Aggregates of national income and product in a country
Importance of National Income Data
All the countries, whether rich or poor, try to make estimates of national income and product aggregates, even though these may be inaccurate or imperfect owing to certain conceptual or statistical problems. The analytical and practical uses of these aggregates are quite immense so much so that the entire fabric of economic system is inextricably linked with these ensures. The importance of national income aggregates can be discussed as follows:
(1) Measurement of inflationary and deflationary gaps: During the recent years phenomenon related to inflationary or deflationary pressures in the economy has been described in terms of inflationary or deflationary gap. The force or momentum of inflationary process is often related to the gap existing between anticipated expenditure and level of the available output expenditure exceeds the vale of available output at the base level of prices by a larger magnitude, it implies a larger inflationary gap and this situation will lead to a rapid increase in the general price level in the country. Similarly the excess of available output over the level of expected expenditure measures the deflationary gap which determines the pace at which deflationary phenomenon will proceed. The inflationary and deflationary gaps, as a matter of fact, are just the inconsistencies of certain sub-totals related to national product and expenditure aggregates. The magnitudes of these gaps depend also upon the amount of saving that the community will like to have in future and the rate at which taxes are imposed by the government. Thus the determination of inflationary or deflationary potential of aggregate spending is simply a matter concerning the magnitudes of various income and product totals and sub-totals.
(ii) Economic forecasting: The aggregates of income and product are of strategic significance in forecasting the general level of business activity. If the forecast about the future productive activity is to be attempted, we must be equipped with a detailed data concerning the output in various sectors of the economy for a few previous years and the rates of change of absolute expenditure in individual sectors as well as in the entire system. The level of sales, the rate of their change and inventory accumulation are other relevant and significant factors. The anticipations of future government expenditure and taxation and possibilities of expansion or otherwise of exports are also given considerable weight in business forecasts. Thus the entire technique of scientific forecasting rests upon the whole complex of income, product, expenditure, investment and export totals and sub-totals.
(iii) Knowledge concerning the structure of economy: These aggregates are crucially important in providing a detailed knowledge about the structure of an economy. The contributions made by different sectors, viz, cultivation, mining, fisheries, manufacturing industries, transport and trade etc., give a clear idea of the organic structure of the economic system. It also reflects whether an economy is agriculture-based, industry-based or it is based on tertiary activities. The changes in the magnitudes of value added by different sectors and sub-sectors of the economy give very useful indications about the pattern of sectoral growth of the system. This has a very important bearing upon the way the entire economy will move over the future years. The national income data also indicate how much amount and what proportion of the nation’s output goes into capital equipment and foreign investment and how much is available for the immediate consumption by the people or the government. If a very large part of the current production is being diverted for the creation of capital equipment, the serious strains on the economy may exist at least in the short period because of the possible shortage of consumption goods and the consequent rising trend of prices. But a greater allocation out of current national product for capital creation assures a great or long run growth potential of the economy. If a large part of current product is dissipated in conspicuous consumption, the present level of satisfaction may be higher but only at a tremendous cost of slowing down the pace of future growth of lengthening the process of economic development. The diversion of a large part of current gross national product for investing abroad can be evaluated from the viewpoint whether the siphoning out of these resources causes any adverse repercussion in the country like the shortage of capital, fall in the level of domestic output and the number of workers employed. Thus the aggregates of national product, income, expenditure, consumption and investment and aggregates of exports and imports shed a very useful light on the various aspects of the economic system.
(iv) Role of government: The size of economic role that government plays in an economic system can also be assessed through the aggregates of national income. The major indicators in this respect are the ratio of taxes to national income and the ratio of government expenditure to net or gross national product. Under the influence of laissez faire philosophy, the State was assigned only the protective duties and consequently she felt a very limited need to impose taxes on the community. But with the greater participation of the government in economic activities for the maintaince of stablity and rapid economic growth, it has become necessary for the government to impose more an more taxes in order to mobilise resources for the achievement of various economic, social and political objectives. The ratio of taxes to national income, taken alone, might have certain sinister implications about the character of the state. For instance, a high ratio of taxes to national income may be condemned as excessively oppressive and the government would be held responsible for any injury to the health of the economy. This role of the State, therefore, must be evaluated taking into account the ratio of public expenditure to net or gross national product. A higher ratio of government expenditure will certainly justify the heavy dose of taxation by the government. But on what items or heads the expenditure has been incurred, will be the decisive factor in regard to the economic role of the government. If the major proportion of the government expenditure has been incurred on the construction of luxury hotels, theatres and palatial buildings rather than on public health, education or social security, one can not be stopped from concluding that the government has failed to maximize the welfare of the people and she is guilty of an unpardonable crime of the dissipation of the community’s scarce and valuable resources.
(v) Importance in war time: During war time, product components of national income assume a very strategic significance. A maximum war effort becomes the greatest need of the hour and a complete mobilsation of national resources and inevitable necessity. During such emergent circumstances, it is essential to make an assessment of the minimum amounts of available labour, capital and other co-operant resources that should be allowed for the continued production of goods and services for non-war civilian consumption. The maximum possible output minus this minimum sub-total of consumption gives an indication of the extent to which the national resources can be diverted for the production of war materials. The national income sub-totals on the factor payments side also assume much significance because it becomes possible through them to determine what kind of behaviour is expected from the people with respect to the departure from the established habits of saving and spending and whether their current behaviour conforms to the exigencies created by war. The state of war is often associated with inflation and, therefore, it also becomes important to determine as to what proportion of disposable income must be saved or to what extent the additional taxes should be imposed by the government to avoid inflationary stresses and strains. The figures of disposable income and the available output for civilian consumption also help in the determination of the extent of direct controls like rationing etc., that must be employed for ensuring a proper distribution of essential commodities and services. Thus national income sub-totals related to output, consumption expenditure, saving, disposable income and taxation are of strategic significance in making an assessment of war effort with a high degree of precision.
(vi) Importance In federal set-up: The national income statistics are also of great use in countries with federal system of government like India. Such governments have to make allocations of grants to various states. The determination of the amount of central assistance is dependent upon the contributions of various states in the aggregate national product as well as the total tax collection. The size of the population and the special economic and other problems of a particular region may also be the other relevant considerations in making a decision about the grants-in-aid to various states. These considerations are of use also when the economic burden of the international debts is to be apportioned among the states. Thus the structure of federal finance rests upon the national income totals and sub-totals.
(vii) Importance in international field :The use of national income data is also made in the international field for the allocation of quotas towards the international monetary institutions, e.g., IMF and I.B.R.D. Similarly the allocation of costs of the United Nations’ operations are also based on the national income and product aggregates. The developing countries have throughout adopted the reasoning that the advanced countries should provide economic assistance in proportion to their national income.
(viii) Measure of material welfare: One of the prominent uses of national income is that the inferences, in respect of the advance or decline of material welfare over a period of years among the different nations or the differences in welfare at any one time, can be made through the statistics of income and product.
(ix) Promotion of research: On the basis of national income data, new vistas of research could be opened. Wassily W. Leontief computed the quantitative input and output relationships of major sectors of the economy. For this contribution of his, he was awarded the Nobel Prize in 1973. similarly Morris A. Copeland has developed the analysis of money flows within the economy, a project which, of course, extends even beyond the boundaries of national income analysis.
