National income is the money value of all the final goods and services produced by a country during a period of one year. National income consists of a collection of different types of goods and services of different types. Since these goods are measured in different physical units it is not possible to add them together. Thus we cannot state national income is so many millions of metres of cloth, so many million litres of milk, etc. Therefore, there is not way except to reduce them to a common measure. This common measure is money. The value of all goods and services produced is measured in money.
Methods of Measuring National Income
Production and sale of goods and services and the generation of income which accompanies these activities are processes that go on continuously. Production gives rise to income, income gives rise to demand for goods and services; and demand in turn gives rises to expenditure; again expenditure leads to further production. The circular flow of production, income and expenditure represents three related phases, namely, production, distribution and disposition. These three phases enable us to look at national income in three ways as a flow of goods and services, as a flow of incomes of as a flow of expenditure on goods and services.
Methodology of Estimation of National Income in India
India has been following the Methodology suggested by United Nations. This methodology appears to be more suitable for a developed economy rather than for an underdeveloped economy. This is because an underdeveloped economy is characterised by large non-monetized and unorganised sector. Quite a few of these enterprises produce at subsistence level. These are functionally undifferentiated, in the sense, that in addition to producing agricultural commodities, they take to other vocations (non agricultural) during off-season but do not keep a proper record of their secondary and primary inputs of production. Small capital assets which may not be very important, are highly important for underdeveloped countries and therefore included in fixed capital investment. Similarly, it is difficult to estimate the imputed value of rent of owner occupied dwellings in India’s rural areas.
Given the nature of the economy and the enterprises the statistical problem of collecting data and its unreliability poses a major problem in estimating national income. For example, income method cannot be used in agricultural sector. Similarly, expenditure method cannot be used where markets are unorganised. The production method cannot also be used for unorganised sector like small scale industry, trade and transport etc. Therefore, different methods are used to measure the income generated by different sectors of the economy.
For the purpose of calculating national income. Indian economy is divided into 14 broad sectors. These sectors are then grouped into three main categories A, B and C, Agriculture, Forestry and Logging, Fishing, Mining and Quarrying. Registered Manufacturing and Construction are included in category A. Production method is applied to category A. Value added by category A is found out by subtracting the value of raw materials and other inputs from the aggregate of commodity-wise output. Electricity, Railways, Air Transport, Water and Organised Transport, Communication Banking and Insurance, Real Estate, Public Adminstration and Defence are included in category B. For category B, income method is applied and for this all types of factor incomes which are reported in the annual accounts of various organisations are aggregated. In category C, Gas and Water supply, of dwelling and other services are included. For this category, sample surveys are done periodically to find out the average productivity of labour. Decennial estimates of working force are interpolated or extrapolated and periodical estimates of average productivity are carried forward or backward by using certain indicators. The year to year estimates of workers and their average productivity so derived are then multiplied to arrive at the estimates of value added.
Problems in the estimation of National Income
Generally two types of difficulties are met within the estimation of national income. One is conceptual and the other is statistical. Conceptual problems relate to definition of various concepts and terminology used in this process like definition of nation for computing national income, method employed in the national income estimation, stage of economic activity at which national income is to be calculated and the type of commodities and services which are to be taken into account in national income. What is a nation for the purpose of calculation of national income? It does not mean a country as such and national income does not necessarily refer to income produced within the borders of a country. The concept of national income extends beyond national political boundaries. For example, national income in India will refer to income produced within India plus income earned by Indian residents in other countries by way of interest or dividend from investments, banking, insurance and shipping freight minus any payments to foreign countries by way of interest, bank charges and so on.
Any one of the method of computing national income can be used depending upon the availabilty of the basic data. The problem is that no similar data are available for all sector of the economy and different methods have to be adopted for different sectors. This affects accuracy of the ultimate results.
In all economies the main economic activities, namely production, distribution and consumption take place simultaneously. The real problem is to decide at which stage national income should be estimated.
Another problem relates to commodities and services that should be included in the total national income estimation. To be included in the total national income the commodity or service must have a money measure of value. But in practical life there are many goods and services which have no money payments. Services that are rendered out of love, mercy or kindness have an economic value but have no money value. Therefore, the problem of whether they should be included, and if so, how to compute money value to them, remains.
As regards statistical problems, in a developing country like India the non-monetised or barter economy is predominant. A large portion of agricultural output does not come to the market at all and is retained either for barter purposes or for self-consumption. There is no means for estimating the volume and value of goods which do not enter market for exchange or which are exchanged under barter system.
For the purpose of estimating the national product, an economy must have appropriate and reliable data. But in India, specially for the unorganised sector like agriculture, small-scale industries and trade, hotels and restaurants, data on production, capital formation, etc. are not very satisfactory. Efforts are being continuously made in this direction but still the accuracy and reliability of the data collected is questionable.
In India, conditions not only differ between different States but also within each State. Information based on samples taken from a few district in a particular State may or may not be valid for the whole State to which they belong. Thus, there is a need for making this data more comprehensive.
Moreover, occupational distribution of working population in India is not very clearly defined. Most of the farmers preparing only one crop in the whole year have tendency to accept alternative work in the unorganized sector. This practice of multiple sources of earnings makes the task of collection of relevant data difficult.
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