What are the Difficulties in Measurement of National Income

Mon, 02/11/2013 - 21:25 -- Umar Farooq

Difficulties in Measurement of National Income

There are some conceptual problems or difficulties that crop up when we start measuring the national income of a country, Following are some of the problems and difficulties in measuring national income

  1. Problems of Definition of National Income
  2. Calculation of Depreciation
  3. Value of Inventories
  4. The Treatment of Government
  5. Income from Foreign Firms

Problems of Definition of National Income

What should we include in the National Income? Ideally we should include all goods and services produced in the Course of the year but there are some parts of total which defy measurement. Generally speaking, only those goods and services are included which enter into exchange i.e. which are bought and sold for money. But allowance is made for some non-exchangeable goods and services e.g. the National Product inhale; the estimated value of the food consumed on farms.

Calculation of Depreciation

Another problem in measuring national income comes from calculation of depreciation capital consumption presents another formidable difficulty, If these were no changes in the form or quality of capital, there would not be much of a problem, but in fact both the amount and the consumption of our capital is changing all the time. There are not accepted standard rates of depreciation applicable to the various categories of machines.

Value of Inventories

It is not easy to calculate the value of inventories i.e. raw materials, semi-finished goods in the custody of the producers. Obviously, any miscalculation on this score will vitiate the estimates of the output of productive enterprises.

The Treatment of Government

Another difficulty arises with regard to the treatment of the Government in national income accounts. On this point, the general viewpoint is that as regards the administrative functions of the government like justice, administration and defence, they should be treated as giving rise to final consumption of such services by the community as a whole, so that the contribution of general government activities will be equal to the amount of wages and salaries paid by the government. As regards capital formation by the government, this is treated at par with capital formation by any other enterprise.

Income from Foreign Firms

Still another major problem arises with regard to the treatment of income arising out of activities of the foreign firms. In a country should their income form a part of the national income of the country owning the firm? On this point, the I.M.F viewpoint is that production and income arising from an enterprise should be ascribed to the territory in which production takes place. However, profits earned by foreign branches and subsidiaries are credited to the parent concern