the income earned from them, and the expenditure incurred on them are not included in national income and its other concepts. As a result, the value of national income appears lower than the reality. Therefore, illegal and unrecorded activities are taken as a difficulty in national income measurement.

(d) Inadequate and Unreliable Statistics: For the calculation of national income and its other concepts, adequate and reliable statistics related to the production, income, and expenditure of various sectors are required. However, such statistics are not available in developing countries. For example, in such countries, it is difficult to obtain adequate and accurate statistics related to the costs of agricultural production and the production costs of small and cottage industries.

(e) Illiteracy and Ignorance: In developing countries, some people, due to being illiterate, and some people, even after being educated, neglect the importance of national income calculation and do not keep annual records of their production, income, and expenditure. Similarly, the knowledge and ability of national income calculators also play an important role in the calculation of national income. There may be disagreements among calculators on which items of production, income, and expenditure within and outside the country should be included or excluded, as well as which method to use.

(f) Frequent Changes in Price Levels: The monetary value of goods and services is included in the calculation of national income and its other concepts. Generally, the monetary value of goods and services reflects their market price. When the market price changes frequently, even if the physical quantity of goods and services produced remains the same, the monetary value of the production of goods and services appears different. Therefore, the calculation of national income and its other concepts must be adjusted according to the changes in the market price of goods and services. For this, a Price Index Number is required.

(g) Small-Scale Production, Income, and Expenditure: Production, income, and expenditure occurring on a very small scale or quantity individually are not included in the measurement of national income because their records are not kept. However, when such quantities are added in the aggregate economy, a significant value is obtained. As a result, the value of national income appears lower than the reality. Therefore, production, income, and expenditure occurring on a small scale are taken as a difficulty in national income measurement.

(h) Payment of Wages and Salaries in Kind: The payment of wages and salaries in kind is not included in national income, but goods and services provided as additional benefits along with wages and salaries are included in national income. This discrepancy creates difficulties in the measurement of national income.

(i) Other Difficulties: In addition to the difficulties mentioned above, issues such as the calculation of depreciation funds, the calculation of environmental damage, transactions of resale or second-hand goods, the calculation of the value of self-used resources by owners of factors of production, public services such as general administration, police, and army services, the calculation of transfer income, and the calculation of unexpected capital gains and losses shown in business are also taken as difficulties in national income measurement.