Complications arising from expenditure taxes and subsidies – Problems in measuring national income

In calculating national income by the expenditure method, expenditures are initially given at market prices and which market prices are distorted by taxes and subsidies.

We are interested in values at factor cost; i.e. at the cost of paying the factors of production responsible for the output. There is the need to correct expenditures at market prices to expenditures at factor cost.

And as earlier seen, this is done by subtracting the value of taxes and adding the value of subsidies to expenditures at market prices.

Complications arising from international trade

Cameroonians for instance spend some of their income on foreign goods while foreigners equally buy Cameroon made goods.

In calculating national income by the expenditure method, it becomes necessary to deduct the value of goods and services imported since they have not been produced by Cameroon.

Similarly, we have to add the value of goods and services exported because they have been locally produced and for which income has been earned by factors of production in Cameroon.

Complications arising from international indebtedness

Another general problems faced in measuring national income is the complications arising from international idebtedness.

Payments of interest and dividends on loans and investments may be paid out of or into a country thus affecting the level of national income.

Property income from abroad (PIFA) comes to add to national income while property income paid abroad (PIPA) cones to reduce the value of national income.

In effect, the difference between the two which gives net property income abroad from (NPIA) has to be valued and adjusted so as to know what the real income of the nation is.

Complications arising from price changes

Constant price changes (inflation and deflation) lead to changes in the value of money and make it difficult) accurately calculate national income.

This is because adjustments have to be made for stack appreciation and stock depreciation in order to neutralise the effects of price changes on output.

Difficulties in estimating depreciation

If we are to know the real value of capital formation (Net investment), it becomes necessary to know the value of used up capital or depreciation.

Net Investment = Gross Investment – Depreciation.

Depreciation figures are notoriously difficult to measure with any accuracy and that 1s the crux of the problem There is no accurate figure for real depreciation. and thus it 1s largely the practice now to refer to Gross National Product rather than to national income

Estimating Public and Financial Services

It not usually easy estimating the value of public services such as defense, education, health, etc. because these services may not readily have a market price A way out has been to value the inputs including wages so as to get the output of these sectors.

In other words, they are valued at RESOURCE COST – that is the cost of the resources used to produce these activities is taken as a measure of their value. We have already mentioned the problem relating to financial services and how it can be taken care of.