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Problems of national income

National income consists of not one but innumerable goods, service, and they have to be somehow
added up to arrive at a measure of national income. The real difficulty arises from the fact that
dissimilar things cannot be added up. They have to be converted into some common denominator
before doing so and the only practical way of doing so is to take their market prices.
The problems of addition increase manifold when we consider the question of estimating national
income in real terms. All the problems faced in the compilation of price index numbers are
encountered in this case.
National income estimates are faulty in terms of their conceptual approach as well. They tend to
concentrate on the market pricing of production flows. This in itself is a major limitation of these
The national income estimates do not cover illegal activities even though they may be adding to
national product. They include smuggling, inland trade activities, production and income generation
concealed from the authorities for avoiding tax obligations and prosecution etc.
National income estimates include profit of the corporate sector. However, the profit of a business
does not reflect the productive contribution of the entrepreneurship. Instead, it varies in relation to
several factors like the overall expected or prevailing rate of profit in the economy. This rate itself
tends to vary from economy to economy, region-to-region, industry to industry and with the passage
of time.
economic activities of the country may add to the output of goods and services (like drugs) which
adversely affect the health and productivity of their users. But national income estimates do not take
this fact into account. So long as a good or service has a market value, its production is added to the
national income estimates.
Several economic activities only add to the disutility of the members of society and entail use of
resources (resource cost) which could be used for more productive purposes. But an increase in such
activities is taken to add to national income rather than reduce it. For example, let us take the case of
a worker who has shifted his residence to a greater distance from his work place.