General Problems in measuring national income

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What are the general problems in measuring national income? We are sure many are asking this question. And today, we’ve decided to through some light on it.

We lastly wrote a short or let’s say summary note on National Income statistics where we gave the different methods for calculating national income.

Today, we will be talking of the problems encountered when measuring national income.

Some of these problems are only specific to particular methods while others are more or less general.

We globally examine all the problems involded in the measurement of national income which you can find below.

Some general Problems in measuring national income

Double (Multiple) Counting

This involves counting the value of output more than once. This problem would arise in the expenditure method if intermediary expenditures and transferred payments are computed alongside expenditure on final output. We only take expenditure on final outputs.

In order to avoid double-counting in the income method, we have to exclude incomes from intermediary expenditures as well as incomes from transferred payments.

The problem of double counting could arise in the output method if the value of intermediary output is computed alongside the final output. We either take the values added at each stage of production or the Values of the final output as earlier explained.

Double counting may also arise from the sale of second-hand goods. For instance, if a car is produced and sold in a given year, the value of this transaction is included in the national income for that year.

If this same car is subsequently resold to someone else. the full value of this transaction need not be included in national income statistics so as to avoid double counting. The dealer’s profit is a reward for the current service and therefore deserves to be included in the income statistics for the year.

Problems in measuring national income: The Underground Economy (black economy)

The Underground Economy (black economy): In most developing countries. data on national income statistics may not be readily available. Economic agents may deliberately underestimate the value of their output So as to avoid taxes. We then talk of the existence of a black economy (underground economy).

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The underground economy does not only involve small entrepreneurs who under-report their income but also a very nice class of people — doctors, lawyers. and even accountants. There is a whole branch of accounting dedicated to the underground economy called creative accounting.

It often involves keeping three separate sets of books — one for your creditors, showing an inflated profit, one for the government taxation agents showing reduced profits, and one for the businessman showing how he is really doing.

Consider this situation to illustrate the operation of the black economy. A medical doctor operates your wife clandestinely in a government hospital and takes payment in cash in order to avoid the tax that would have been paid if the operation took place in a private clinic. The black economy has grown tremendously in many economies in the past years, and so let us consider the following factors that influence its size:

• The marginal rate of tax (MRT): The higher the MRT. the more people will try to evade lay payment, thereby increasing the size of the black economy.
• The range of activities declared as illegal: The more activities are declared illegal, the larger the black economy and vice-versa.
• The level of development of an economy: The less developed an economy, the bigger the size of the “black economy” and the more the national income is underestimated. This is because of subsistence activities. dominate in such economies that are monetized in developed economies.
• The penalties imposed: Where mild penalties are imposed on undeclared activities, the size of the hidden economy increases. unlike where such penalties are quite severe.
• Chances of being discovered: The “black economy” increases where it is difficult to discover such activities by public authorities unlike where they can be easily discovered.

Non-monetary transactions or non-marketed economic activities

National income statistics only attempt to measure those activities where money changes hands.

This excludes economically beneficial activities like those of housewives. Ifhouscholds suddenly had alt their cooking and laundry done by hotels. the value of national income would increase although there would be no “real” difference in the services the economy is enjoying.

This problem of non-monetary transactions or the non-monetised economy is even more serious in developing countries with the prevalence of subsistence agriculture.

Also, this explains why some of these developing countries like Kenya add 25% to their national income to allow for the non-monetary sector.

Coverage

There is often disagreement on what items of expenditure do and do not form a part of national income.

There is an imputed value for the output of owner-occupied dwellings whereas there is non for other consumer durables like a TV set, dishwasher, car. etc. Even a toothbrush, pots and pans render services over their life.

The idea behind including a notional rent for owner-occupied houses is to have such property in line with property owned for letting and prevents national income from falling a people become owner-occupiers.