Introduction to National income accounting, measurement and determinants of national income National income National income reflects the economic growth and development of a country. According to the National Income Committee (1951), “A national income estimate measures the volume of commodities and services turned out during a given period, counted without duplication”.

Investment  Investment is an important concept in macro economics. It is an indispensable input to accelerate economic development of an economy.  Developing nations lack adequate capital to invest in modern industries. Hence foreign aid was considered necessary to accelerate economic development.  But, donors have vested interests and foreign aid is often attached with strings (conditions). Hence foreign aid actually turn out to benefit the donor more than the receiving country.

Types of investment Gross and net investment Gross investment is defined as a flow of expenditure or new fixed capital assets or additions to inventories over a given period of time. Net investment = Gross investment – depreciation of fixed capital A positive net investment is always desirable. Otherwise, a negative net investment means lack of capital formation and it may lead to depression and recession in the economy

Inflation and deflation  Inflation is a global phenomenon as it is experienced by every country at some point of time or the other.  The Great Depression that choked the western economies, notably the USA, during the nineteen thirties, engaged the attention of economists fully.  Since then control of inflation became more important in the growth and development of an economy.

 Inflation is defined as a sustained and appreciable rise in the general price level. The general rise in the price level means a fall in the money value.  Inflation is usually associated with rising activity and employment.

Causes of inflation  Inflation may be caused by excess demand, by the rise in wage rates or monopoly profits or by some combination of the two.  If the inflation is due to excess demand, it could be controlled with monetary measures. The excess – demand driven inflation is called demand-pull inflation.  Growth of monopolies in goods or factor markets cause what is known as cost-push inflation which could not be effectively controlled by monetary and fiscal tools.

Demand-Pull Inflation  An increase in aggregate demand indicated by an upward shift in the aggregate demand function may cause a mild increase in the general price level when the economy has involuntary unemployment.  However, when the economy has full employment an increase in aggregate demand will simply rise the general price level without any impact on real national income.  Such an inflation caused by the excess demand could be controlled by appropriate fiscal and monetary measures.

Inflationary Gap o The inflationary gap refers to the amount by which aggregate demand will exceed aggregate output at the full employment level. Cost Push Inflation o The cost-push inflation is caused by wage-push inflation and profit push inflation. Wage push inflation refers to a rising price level by rising money wage rates.

o The concept of wage push inflation is limited to increases in labour costs which are the causes and not the results of higher prices o Profit – push inflation occurs when oligopolists and monopolists in their pursuit of more profit raises prices more than required to offset the cost.

Convergent Inflation  An inflation may be caused by many factors but when it comes to an end it is said to be convergent inflation.  But, all inflations are not convergent. The inflationary process may sometime exist for protracted periods and the inflationary gap may continue to widen.  Such an inflation could not be controlled by monetary or fiscal measures. Often, it cannot last long indefinitely and would cease to exist on its own in due course of time.

Control of inflation o Inflation could slow down economic growth an hence it is essential to keep it under control using the following anti-inflationary measures: a) Monetary measures; b) Fiscal measures; c) Wage control; d) Price control and e) Indexation.

Monetary measures o The central or national bank may use monetary measures like bank rate policy, open market operations, variable cash-reserve ration and selective credit controls to control inflation. Fiscal measures o The government could cut down its spending in relation to income earned from taxes as a fiscal measure to control inflation. Indexation o Indexation is a method whereby such adjustments in monetary returns are made that are necessary to set off losses in real incomes due to inflation.

Wage control o The wage control is a measure to deal with the cost push inflation occuring when the money wage rate rises faster than the productivity of labour. However, wage controls are generally arbitrary and difficult to implement. Price control o Fixation of maximum prices for the commodities below the market equilibrium price causes but it may lead to black market, parallel economy or rationing etc.

Deflation o Deflation is a process in which persistent and appreciable fall in the general price level is accompanied by considerable amount of involuntary unemployment. When the aggregate demand is not matched with aggregate supply in an economy at full employment level it may also contribute to deflation. Deflationary Gap o A deflationary gap may be defined as the amount by which aggregate demand or spending will fall short of aggregate supply or aggregate income if full employment were to be achieved.

Stagflation Stagflation is a phenomenon characterized by unemployment, lack of growth and inflation. India experienced stagflation twice the first time was for four years from 1964 – 65 to 1967 – 68 and again for three years from 1971 – 72 to 1974 – 75.