Difficulties in Measuring National Income

National Income is a measure of the money value of goods and services becoming available to a nation from economic activities. It can also be defined as the total money value of all final goods and services produced by the nationals of a country during some specific period of time – usually a year – and to the total of all incomes earned over the same period of time by the nationals.

To know how the economy is doing, a country usually measures the amount of national income in that particular country. The different methods of measuring national income include the income method, expenditure method, and output method.

These methods of measuring national income face numerous challenges that may lead to inaccurate figures. National Income Accounting is beset with several difficulties. These are:

1) Making decisions on what goods and services to include

One of the challenges involved in measuring national income is that it is sometimes difficult to determine which goods and services to include in the calculation of national income. 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 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. The solution is that all unpaid services are excluded.

2) Danger of Double Counting 

Another difficulty or challenge of measuring national income is the possibility of double counting. The problem of double counting arises because of the interrelationships 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.

3) Inadequate Information

Inadequate information is also another challenge of measuring national income. The sources from which information is obtained are not designed specifically to enable national income to be calculated. This challenge may lead to omission of important information or data when measuring national income.

4) Difficulties in Measuring Goods That are Not Sold in the Market

It is easy to value the goods that are sold in market but those which are not sold in market have no price attached to them. There are some important goods that contribute towards national economic growth, but they do not have no price attached to them since they are not exchanged in the market.

5) Exclusion of Illegal Activities

When measuring national income, revenues generated through illegal activities are not included. Activities that are considered illegal e.g. making illicit brews are not included when measuring national output although they involve exchange of money. This means that there could be more income in the economy than the figures that have been measured.

6) Determining the Actual Value of Goods

Determining the actual value of goods is a major challenge when measuring national incomes. The value to put on goods that have been kept as stock becomes difficult. One has to decide whether to use the cost of goods or the price to be paid for them. Price is different from cost of similar goods being produced due to a rise or fall in the production costs.

7) Price Fluctuations

Prices of some goods and services keep fluctuating in markets, making it difficult to determine the value of each good and service to be included when measuring national income.

8) Difficult to Measure the Cost of Wear and Tear

It is difficult to measure the cost of wear and tear or depreciation of equipment in order to arrive at net national income. This challenge may lead to inaccurate figures when measuring national income.

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