Difficulties in measuring national income, Managerial Economics


National Income Accounting is beset with several difficulties. These are:

a.       What goods and services to include

Although the general principle is to take into account only those products which change hands for money, the application of this principle involves some arbitrary decisions and distortions. For example, unpaid services such as those performed by a housewife are not included but the same services if provided by a paid housekeeper would be.

Many farmers regularly consume part of their produce with no money changing hands. An imputed value is usually assigned to this income. Many durable consumer goods render services over a period of time. It would be impossible to estimate this value and hence these goods are included when they are first bought and subsequent services ignored.  Furthermore, there are a number of governmental services such as medical care and education, which are provided either 'free' or for a small charge.  All these provide a service and are included in the national income at cost. Finally, there are many illegal activities, which are ordinary business and produce goods and services that are sold on the market and generate factor incomes.

b.       Danger of Double Counting

The problem of double counting arises because of the inter-relationships between industries and sectors. Thus we find that the output of one sector is the input of another. If the values of the outputs of all the sectors were added, some would be added more than once, giving an erroneously large figure of national income. This may be avoided either by only including the value of the final product or alternatively by summing the values added at each stage which will give the same result.

Some incomes such as social security benefits are received without any corresponding contribution to production. These are transfer payments from the taxpayer to the recipient and are not included. Taxes and subsidies on goods will distort the true value of goods. To give the correct figure, the former should not be counted as an increase in national income for it does not represent any growth in real output.

c.         Inadequate Information

The sources from which information is obtained are not designed specifically to enable national income to be calculated.  Income tax returns are likely to err on the side of understatement. There are also some incomes that have to be estimated. Also, some income is not recorded, as for example when a joiner, electrician or plumber does a job in his spare time for a friend or neighbour. Also information on foreign payments or receipts may not all be recorded.

Posted Date: 11/28/2012 5:57:29 AM | Location : United States

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