The Price System and National Income and Product

Abstract

M ANY attempts have been made to estimate the national income of economically backward countries. The Statistical Office of the United Nations has assembled estimates of 39 countries, roughly half of which are countries with underdeveloped economies.1 And several projects are underway for making other and better estimates. But it may be asked to what extent these efforts are justified. In making estimates of Japanese national income some years ago, the writer frequently found difficulties in applying national income and product concepts to backward areas of the economy. The problem is not so much the degree of accuracy of the estimates involved, since these estimates are usually presented to convey orders of magnitude and nothing else. Rather, the problem is: Do national income and national product exist in the backward areas? (In the sense analogous to the question: Did national states exist in Western Europe before mercantilism?) One national income economist, very much puzzled by the results of the estimates for underdeveloped economies, has posed one aspect of the problem as follows: What meaning is to be attached to per capita income of the African population, including income in kind, in the neighborhood of ?2 a year? The reviewer has never been able to grasp figures of this magnitude, which are common for countries with much of the world's (italics added).2 It should be noted that the difficulty in this case is not due to inadequacies of exchange rate conversion; the currency unit of the African colony happened to be the British pound. The ?2 per capita income is an average. This means that perhaps half of the population lived on incomes between zero and ?2, while a substantial portion lived on incomes between zero and Li throughout the year. These strange results point to the possible existence of certain difficulties in the concepts, if the possibility of inadequate estimates and exchange rates is ruled out. To avoid confusion, it is necessary at the outset to distinguish for present purposes two of the major uses of national income estimates. First, there is the use of the ratios of the various national income components to the total national income of a given year (or to other components); for example, such ratios as one state's income to that of the nation (or another state); of agricultural income to the national income (or to manufacturing); of wages to the national income (or to property incomes); of investment to national income (or to consumption). The second use is the measurement of changes over time (or inter-spatially) of either the total national income or the various composition or structural ratios mentioned in the first use. For brevity and convenience, these uses may be designated as the compositional or structural use, and the index number use, respectively. This paper deals with the problems of the first or compositional use. The problems of the second use are essentially no different from those encountered in the construction of index numbers of physical production and as such they are best discussed under that topic. One of the reasons for the extensive and peculiar usefulness of national income statistics stems from the rough equivalence of actual (or accrued) net income to net value product. The national income totals estimated for the second use do not have this quality. But to the extent that the thesis of this paper has relevance for the second use, some brief comments are made at the end of this paper.