Income Velocity and Pakistan's Second Plan

Richard C. Porter


An attempt is made in this paper to appraise the extent to
which the income velocity concept1 is a useful tool in the financial
planning of the Second Five Year Plan. For many years now, economists
have been skeptical of the efficacy of velocity analysis, but most of
this skepticism derives from its disastrous failure in the depression of
the 1930s. Theorists generally concede its applicability in
full-capacity situations2, and it is in just such a situation that it is
being applied in current analyses of the financial implications of
Pakistan's Second Plan. Nevertheless, the basic reason why the quantity
theory is being revived in Pakistan, and in many other developing
countries, is not so much its theoretical relevance as its great
practicability. "Modern" Keynesian gap analysis is just not feasible
where data on consumption and investment (not to mention their
functional determinants) are totally lacking. Since data do exist for
velocity analysis3, it is used for want of a better.

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