Explain the concept of National income and explain the practical difficulties involved in the measurement of National income.

Answer:

Concept: National income is the money value of all final goods and services produced in a country during a financial year, plus net income from abroad. Prof. Alfred Marshall defined it as the labour and capital of a country acting on its natural resources produce annually a certain net aggregate of commodities, material and immaterial, including services of all kinds; this is the net annual income or revenue of the country, or the national dividend. National income is a flow concept, measured in money terms for a year, and includes only final goods and services to avoid double counting.

Practical difficulties in measuring national income:

1. Problem of double counting: It is difficult to separate final goods from intermediate goods, so the value of some goods may be counted more than once.
2. Existence of non-monetised sector: In India a large part of output in rural areas is produced for self-consumption or bartered, so it is not recorded in money terms.
3. Inadequate and unreliable statistical data: Small producers, farmers and the unorganised sector do not keep proper accounts.
4. Illiteracy and ignorance: Many producers do not know or do not disclose their correct output and income.
5. Unpaid services: Services of housewives and other unpaid domestic work are not included, though they are productive.
6. Valuation of depreciation: It is difficult to estimate the correct depreciation of capital goods.
7. Changes in price level: Inflation raises money national income without any rise in real output; adjusting for prices is difficult.
8. Illegal income (parallel economy): Income from smuggling, black-marketing, gambling, etc. is not reported.
9. Transfer payments and capital gains: Deciding what to exclude, such as pensions and capital gains, creates confusion.
10. Income of foreign firms: Treatment of profits earned by multinational companies and income of residents abroad is complicated.

Conclusion: Because of these difficulties, national income estimates are approximate, yet they are essential for planning, policy making and comparing economic welfare.