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  1. Developmental functions include maintenance of high and steady rate of growth of real national income, avoidance of inflation and compensatory or functional finance policies. Lord Keynes in his General Theory (1936) has made it clear that a free enterprise economy is subject to periodic fluctuations and instability. Hence the undertaking of large-scale public expenditure to maintain high levels of effective demand, output and employment is required. Again a free market economy has a strong tendency towards a biased distribution of national income; more in the favor of the richer sections of society. This needs to be corrected through progressive taxation measures in order to promote social welfare. Finally, the experience of the two menacing wars has led the nations to undertake large-scale defense expenditure and to organize technically superior defense systems. Again maintenance of high levels of effective demand and employment is only a short-term goal. In the long run, it assumes the form of steady growth rates of the economy and of national income. Such a growth rate is expressed in the light of Harrod-Domar models in terms of two coefficients. These are the savings - investment ratio (S) and capital - output ratio (C). If the values of these two coefficients are known then the growth rate (g) can be expressed as a ratio of the two coefficients. Thus we have,

If we assume value of S as 20% and value of C as 4% then growth rate will be 5%.

It may be noted that value of 'g' depends directly on S and hence greater the ability of the society to save and invest, greater would be the growth rate. On the contrary, value of 'g' depends inversely upon C i.e. the capital - output ratio or the technical conditions of production. Hence if productive methods are more efficient and if a lower value of the C can be maintained, then the value of growth rate 'g' would be higher. The public authorities have to adopt suitable measures to achieve these ends. Most of the modern governments resort to some sort of planning to achieve these objectives.

(C) National Aggregates: National income is the primary macro aggregate. But measurement of national income is a highly complicated activity. This is clear from the definition of national income stated by Alfred Marshall. Accordingly, in a simplified form we have,

National income is the money value or market price value of all the goods and services produced by the national citizens of a country during every financial year.

Several terms in this definition such as 'money value', 'market price', 'all goods and services', 'national citizens' result into variety of conceptual (related to definition) and practical difficulties. Moreover, the statistical methods employed for the purpose of the measurement of national income are not completely resistant to errors. Consequently what we expect is an approximation and a less exact value of national income than the value of millions of economic activities actually performed by numerous citizens of the country. One way of minimizing the error element is to measure national income employing various approaches and express them in distinct national aggregates. All these national aggregates are however mutually related and serve the purpose of a self correcting device of aggregative values to make them as accurate as possible.

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Index

3. 1 Macro Aggregates
3.2 Unemployment
3.3 Inflation

Chapter 4

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