1) Why measurement is difficult (big picture)
National income numbers look precise, but they face practical and conceptual issues due to:
- missing/hidden activities,
- price changes and quality changes,
- non-market production,
- data gaps and reporting errors.
These issues matter for:
- policy targets (growth),
- welfare comparisons,
- international comparisons.
2) Major difficulties in measuring national income
2.1 Underground / black economy (unreported income)
Some production and income are not recorded because:
- tax evasion,
- illegal activities,
- informal cash transactions,
- underreporting in small enterprises.
Effect:
- GDP/NI may be underestimated.
2.2 Non-market production (household work)
Activities like:
- cooking at home, childcare by family,
- household services for own use, produce value but are often not included (or only partly via imputations).
Effect:
- GDP undervalues economic activity and welfare, especially across societies with different household structures.
2.3 Informal sector measurement (especially in developing economies)
Large informal sector leads to:
- weak record-keeping,
- irregular employment,
- undercounting of output and incomes.
2.4 Imputed values (conceptual + practical)
Some items must be imputed:
- owner-occupied housing services (imputed rent),
- some financial services. Imputation requires assumptions → measurement uncertainty.
2.5 Double counting and classification errors
Mistakes occur when:
- intermediate goods treated as final,
- government spending classification errors,
- misreporting sectoral outputs.
2.6 Inventory valuation problems
Change in inventories depends on:
- correct stock measurement,
- correct valuation at current vs constant prices. Inventory errors can distort growth rates.
2.7 Price changes: nominal vs real issues
To compare across time, we must separate:
- price changes (inflation),
- quantity changes (real output).