9 Main Precautions that must be followed in the Estimation of National Income
- Transfer payments are not included in estimating national income.
- Imputed rent of self-occupied houses are to be included in calculating national income.
- Illegal money through smuggling etc. are not included as they cannot be easily estimated.
- Windfall gains are not included in this method.
- Death duties, gift tax, tax on lotteries etc. are paid from past saving or wealth and not from current income. So, they should not be treated as a part of national income of a year.
- The receipts from sale of second-hand goods should not be treated as a part of national income because second-hand goods do not create new flows of goods and services in the current year.
- Income equal to the value of Production for self-consumption should be estimated and included in the measure of national income.
- Indirect taxes are not included while estimating national income at factor cost.
- Income tax is paid out of income (compensation of employees). So it should not be separately added while estimating national income.
There are also some difficulties in the estimation of national income under this method. In case of self-employed persons in one-man business or partnership the earned income is a mixture. It is difficult to separate components of factor income.
Further, in countries like India, we have many small traders who do not maintain any account of their income. In such cases, it is difficult to allocate their income on various factors.
Similar problems arise in case of the production of goods meant for self-consumption. It generates income but it is difficult to allocate such income among the factors of production.