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Components of National Income, Difficulties in Measurement of National Income

EPOS-Eco

Published on: December 22, 2020

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Components of National Income

There are two famous methods of the approach to national income.

The components of national income are as follows:

(1) Components of national income under product method

If we measure national income by product method, the components of national income would be agricultural products, industrial products, total product of tertiary sector and net incomes from foreign.

(2) Components national income under expenditure method

Personal consumption expenditure

It includes the consumption expenditure made for both durable and non-durable goods produced in the country within the year.

Expenditure on services is also taken into consideration under this method.

Gross domestic private investment

It includes private investment in capital goods or producer goods such as building machinery, plant, equipment etc.

Government expenditure on various goods and services

Government expenditure includes spending on defense and other services.

Net foreign investment

It refers the difference between export earnings and import expenses.

Every country exports to or imports from foreign countries.

The imports goods are not produced in the country and hence cannot be included in national income, but the exported goods are manufactured within the country.

Thus, net foreign investment, whether positive or negative, is included in Gross National Expenditure (GNE).

(3) Components of national income under income method

The major components of national income are gross national income (GNP), net national product (NNP) and national income (NI).

These are also components of national income.

Wages and salaries

It includes the wages and salaries received by the employees during the year.

It also includes certain supplements.

Income of non-company business

It includes the income earned by individual proprietors, partners and self-employed persons.

Rental incomes of persons

It comprises rental incomes earned by individuals on agricultural and non-agricultural property.

Corporate profits

It comprises corporate profits earned by business corporations before the payments of corporate profits taxes or payment of the individuals to the shareholders.

Thus, corporate profit is used in calculating the GNP is equal to the sum of corporate profits taxes plus dividend paid to the shareholders plus undistributed profits.

Income from net interest

It includes net interest earned by individuals other than the organs of the government.

Net foreign income

It is the difference between export earnings and import expenses of goods and services.

It may either positive or negative, it is calculated in GNP.

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Difficulties in Measurement of National Income

There are some theoretical and practical difficulties in the way of the exact measurement of national income.

A clear understanding of these difficulties, therefore, becomes necessary to understand the concept of national income relation to any particular country.

Lack of statistical data

We cannot easily take statistical data of national income.

The available data are inadequate and unreliable.

For example, statistics of agriculture in developing countries is not complete.

We have no reliable estimates of production cost in developing countries.

These are not statistical value of small scale industry and middle scale industries production.

Existence of non-monetized sectors

All agricultural outputs do not reach the market.

Either agriculture products are consumed at home or exchanged for other goods in the village.

This presents several in the calculation of national income.

Illiteracy and ignorance

Most of the small producers in the underdeveloped countries are illiterate and ignorant.

These producers are not able to keep any account of their productive activities.

So, they cannot give the information about the value of their output.

Lack of occupational specialization

There are little occupational specializations people in underdeveloped country.

Many people do more than one activity to earn money.

It becomes difficult to collect information about their incomes.

A farmer engaged in agriculture industries in season and engaged in other sectors during off season.

Frequent changes in price level

National income depends on monetary price of the production.

But, the problem of changing price level is one of the major problems of national income accounting.

Problem of double and multi-counting

It is very difficult in national income calculation only one time because the goods maybe counted as intermediate goods and final goods.

For example, oranges produced by farmers can be consumed as final goods if they consume it; and oranges become intermediate goods if farmers sell oranges to the wholesaler.

Sometimes it is difficult to find the exact quantity of consumption and sales.

Illegal incomes

Economic activities do not occur easily.

For example, incomes from gambling, prostitution, black marketing, drug dealing etc are illegal.

Illegal incomes are not included in national income.

So, due to the presence of illegal economic activities, national income underestimates the value of the output of an economy.

Value of money may not be suitable measure of national income

The value of money does not remain stable; so, it cannot give a correct account of national income.

The value of money may remain the same; but the quality of goods may change.

There could be certain goods and services which may not have any money value at all.

For example, services rendered in friendship or even in mercy, housewife’s work in the family etc.

Calculation of depreciation

The calculation of depreciation valuation is also another difficulty to the measurement of national income.

There are no standard rates of depreciation applicable to the various categories of fixed assets.

In underdeveloped countries, conceptual and statistical difficulties of national income calculations become more severe.

International transactions

Foreigners own a part of the output produced in the country and the people of the country may receive income payments from abroad.

How are these payments to be accounted for in the national income?

Including in the national income produced within the country can solve this problems plus any income earned by the nationals of that country in other countries by way of interest, banking changes etc. minus any payments of foreign countries by way of interest, bank changes etc.

Difficult in the Measurement of National Income in Contest of Developing Countries

Major difficulties in measurement of national income are given below:

1	A large portion of produce, especially in the agriculture sector, is not bought to the market for sale. It is either directly consumed by the producers or exchanged for other goods.
2	People are socially backward.
2	They are superstitious and do not disclose their incomes easily and correctly.
3	Most of producers do not keep accounts of their produce because of illiteracy.
4	Lack of occupational specialization, an individual is engaged in supplementary occupations too.
4	Due to this, the income from supplementary activities is not included in the estimation of national income.
5	Adequate statistical data are not available and if available, they are not reliable.
6	There is a lack of trained and efficient statistical staff.
7	Problems of calculating national income also arise due to regional disparities of language, customers etc.
8	Mostly, people are indifferent and non-cooperative to the acquirement regarding the national income estimates.
9	A large number of producers are petty producers; they do not have any accounts of their business. Therefore, it is difficult to include in national income.

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Importance of National Income

The following points indicate the great importance of accurate national income estimates in the economy of a country:

a.	Since the national income estimates represent of monetary measure of the volume of production in a country in a year, they give us an idea of the aggregate production in the country concerned.
b.	An increasing national income is a symptom of growing economic progress.
b.	A decreasing national income on the country is a symptom of economic deterioration in the country concerned.
c.	The national income estimates give an idea of the rate of national income growth in a country.
	The rate of national income growth also represents, it should be remembered, the rate of growth of the economy concerned.
	Hence, from this point of view the national income estimates are of great importance for the economy of a country.
d.	The economic welfare of a country, as we know is closely connected with the magnitude of its national income.
d.	An increase in the national income of a country, other things remaining the same, also implies an increase in the economic welfare of the community.
e.	The national income estimates throw light on the contributions of the various sectors of the economy to the Gross National Product of the country concerned.
e.	These estimates also reveal the comparative importance of the various sectors in the national economy.
f.	The national income estimates also should how the national income of a country is distributed among the various sections of the population.
f.	An increase in the share of labour (wages) out of the national income is a clear indication that the economic inequalities are lessening in the country concerned.
g.	The national income estimates also throw light on the volume of consumption, saving and investment in the economy.
g.	The level of consumption shows the level of economic welfare in society, while saving and investment determine the economic growth of a country.
h.	By comparing national income estimates of different countries, we can compare their standards of living and the levels of economic welfare achieved by them.
i.	It needs hardly be said that national income estimates are indispensable for the formulation of economic policy of government.
i.	No government can formulate a correct, realistic and well-balanced economic policy without having at its disposal correct and reliable estimates about the volume and distribution of national income in the country concerned.
j.	Economic planning is the order of the day.
	All countries, whether socialist or capitalist or mixed are increasingly resorting to planned economic development through five year plans.
	Now this formulation of economic plans is simply not possible without reliable estimates of national consumption, national saving and national investment.
	No economic plan can, indeed, be formulated without adequate national statistics.
	Further, the evaluation of the working of the economic plans is also not possible without reliable national income estimates.