The measurement of national income in any country is beset with many problems.
Problems are more acute in LDCs like India than advanced countries.
These problems are grouped into two: (i) conceptual or theoretical problem, and (ii) practical or statistical problem. However, as there is no escape route to avoid all the conceptual problems, we set aside these problems and consider only practical problems.
Some of the difficulties in measuring national income are as follows:
1. Lack of Reliable Data:
The reliability of data relating to national income estimation is often questioned (in India). National income estimate is made on the basis of primary data relating to incomes and values of goods produced. It is observed that many producers —particularly petty producers and traders— do not maintain any accounts of their incomes and even goods produced. Obviously, the primary data collected from this source is supposed to be vague. The reason behind this is illiteracy. Further, many people are reluctant to cooperate with the data collectors. Above all, data collectors often ‘fabricate’ data even without approaching the door of producing sectors or economic units. If this information is considered to be the basis of judgement, then the judgement will suffer from inaccuracy.
2. Existence of Non-Monetised Sector:
The soundness of national income estimates is affected badly if there exists a large non- monetised sector. This creates valuation problem. In an LDC, there exists an unorganised barter economy where money is not used for transaction purposes.
In each transaction, the problem of valuation of goods transacted crops up. Further, poor farmers of these countries retain large chunks of their output for self-consumption. Naturally, a large amount of output does not come to the market and is not subject to the valuation process. By imputing values to these goods, the problem of valuation can be partially removed. But considering the vastness of a country like India, such imputation is an uphill task. Even if imputation is possible, its reliability is also doubted.
Various non-market and domestic activities like child care by mothers and sisters are not taken into account while estimating national income of a country, for the said reasons. In fact, these activities add to production when we engage the services of a lady ayah who takes care of a child against some monetary payments. But these are not considered in view of the difficulties of estimating such income.
Further, in national income estimation, looses or social ills do not get reflected. C02 emission from automobile car pollutes the environment resulting in fewer ‘outputs’ for future generations. Such is not adjusted usually, although attempts are often made to measure ‘green GNP’.
3. Difficulties in the Classification of Working Population:
In India, working population is not clearly defined. For instance, agriculturists in India are not engaged in agriculture round the year. Obviously, in offseason they engage themselves in alternative occupations. In such a case, it is very difficult to identify their incomes to a particular occupation.
4. Illegal Income:
Finally, illegal incomes are not reported in national income accounts. In other words, illegal forms of economic activity and illegal activities that are not reported to the authority for the purpose of paying taxes are left out from national income accounts.
This is what is called underground or black economy. Gambling and drug trade are illegal forms of economic activities while people in power receive bribes but these people either underreport or do not report the bribed incomes that are illegal. In India, incomes generated in India’s black economy are estimated to be around 40 p.c. of GDP. Such transactions underestimate the true value of national income of any country.