7/27/2019 Problems in Calculating National Income

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`SKS Smile Knowledge Services-9910524429, 9953776931From Knowledge To Success

Eco-National Income-1 Prepared By: - Sameer Wadhwa1

Problems in calculating National I ncome

The measurement of national income encounters many problems. The problem of

double-counting has already bee noted. Though there are some corrective

measures, it is difficult to eliminate double-counting altogether. And there are

many such problems and the following are some of them.

Black Money

In countries where level of illegal activities, illegal businesses and the level of

corruption are very high, the circulation of black money is so high, it has created a

parallel economy. It means unreported economy which is equivalent to the size ofofficially estimated size of the economy. GDP does not take into account the

parallel economy as the transactions of black money are not registered. In India,

black money is all-pervasive, affecting not only the economy but also the society at

large. The black economy as percentage of GDP is estimated to have grown from

about 3 percent in the mid-fifties to 40 per cent by 1995-96.

Non-Monetization

In most of the rural economy, considerable portion of transactions occurs

informally and they are called as non-monetized economy. The presence of such

non-monetary economy in developing countries keeps the GDP estimates at lower

level than the actual.

Growing Service Sector

In recent years, the service sector is growing faster than that of the agricultural and

industrial sectors. Many new services like business process outsourcing (BPO)

have come up. However, value addition in legal consultancy, health services,

financial and business services and the service sector as a whole is not based on

accurate reporting and hence underestimated in national income measures.

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`SKS Smile Knowledge Services-9910524429, 9953776931From Knowledge To Success

Eco-National Income-1 Prepared By: - Sameer Wadhwa2

Household Services

The national income analysis ignores domestic work, and housekeeping and social

services. Most of such valuable work rendered by our women at home does not

enter our national accounting.

Social Services

It ignores volunteer and unpaid social services. For example, the wonderful

services of Mother Teresa is invaluable for millions of poor, destitute, orphans andthe diseased but at the same time not included in our GDP.

Environmental Cost

National income estimation does not distinguish between environmental-friendly

and environmental-hazardous industries. The cost of polluting industries is not

included in the estimate.