Conceptual Problems are Faced in the Estimation of National Income
National Product income has been defined as the value of the net output of goods and services in an economy. The goods and services may be tangible goods like a car, a loaf of bread, etc., or it may take an intangible form such as the service rendered by a doctor, a teacher or a barber. But it is not necessary that national product would include all such services. It is perhaps impossible to include the value of services like shaving oneself, services rendered by a mother to her children etc. in the national product because any value assigned to such services would be subjective and arbitrary. A distinction must, therefore, be drawn between the goods and services to be included and those not to be included in the national product. This can easily be accomplished by including in the national product all the marketable goods and services. This rule can be applied to any country, but its usefulness is restricted to advanced countries. It is important to realize the implications of this rule. The value of the activity of a housewife in cooking meals is not included in the national product while the value of a similar activity carried on in a restaurant or by a paid servant in a house is included.
Practically, an activity carried out within the household is classified as non-economic. But this classification makes the inter-country and inter-temporal comparisons within the same country difficult, much of the activity considered non-economic in Pakistan is treated as economic in USA, or UK. The value of the loaf baked by a Pakistani housewife, for example, is excluded from the national product while the value of a loaf of bread purchased by an American housewife is included in it.
Value of the household activity is excluded from the national product. There are also certain payments which do not represent exchange of goods and services and changes in the value of goods and services resulting from economic activity. All such payments can be classified into three categories in the estimation of national income.
- Transfer Payments
- Capital Gains and Losses
- Illegal Activities
Transfer payments do not result from current productive activity but constitute redistribution of income out of a feeling of devotion, help or merit and are excluded from the national income. Gifts, inheritances, charities, prizes and pocket money for a school-going child are all examples of transfer payments. A payment made for a goof not currently produced is also excluded from the national product. The purchase price of an old picture, on resale, for example, is not included in the national product because the transaction represents only a transfer of an asset rather than a payment for current productive activity. If, however, the picture is got restored from an art dealer, then its restoration charges would be included in the national product. Transfer payments at government level take the form of grants and relief payments by the central government to the provincial governments and local bodies and from the provincial Government to local bodies.
Capital Gains & Losses
Capital gains and losses brought about by changes in the market forces (Price changes) are also excluded from the national product. Suppose the value of a capital asset, e.g. the value of a house increases due to monetary inflation in the market value. Such an increase differs fundamentally from an increase in value brought about by an addition and. as such, does not represent a current productive activity, Similarly, the gains and losses in asset valuation resulting from exogenous shifts in consumer demand are not included in the national product.
Market Transaction from Illegal Activities
Market transaction from illegal activities are excluded from the national product being not socially useful and outlawed by the society. To avoid double counting, only the value of final products should be included in the national product and value intermediate goods should be excluded from it. To clarify the distinction between final and intermediate goods, some examples are discussed here. Suppose a steel mill-owner purchases 1000 tons of coal and uses 500 tons in the production of steel, and 100 tons for current consumption is treated as ‘final’ product. All coal purchased by a house-wile for cooking and heating the rooms is a ‘final’ product.
Broadly speaking, a product used in a productive enterprise may be classified as ‘intermediates, and that used by a household as ‘final’. The traveling expenses by a businessman on a trip in connection with business are intermediate, while in case of a person traveling on private affair will fall in ‘final’ product (services).
Similarly, water bought for use in business operations is ‘intermediate’ but the water bought by a housewife is a ‘final’ good.