Considering growth rate in national income as an indicator of economic development has got its own limitations.
These are discussed below:
1. Difficulty in calculating the true national income:
Problems of double counting, products produced for self-consumption, difficulties in calculating depreciation, illegal income, tax avoidance, tax evasion, barter transactions, illiteracy, employment of persons in more than one occupation, etc. make it difficult to estimate the true national income of the country. Hence national income cannot be considered as a true measuring rod of the rate of economic development of a country.
- One cannot understand the rate of economic development just by knowing the national income of the country. The extent of population of the country should also be known.
- By considering population we can say that if the rate of growth of national income is lesser than the rate of growth of population, then development is in negative. Similarly, if the rate of growth of national income is higher than the rate of growth, of population, then the rate of economic development is positive.
- Since, the method of national income does not consider the population and its growth, this indicator of development is not the true indicator of economic development.
3. Different methods of calculating national income:
There are different methods used to calculate national income across the world. The most important among them are
(a) Production method,
(b) Income method and
(c) Expenditure method.
- The measurement of national income varies based on the method of calculation used by the country.
- Different countries adopt different methods to calculate national income. Hence, comparing the economic development through national income as an indicator becomes difficult.