Q.(a) What are the difficulties involved in the measurement of National Income ?

(a) Measuring national income faces conceptual difficulties (what to include, transfer payments, underground economy, non-market and self-consumed output) and practical difficulties (double counting, poor data, the non-monetised sector, illiteracy). (b) Classical theory assumes automatic full employment via Say's law with no need for state action, while Keynes rejects this and shows equilibrium can occur below full employment, requiring government intervention. (a) Difficulties in the measurement of National Income Conceptual (theoretical) difficulties: 1. Transfer payments — pensions, scholarships and gifts are incomes to receivers but are not payments for current production; deciding whether to include them is difficult. 2. Non-market / non-monetised transactions — services of a housewife, and goods produced for self-consumption (especially in agriculture), have value but are not sold in the market. 3. The underground / illegal economy — incomes from smuggling, black-market and unreported activities escape measurement. 4. Income of foreign firms and treatment of self-consumed output raise problems of what to include as domestic income. Practical (statistical) difficulties: 5. Double counting — the value of intermediate goods may be counted more than once if only final goods are not carefully identified. 6. Lack of reliable and adequate data / statistics, and unaccounted incomes. 7. Large non-monetised (barter) sector, especially in villages, whose output is hard to value. 8. Illiteracy and ignorance of producers, who do not keep proper accounts. 9. High cost, time and expenses involved in collecting accurate data. (b) Differences between the Classical theory and Keynes's theory | Basis | Classical theory | Keynes's theory | | --- | --- | --- | | Employment assumption | Assumes full employment is normal | Full employment is a special case; under-employment equilibrium is normal | | Say's law | Supply creates its own demand; no general overproduction | Rejects Say's law; demand determines output and employment | | Determination of income/employment | Determined by supply-side forces (labour market, wage flexibility) | Determined by aggregate (effect …