Problems Related to National In

Difficulties in calculating National Income

1. Double counting
 The inclusion of values of intermediate goods in the circulation of National Income will
cause national production to be overvalued.
 This creates an inaccurate representation of the nation’s economic situation.
2. Accuracy of information
 Difficult to obtain accurate information about national income from developing, less
developed, or Third-World countries. The value of National Income may be estimated.
 Difficult to evaluate the contribution of some economics activities to national
production. For example, farmers in agriculture activities do not keep records of the
values of production.
 Obsolete technology in the country will cause governments to be unable to use modern
technology and equipment. This may result in the possibility of a mistake in the
calculation.
3. Unpaid activities
 Only income received or activities paid in money will be included in the calculation of
national income. However, many activities are unpaid for example a housewife works
such as washing, cleaning, and childminding NOT INCLUDED in the calculation of
national income.
 The exclusion of unpaid activities and income will cause the national product to be
undervalued.
4. Activities that are illegal yet productive
 Activities that are illegal yet productive are EXCLUDED from the calculation of national
income in certain countries such as gambling and prostitution.
5. Transfer payments
 Several types of government expenditure are EXCLUDED from the calculation of national
income such as defense, security, and transfer payment.
6. Depreciation
 The industrial and mining sector uses heavy machinery will experience depreciation due
to damage, exhaustion, and obsolescence.
 Depreciation cannot be valued accurately. This will result in an inaccurate estimation of
national income.
Difficulties in comparing National Income between Countries

1. Concepts of national income

 Some countries include the total values of final goods and services produced by
different economic sector in the calculation of national income, while others include the
values of final goods but exclude the contribution by the services sector in the
calculation of national income.
2. Different treatment of items
 Certain expenses that are considered to be transfer payments by some countries may
be considered as expenditure on goods and services by other countries.
 Illegal prostitution activities are excluded in the calculation of national income in
Malysia but are included in the calculation of national income in Thailand
3. Patterns of income distribution
 Per capita income is the basic of the comparison of the standard of living between
countries.
 Although a country may be have a high national income, this does not necessarily mean
that its citizen has a high standard of living. If the pattern of distribution of income in
these countries is not equal, national production may be concentrated in certain group.
4. Unpaid productive activities
 In developing countries, many activities are unpaid and are not included in the
calculation of national income. Therefore, the national income in developing countries
may be undervalued.
 For example, a housewife done by a housewife is not paid for, and thus makes it difficult
to be valued. Therefore, it is not included in the calculations od GDP. However, if the job
is given to the maid and she is paid for the work done, then it will be accounted for in
the GDP.
5. General price level
 Comparison of national income between countries must be done based on real income
value (purchasing power), and not based on the value of monetary income.
 The value of monetary income will provide an inaccurate representation of the
country’s standard of living due to the difference between general price levels between
countries. If a country has a high national income and a high general level of price, the
real income value will be low, the country will have a low standard of living.
6. Working hours
 A national productivity does not include the rest hours of its citizens. Countries that
practice longer working hours will have a higher per capita income.
 A high standard of living and level of social welfare may not be indicated by a high per
capita income.
7. Foreign exchange rate
 Fluctuations in exchange rate will cause the per capita income to change
correspondingly, but the country’s standard of living may not change at the same rate.
Difficulties in comparing National Income between time period

1. General price level

 Increased national production may be caused by an increased production quantity or
increased general price.
 A longer period comparison will result in a less accurate comparison of national income
over time.
2. Quality of goods and services
 The quality of goods and services will change over time.
 A high-quality good will have a high price.
 However, the GDP does not indicate the change in the quality of goods and services over time.
3. Population composition and total population

 An increased in population that is high compared to national income will result in problems of
deficiencies od necessary goods.

 Therefore, the country’s standard of living will decrease.

4. Pattern of income distribution

 The level of prosperity cannot be said to increase if an increase in national income is only
concentrated on the wealthy and influential members of the community.
 For example, if the GNP between two years is found to increase by 50%, this does not mean that
the country’s standard of living is also increased by 50% for the same period.

The uses of National income data

1. To measure a country’s rate of economic growth
 Can be comparing the current national production data with that of the previous year.
 The information regarding the economic growth rate helps the government make
comparisons with other countries.
2. To measure the total contribution of the economic sector to total national production
 Using the product approach the contribution made by each economic sector towards the
overall economic growth can be evaluated.
 Government can determine the sector that are the backbone of the country’s economy.
3. Economic planning
 Policymakers need the national income data to draft economic policies for the coming years
as a tool for the government to formulate the short-terms or long-terms economic planning
 Important guide that provides details about a country’s economic performance and planning
purposes.
 National income statistics to forecast future development based on current performance
such as the ‘Malaysian Plan’ for five years.
4. To show or indicate the success or failure of government policies
 Evaluate the effectiveness of an economic policy that has been implemented.
 Allow the government to look at any economic problems that may have arisen and find
ways to solve the problems.