state the constituents of national income in three phases viz production , income and expenditure. how national income is measured in India? Explain the problems and difficulties encountered in computation of National income in India.
Answers
The problems are that the domestic work done by housewives, without remuneration, infrastructure spending by the Government, labour rendered in unorganised activities, menial remunerated labour etc are not factored in while computing National Income. Furthermore, non-monetary transactions, problem of double counting, the parallel economy, petty production, public services, transfer payments like pension and unemployment allowance, capital gains/losses, price changes, wages/salaries paid in kind etc hinder the estimation of National Income accurately.
National income is an uncertain term which is used interchangeably with national dividend, national output and national expenditure. On this basis, national income has been defined in a number of ways. In common parlance, national income means the total value of goods and services produced annually in a country.
1. The Product Method:
In this method, the value of all goods and services produced in different industries during the year is added up. This is also known as the value added method to GDP or GDP at factor cost by industry of origin. The following items are included in India in this: agriculture and allied services; mining; manufacturing, construction, electricity, gas and water supply; transport, communication and trade; banking and insurance, real estates and ownership of dwellings and business services; and public administration and defense and other services (or government services). In other words, it is the sum of gross value added.
2. The Income Method:
The people of a country who produce GDP during a year receive incomes from their work. Thus GDP by income method is the sum of all factor incomes: Wages and Salaries (compensation of employees) + Rent + Interest + Profit.
3. Expenditure Method:
This method focuses on goods and services produced within the country during one year.
GDP by expenditure method includes:
(1) Consumer expenditure on services and durable and non-durable goods (C),
(2) Investment in fixed capital such as residential and non-residential building, machinery, and inventories (I),
(3) Government expenditure on final goods and services (G),
(4) Export of goods and services produced by the people of country (X),
(5) Less imports (M). That part of consumption, investment and government expenditure which is spent on imports is subtracted from GDP. Similarly, any imported component, such as raw materials, which is used in the manufacture of export goods, is also excluded.
There are many difficulties in measuring national income of a country accurately. The difficulties involved in national income accounting are both conceptual and statical in nature. Some of these difficulties involved in the measurement of national income are discussed below:
Non Monetary Transactions
Problem of Double Counting
The Underground Economy
The underground economy consists of illegal and uncleared transactions where the goods and services are themselves illegal such as drugs, gambling, smuggling, and prostitution. Since, these incomes are not included in the national income, the national income seems to be less than the actual amount as they are not included in the accounting.
Petty Production
There are large numbers of petty producers and it is difficult to include their production in national income because they do not maintain any account.
Public Services
Another problem is whether the public services like general administration, police, army services, should be included in national income or not. It is very difficult to evaluate such services.
Transfer Payments
Individual get pension, unemployment allowance and interest on public loans, but these payments creates difficulty in the measurement of national income. These earnings are a part of individual income and they are also a part of government expenditures.
Capital Gains or Loss
When the market prices of capital assets change the owners make capital gains or loss such gains or losses are not included in national income.
Price Changes
Wages and Salaries paid in Kind
Illiteracy and Ignorance
The main problem is whether to include the income generated within the country or even generated abroad in national income and which method should be used in the measurement of national income.
Second hand transactions;Environment damages;Calculation of depreciation;Inadequate and unreliable statistics; etc