Explain the practical difficulties involved in the measurement of national income.

Answer: Problems of double counting, non-monetary transactions, inadequate data, illegal income, valuation of depreciation and changing prices, transfer payments, etc.

1. Problem of double counting: It is difficult to separate final goods from intermediate goods. If the value of raw materials is counted again in the final product, national income is overstated.
2. Existence of non-monetised sector: In India a large part of output in rural areas is exchanged through barter or consumed by producers themselves, and is not recorded.
3. Inadequate and unreliable statistics: Many small producers, farmers and the unorganised sector do not keep accounts, so correct data on production and income are not available.
4. Illegal income: Income from smuggling, black marketing, gambling etc. is not reported, and black money is not included.
5. Problem of depreciation: Different methods and rates of calculating depreciation of capital assets make it difficult to estimate net national income accurately.
6. Changing price level: National income is measured in money; price changes distort it, so it must be converted to real terms using index numbers, which is itself difficult.
7. Transfer payments: Pensions, unemployment allowance, gifts etc. must be excluded, but it is difficult to identify them separately from earned income.
8. Valuation of services of housewives and self-consumed services: Services of housewives and of owner-occupied houses are difficult to value.
9. Capital gains and losses from sale of assets and income from abroad also create difficulties in estimation.
10. Lack of trained staff and illiteracy: People cannot give correct information about their income and output.

Because of these difficulties, national income estimates in a developing country like India are only approximate.