There are different methods used in computing national income. Whatever method is used in computing national income, some difficulties are found to arise. Thought measuring national income in reality is not impossible, there are surely some difficulties. While computing national income, the countries have to take into considerations things like data available in the country, available resources and factors, distribution of national income , economic activities, behavior and customs of the people ,economic structure, etc therefore, the difficulties that arise while computing the national income can be explained as follows:
1. Problems of double counting
The biggest problem in computing national income is the double counting of goods and services. There are some goods which are taken as final goods at one time and as intermediates goods some other time. For example, sugarcane for a farmer is the final goods. But for sugar mill this will be intermediate goods or row material for the production of sugar. For the sugar mill sugar is the final goods but again this will be taken as intermediate goods in the production of sweets and tea. So, when the same commodity is used as final goods intermediate goods at different times, there is a very high possibility of double counting.
2. Transfer payments
While computing national income there arises a problem of identifying the transfer payments. Transfer payments means the various facilities and subsidies provided by the government to the people of the country. There seems to be a very big problem in whether to include or not to include the facilities provided by the government such as unemployment allowances, old age allowances, widow allowances, pension, interest on public loans, etc. in the national income. These things on one hand are the personal incomes and on the other hand are the government expenditures. If this is included in both, then national income will be more then real national income. Therefore, transfer payments between an individual or institution and government will not be suitable to be included in the national income.
3. Changes in the price level
In any country the price level of various goods and services will be changing from time to time. Due to change in the price level of the goods and services, the value of the currency of the country will also change. If price level increase, then in the situation of constant production or decrease in production may still indicate increase in national income. In country to this, if the price level decrease, the national income seems to decrease despite the increase in the national production. To solve this problem, the current period’s value is expressed in terms of the value of the base year. But still, since real data are not possible to be taken, this will be faulty.
4. Non – monetized sector
While defining national income, pigou gave the concept of taking money as the base of computing national income. But, if national income is computed according to his concept, the real fact of the national Income of the developing countries won’t be reflected. In developing countries such as Nepal, there are still many sectors which are based on barter system. So, in such countries, if national income is measured on the basis of money, then the national income will be less than real data. Similarly, there are many goods and services which can’t be expressed in terms of money values. For example, services provided by police and army for peace and security, the services provided by roads, schools, collages, etc. can be taken. It is difficult to express these services and contributions in terms of money values. As a result, real data won’t be available and difficulties will arise in computation of national income.
5. Difficult to choose the method of national income
There are various methods for the measurement of national income. It is very difficult to choose the method for the computing national income. The most commonly used method in computing national income are production method, income method and expenditure method. the selection of these methods depend upon the availability of the data. So, a suitable method will be chosen according to the availability of the data. But in countries like Nepal, none of these method will be able to given the correct data of national income.
6. Income from illegal activities
Different people can earn from various illegal economic activities. The incomes earned from black – market, smuggling, bribery, gambling, etc. come under income from illegal activities. The incomes earned from such illegal activities are not shown by the people who are indulged in such activities. But these sorts of incomes also have important shares in the national income. Due to exclusion of these incomes, the real data of national income won’t be available.
1. Problems of double counting
The biggest problem in computing national income is the double counting of goods and services. There are some goods which are taken as final goods at one time and as intermediates goods some other time. For example, sugarcane for a farmer is the final goods. But for sugar mill this will be intermediate goods or row material for the production of sugar. For the sugar mill sugar is the final goods but again this will be taken as intermediate goods in the production of sweets and tea. So, when the same commodity is used as final goods intermediate goods at different times, there is a very high possibility of double counting.
2. Transfer payments
While computing national income there arises a problem of identifying the transfer payments. Transfer payments means the various facilities and subsidies provided by the government to the people of the country. There seems to be a very big problem in whether to include or not to include the facilities provided by the government such as unemployment allowances, old age allowances, widow allowances, pension, interest on public loans, etc. in the national income. These things on one hand are the personal incomes and on the other hand are the government expenditures. If this is included in both, then national income will be more then real national income. Therefore, transfer payments between an individual or institution and government will not be suitable to be included in the national income.
3. Changes in the price level
In any country the price level of various goods and services will be changing from time to time. Due to change in the price level of the goods and services, the value of the currency of the country will also change. If price level increase, then in the situation of constant production or decrease in production may still indicate increase in national income. In country to this, if the price level decrease, the national income seems to decrease despite the increase in the national production. To solve this problem, the current period’s value is expressed in terms of the value of the base year. But still, since real data are not possible to be taken, this will be faulty.
4. Non – monetized sector
While defining national income, pigou gave the concept of taking money as the base of computing national income. But, if national income is computed according to his concept, the real fact of the national Income of the developing countries won’t be reflected. In developing countries such as Nepal, there are still many sectors which are based on barter system. So, in such countries, if national income is measured on the basis of money, then the national income will be less than real data. Similarly, there are many goods and services which can’t be expressed in terms of money values. For example, services provided by police and army for peace and security, the services provided by roads, schools, collages, etc. can be taken. It is difficult to express these services and contributions in terms of money values. As a result, real data won’t be available and difficulties will arise in computation of national income.
5. Difficult to choose the method of national income
There are various methods for the measurement of national income. It is very difficult to choose the method for the computing national income. The most commonly used method in computing national income are production method, income method and expenditure method. the selection of these methods depend upon the availability of the data. So, a suitable method will be chosen according to the availability of the data. But in countries like Nepal, none of these method will be able to given the correct data of national income.
6. Income from illegal activities
Different people can earn from various illegal economic activities. The incomes earned from black – market, smuggling, bribery, gambling, etc. come under income from illegal activities. The incomes earned from such illegal activities are not shown by the people who are indulged in such activities. But these sorts of incomes also have important shares in the national income. Due to exclusion of these incomes, the real data of national income won’t be available.
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