Calculating the National Income of all Countries: 10 Difficulties

The following points highlight the ten conceptual and statistical difficulties faced in calculating national income of all countries according to Kuznets. Some of the difficulties are: 1. Difficulty of Defining the Nation 2. Non-marketed Services 3. Inapplicability of any One Method 4. Which Stage to Choose 5. Paucity of Statistics and Others.

Difficulty # 1. Difficulty of Defining the Nation:

The definition of ‘nation’ is used in the studies of national income. National income doesn’t only include income produced within the country but also income earned in other countries by way of shipping charges, interest, insurance, and banking, minus any payments made to foreign countries.

Therefore, the definition of nation goes beyond the political boundaries.

Difficulty # 2. Non-Marketed Services:

Which kinds of goods and services should be included in national income? Commodities and services having money value are included in the national income but there are goods and services which may have no corresponding flow of money payments. Services performed for love, kindness and mercy and not for money have an economic value but have no money value.

The difficulty is whether these services should be included in national income and how to measure their money value. For example, a paid maid servant’s services are included in the national income but later when she marries the master, she is not paid any more, though she continues to perform the services. There is, thus, a reduction in the national income.

Difficulty # 3. Inapplicability of any One Method:

Another difficulty is regarding the method to be used in the estimation of national income because of the costs of collecting statistics. It is, however, preferred to use the three methods simultaneously depending upon the availability of statistics. This save the data collection costs.

Difficulty # 4. Which Stage to Choose:

Regarding the stage of economic activity at which national income be calculated, it is agreed that any stage-production, consumption and distribution – may be adopted depending upon the function the national income estimate is expected to discharge.

If the aim is to show the economic progress and power of the economy, then the production stage would be more suitable; if the aim is to measure the welfare of individuals, then consumption stage would be more useful.

Difficulty # 5. Paucity of Statistics:

Another important difficulty is the non-availability of statistical material. This difficulty is not peculiar to under developed countries, but even in advanced countries reliable and sufficient statistics are lacking. According to the National Income Committee of India, the available statistics, specially for agriculture and small-scale industries, are extremely unreliable and incomplete.

Difficulty # 6. How to Avoid Double Counting:

Another difficulty is of double counting usually associated with the inventory method.

Double counting implies the possibility of a commodity like raw material or labour being included in national income more than once e.g. a farmer sells maize worth rupees two hundred to a mill-owner, the mill-owner further sells the maize flour to a wholesale dealer, who further sells it to a retailer and who in turn sells it to consumer; if we calculate it at every stage, its money value will come to eight hundred rupees but actually the increase in national income has been to the extent of two hundred rupees only.

The best way to avoid this difficulty is to calculate only the value of all goods and services that enter into final consumption.

Difficulty # 7. Identification of Transfer Payments:

Another difficulty in the calculation of national income is that of transfer payments associated with the income method of national income calculation. A person receives income of say Rs. 1,000 per year; part of it may have been received as interest payment on government loans. This part is in the nature of transfer payments and may be taken either as the income of the individual or of the government.

If it figures under both the categories, aggregate national income will be unduly inflated. Therefore, the transfer of money from one person or group to another person or group should be avoided. The best way to solve this difficulty is to consider only the disposable income of individuals or groups i.e. personal incomes minus all transfer payments.

Difficulty # 8. Self-consumed Production:

Another difficulty mostly peculiar to backward countries is that a substantial part of the output is not exchanged for money in the market, it being either consumed directly by producers or bartered for other goods and services in the unorganised sector. The existence of a vast unorganised and non-monetized sector makes calculation of national income very difficult.

Difficulty # 9. Multiple Occupations:

As a result of little specialisation of functions a precise calculation of income by industrial origin or by distributive shares is rendered almost impossible. The production in agricultural, and industrial, as a matter of fact in all sectors is highly scattered and unorganised rendering the calculation of national income very difficult.

Difficulty # 10. Incorrect Statistics:

Other difficulties pertain to the social backwardness of the people; they are superstitious and secretive. People do not disclose their incomes easily and correctly; they are illiterate and do not keep proper accounts or if at all they keep any accounts, these are highly unreliable.

All these difficulties exist in India and thus the calculation of national income has been rendered difficult in the past. The National Income Committee listed all these. Efforts are, however, being made to solve these difficulties so as to find out correct estimates of national income and per capita income in India.