Challenges/problems of measuring national income

(i) Income approach. Here the incomes received by factors of production are added. Such incomes include rent, salaries, wages, interest and profits.

Problems faced in using the income approach measure.

• Double counting. this means including some commodities more than once e.g. counting inventories (inputs and unfinished goods) several times at different stages
• Inadequate information. E.g. on private expenditure and income, wages in the private sector.
• Transfer payment like gifts are difficult to determine. In most cases it is not clear whether such payment are for free or for work done.
• Shortage of qualified and motivated manpower to compile data
• Imputed income such as income from owner-occupied houses and flats is a part of a person’s taxable income.
• Exclusion of Real Transactions: Examples are barter transactions and various free services rendered at personal levels such as many useful services are produced by members of households for the benefit of themselves or their families.
• Assessing value the value of leisure:
• Discount the damage to environment during production process

(ii) The expenditure approach.

Here we add up the value spending on all final goods and services. Such expenditures include consumption, investment, government expenditure and net exports.

Problems faced I using expenditure approach

• Government utilities like roads, security etc. are usually subsidized and thus it is difficult to determine their actual value.
• Net exports and income earned from abroad are not easy to determine. For example foreign exchange from smuggled output is unknown; some income earned abroad is not declared and therefore not recorded.
• There is insufficient funds and facilities to compile data
• Illegal activities e.g. prostitution, gambling, smuggling generate income which is difficult to measure.
• The effect of inflation is difficult to adjust and is likely to be misinterpreted to mean increase in output.

(iii) The product (output) approach.

In this method, all goods and services produced during the year in various industries are added up.

This is also known as value-added to GDP or GDP at the sector of origin’s cost factor. It includes the following items: agriculture and allied services; mining; development, construction, the supply of electricity, gas, and water, transport, communication, and trade; banking and industrial real estate and property ownership of residential and commercial services and public administration and defence and other services (or government services). It is, in other words, the amount of the added gross value.

Problems faced in using product (output) approach.

• Non-monetary output; commodities which are not taken to market are difficult to give value e.g. subsistence output, work done by house wives, leisure foregone when work is done, houses built by owners.
• It is difficult to determine when output was produced e.g. perennial crops.
• The effect of inflation is difficult to adjust and is likely to be misinterpreted as increase in output.
• There are difficulties of determining what to include and what to exclude (subsistence output)and determine methods of valuing different items.
• Possibility of double counting