Economic development-10

Economic development 10ok Let me state a theory of price variations in the context of an economy having a process of planned economic development. Assume, first, that the additional investment, both in the public sector and in the private sector, is matched entirely by taxation and voluntary savings. Assume, too, that the period under consideration is too short for the output of consumption goods to increase with the increase in the outlay on investment.

On these assumptions the aggregate expenditure on consumption remains the same and, since the output also remains the same, there is a sense in which it can be said that the general price level remains constant. Employment in the investment goods sector no doubt increases; so does the total wage bill in this sector. But the additional expenditure on consumption on this account is just neutralized by the curtailment of consumption done by the rest of the community. So economic development is important.

The general price level may even fall under the condition postulated if the period chosen is long enough for some of the investment projects to be completed and to start yielding consumption goods. For, the output of consumption goods increases during the period, while the aggregate expenditure remains the same. This, incidentally, is a situation in which, if money wage rate is held constant, as indeed is our assumption, labour gets the full benefit of its increased productivity resulting from the additional investment. If in such circumstances, the general price level is to be kept stable, a part of the additional investment has to be financed by deficit, i.e. by pushing the additional wage bill in the investment goods sector beyond what is warranted by the additional savings of the community. So economic development is important.

This indeed is the ralson d’etre of deficit financing in the context of planned economic development of an under-developed country. Deficit financing, however, generates a rise in the general price level if pushed further up so as to outrun the increase in the output of consumption goods during any planning period. The deficit may occur in the private sector as much as it can occur in the public sector. It is customary to relate deficit financing to Budget deficit. But, in fact, from the point of view of ‘social accounting’, deficit in the private sector is as significant as deficit in the public sector.

Whereas the latter manifests itself in an expansion of currency coming via sale of Treasury Bills to the Central Bank, the former manifests itself in are expansion of credit coming via sale of commercial bills and mortgage of other assets to the commercial banks. The two have the same kind of impact upon the economy, and they can, and often do, operate at the same time. So economic development is important.

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