Difficulties in Measurement of National Income

Estimating national income is quite a complicated task. It is beset with difficulties of various kinds. These in Measurement of National Income can be broadly classified into two categories: (a) conceptual difficulties, and (b) practical difficulties.

Conceptual Difficulties:

Some of the important conceptual difficulties are:

1) Inclusion of services:

There is a basic problem of what should be included in the output and, therefore, national income. Others even say that services should be excluded from national income. In other countries including Nepal, services are included in national income.

2) Identifying Intermediate goods:

As we know, national income comprises final goods and services only; intermediate goods are excluded in national income. It is difficult to decide what part of the expenditure on transportation is intermediate cost and how much of this expenditure is of the nature of final expenditure.

3) Identifying Factor Incomes:

There is also the problem of separating factor incomes from non-factor incomes. National income comprises only factor incomes, i.e. incomes paid in exchange for factor services. Non-factor incomes, i.e. payments received which look like factor income but are not actually factor payment, are not included in national income.

4) Services of Housewives and other Similar Services:

National income largely includes those goods and services for which payment in money form is made. No payment is made for these services and, therefore they are not included in national income. The national income of underdeveloped countries is underestimated because these unpaid services are relatively more important in these countries.

5) Imputing unpaid Services:

There are some goods and services performed in the market or otherwise without involving any payment. However, there is no record of such free services; there is no standard method of imputing the value of these services.

6) The income of foreign Companies:

It is a matter of controversy, whether the income of foreign firms should be included in national income or not. It is to be known that the income which the foreign firms retain in the country should be included in national income, and the income which is repatriated abroad should not be included.

7) Valuation of Inventory Changes:

Inventory valuation is a very difficult and cumbersome job. Its main problem is how to take the valuation of the stock of goods. However, the main thing is that valuation is done at the current prices.

8) Estimation of Depreciation: Estimation of depreciation is also a very different task. The usual practice on the part of the firms is to base their depreciation provisions on the original cost of their assets.

Practical Difficulties:

It can be related to partly difficulties associated with the underdeveloped stage of the country and parts of statistical nature.
1) Lack of Occupational Specialization:

For national income calculation, it is necessary that producers should be classified into various specific occupations. A substantial amount of working population undertakes more than one activity during a year. This makes the estimation of national income difficult.

2) Non-Monetized Sector:

The large, unorganized non-monetized sector of the developing economy like Nepal serves as the biggest bogey for national income calculation. A very large part of production does not come to the market for sale. Therefore, estimates of national income have the stamp of guess-work and arbitrary imputations.

3) Inadequate Information:

Regarding income and output, another difficulty that arises particularly in underdeveloped countries is that a very large number of producers in Nepal. Most of the small producers do not keep account of their production and income. Under these circumstances, the estimates of output and income are simply guess-work.

4) Unreported Illegal Income:

Sometimes people distort facts and provide false information about their income to evade income-tax and wealth tax. Therefore, National income estimates to that extent have an element of underestimation.

5) Non-Availability of Reliable Statistical Data:

The most difficult in the estimation of national income in a developing country like Nepal is the non-availability of reliable data. There are a number of gaps here, which are:

a. There is a dearth of agencies and statistical organizations collecting national income data.
b.  A large number of enumerators entrusted with the task of collecting data at the village level are semi-illiterate and untrained in the collection of data.
c. There is also a major gap of data in respect of agricultural by-products, like fruits, vegetables, timber, and firewood, price data on several products like livestock, poultry products.