Q.What is 'national income'? Explain the theoretical difficulties involved in estimation of national income.

National income = money value of final goods and services in a year; theoretical difficulties include double counting, transfer payments, non-monetised output and unpaid services.

Meaning: National income is the total money value of all final goods and services produced by the normal residents of a country during an accounting year (usually one year). It is measured as NNP at factor cost. (Marshall/Pigou/Fisher gave classic definitions.)

Theoretical (conceptual) difficulties in estimating national income:

1. Problem of double counting — the value of intermediate goods may be counted more than once; only the value of final goods (or value added) should be counted.
2. Transfer payments — pensions, scholarships and subsidies are receipts without any productive service; deciding to exclude them is difficult.
3. Non-monetised / self-consumed output — output kept for self-consumption (a farmer's own produce) and the services of housewives are not sold in the market, so valuing them is hard.
4. Unpaid and voluntary services — services rendered free (self-service, social work) are not counted though they add to welfare.
5. Illegal and underground incomes — income from smuggling, gambling and black-market activity escapes records.
6. Valuation of government services — free services like defence, administration and public health have no market price.
7. Capital gains and losses — rise/fall in the value of assets due to price changes creates valuation problems. …