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Unit 14: Calculation of National Income

million more people in India became poor or remained in poverty over 2008 and 2009 Notes
than would have been poor had the pre-crisis (2004-07) growth rates been maintained
over these two years.
The 2009 Asia-Pacific Wealth Report notes that the HNWI population in India is also expected
to be more than three times its 2008 size by the year 2018, with emergent wealth playing a
key role. Like China, relatively few among the current HNWI population (13%, compared
to 22% in Japan) have inherited their wealth and even fewer (9%) are over the age of 66.
Question
What does the case say about distribution of income in India?
Source: timesofindia.indiatimes.com

14.4 Problems in Measuring National Income

The major problems that hinder the calculation of national income using a particular method
have already been discussed before along with the methods. Now let’s discuss the problems that
occur, in general.
The difficulties in measurement of national income are:

1. National income measures domestic economic performance and not social welfare. For
real economic growth, there should be strong positive correlation between the two.
2. National Income understates social welfare-non-market transactions like home-makers
service and do-it-yourself projects are not counted.
3. National Income does not measure an increase in leisure or work satisfaction or changes
in product quality.
4. National Income does not accurately reflect changes in environment like oil spills cleanup
is measured as positive output but increased in pollution is not measured as negative.
5. Per capital income is a more meaningful measure of living standards than total national
income.
6. There is a problem of double counting. However, problem of double counting could be
avoided by utilizing the value added approach. For example, the wheat that is used to
make bread is an “intermediate good”. The value of the bread only is counted as part of
GNP and we do not count the value of wheat sold to the miller and the value of flour sold
to the baker.
7. Problems of depreciation estimation as there are different methods of calculating or
estimating depreciation.

8. Inclusion or exclusion of certain items in national income accounting can cause confusion.
(a) Imputed rent of owner occupied houses is also included in calculation of national
income.

(b) Imputed value of goods and services produced for self consumption are included.
(c) Sale and purchase of second hand goods are excluded.
(d) Imputed rent of owner occupied houses and production for self-consumption are
included.

(e) Incomes from illegal activities are not included.
(f) Direct taxes such as Income tax are paid by employees from their salaries are included.

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