Difficulties in measuring the national income, Macroeconomics

 

DIFFICULTIES IN MEASURING THE NATIONAL INCOME 

There are some conceptual and statistical problems in measuring national product. Some items are excluded from the national income accounting, even though they would be properly classified as "current production" of goods and services. Sometimes production leads to harmful side effects which are not fully taken into consideration. A brief discussion of some of these limitations of national products is given below.

i.Non-market Production

The national product fails to account household production because such production does not involve a market transaction. As a result the household services of millions of people are excluded from the national income accounts. For instance, house work done by house-wives is not included but the same work done by a paid servant is. Their exclusion results in some oddities in national income accounting and underestimates our national product.

ii.Imputed Values

Some self supplied goods and services are given as imputed value for their inclusion in national income accounts. For instance owner-occupied houses and the value of food consumed by the farmers themselves. Sometimes this may result in overestimation or underestimation of national product.

iii.The Underground Economy

There are many transactions that go unreported because they involve either illegal activities or tax evasion. Most of these underground activities produce goods and services that are valued by purchasers. However, these activities are unreported and not included in national income accounts. They do not figure in our national product estimate.

iv."Side Effects" and Economic "Bads"

National income accounts make no adjustment for harmful side effects that sometimes arise from several productive activities and the events of nature. If they do not involve market transactions, economic 'bads' are not deducted from national product. When private property rights are not defined properly, air and water pollution are sometimes side effects of the process of economic activity and reduce our future production possibilities. Similarly the growing defense expenditure and the greater outputs of military equipment might increase the national product but the moot point is whether the country has become better off or not. Since national accounts ignore these negative aspects of growth and development, it tends to overstate our real national output. 

v.Leisure and Human Costs

According to Simon Kuznets, the inventor of GNP, the failure to fully include leisure and human costs is one of the grave oddities of national income accounting. National income accounts exclude leisure, a commodity that is valuable to everybody. Similarly, national product also fails to take into account human costs of employment in terms of the physical and mental strains associated with many jobs. On an average, jobs today are relatively less strenuous and less exhausting than they were some 40 years ago, but they have become perhaps more monotonous. These limitations reduce the significance of national product comparisons in the long run.

vi.Double Counting

     There is a possibility that some output may be counted twice. Thereby the measure of national product is        exaggerated. We must exclude the value of inputs if they have already been accounted for. Because the distinction between intermediate products and final products is vital in connection with the welfare significance of the national product measure. 


Posted Date: 9/12/2012 5:09:34 AM | Location : United States







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