Importance and Difficulties of Measuring National Income

Importance of National Income:

1.     Increase in the national income causes an increase in the material well-being of the country.

2.     It gives an idea to understand the living standard of the people.

3.     It provides the data which government and external agencies can use in different ways.

4.     Policy makers use GDP/GNP to monitor short-terms fluctuations in economic activities and observe long-run growth trends.

5.     It helps in assessing the pace of economic development.

6.    

It gives an regular estimate of an economy's gross output.

7.     It is useful for diagnosing economic ills of a country and suggesting remedies.

8.     It enables to assess intra-sector growth of an economy.

Difficulties in the Measurement of National Income:

a. Statistical Difficulties

i. Unrealistic and Inadequate Statistics

It is difficult to obtain data due to the illiteracy in developing and underdeveloped countries. No proper accounts are maintained for production and expenditure. Beside this, producers also provide fabricate data in order to evade from tax.

ii. Existence of Barter System

Even in the era, barter system continues to exist in the backward communities. No transcations are carried out in monetary terms in barter economy. Under this circumstances, a correct estimation of NI is impossible.

iii. Underground Economy

It includes illegal activities like gambling, smuggling, drugs, etc. These activities are not reported to the authority for the tax purpose and are excluded from NI account.

iv. Self-Consumed Production

Economies in developing countries are involved in producing goods and services for self-consumption rather for commercial purpose. Some parts of the produced goods are either consumed by the producer themselves or bartered for some other goods with consumers or other entities in the market which makes it difficult to calculate NI.

v. Lack of Occupational Classification

People under developed countries engage themselves in one or more occupations to earn their livelihood. There is no clear cut classification of occupations and it is very difficult to identify the incomes of the individuals from specific job or other occupational undertaking.

b. Conceptual Difficulties                           

i. Problem of Definition

The major problem arises when defining the composition of NI. Ideally NI includes all the goods and services produced within the certain time period but there are times when it is difficult to decide which goods to include and which goods to exclude.

ii. Price Changes

Change in price is the greatest challenge in computing national income. The continuous change in the raw material, production process and finished goods make it difficult to get determined the actual cost of the good and services when they arrive at the market.

iii. Double Counting

It is one of the issues arise when determining national income. The problem of inaccuracy is seen when the value of NI is inflated due to the double counting so only the value of final goods must be taken into considerations.

iv. Income from foreign investors

The problem arises especially with countries where MNC reside. Although MNC are doing well in the host country, a part of their total income goes to the mother company located in a foreign land So the actual NI of a host country for the current year cannot be accurate determined.

v. Environmental Damage

It is caused by the depletion of natural resources, pollution and the reduction in the mineral resources. NI accounting neither prepare the account of natural resources depletion nor measures the impact of environmental damage in human healthy condition.