Importance of Consumption:

Modern economists rightly emphasize the importance of consumption. It

has already been explainedthat Consumption is the beginning as well as I
he end of all economic activity. A man feels a desire and then he makes an
effort to satisfy it. When the effort has been made, the result is the
satisfaction of the want.

Want is thus the beginning and its satisfaction the end of our economic
effort. Consumption is regarded as the be-all and the end-all of all
economic activity. In other words, consumption is the beginning as well as
the end of all economic activity. It is consumption which gives the initial
push to production. Production, thus, is directed and stimulated by
consumption.

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Not only do the consumers give initial push to production, but their desires
govern the volume and direction of all productive activity throughout. If the
consumers are satisfied, business prospers and production expands. But if
the consumers happen to dislike a commodity or think that its price is too
high, its production will sooner or later come to an end. A consumer has
been compared to a king, and his sway extends over the entire realm of
economic activity.

The existence of wants is the mainspring of all economic activity and then
multiplying or expansion is the secret of all economic progress.
Multiplication of wants and economic progress go together. Manufacturers
try to find out better and more profitable methods to satisfy the consumers.
This leads to the discovery of new products and new processes and the
invention of new machines. Every economic effort made to satisfy one want
creates more wants.

The more the wants are satisfied, the more they increase. “Appetite comes
with eating.” Besides, human faculties are exercised in the effort to satisfy
human wants. A body of skilled workers is, therefore, built up besides
successful businessmen.
The all-pervading influence of consumption can be seen in all branches of
Economics. Consumers direct and guide production. It is the intensity of
consumers’ desires which determines prices in the market. Consumption
thus exerts its influence on exchange also. Without consumption there
would have been no exchange.

Distribution, i.e., the flow of incomes to landlords, workers, capitalists and

organizers, is also influenced by the consumption (standard of living) of
each of these classes. Standard of living determines their efficiency and on
efficiency depends their shares in the national income.

Thus, the importance of consumption cannot be over-emphasized. It is all-

pervasive. It affects ill economic activity and contributes to economic
progress. It determines the standard of living of the people to the study of
which we now turn.

The definitions of national income can be grouped into two

classes:
1. The traditional definitions advanced by Marshall, Pigou and Fisher.

2. Modern definition given by Prof. Simon Kuznet.

The Marshallian Definition:

According to Marshall—”The labour and capital of a country acting on its
natural resources produce annually a certain net aggregate of commodities,
material and immaterial including services of all kinds. This is the true net
annual income or revenue of the country or national dividend.” In this
definition, the word “net” refers to deductions from the gross national
income in respect of depreciation of capital equipment used in the creation
of productive activity. And to this must be added income from abroad.
Other features of this definition are:
(i) It is measured on one year basis,

(ii) It includes the values of goods and services,

(iii) It includes only those things which are produced by labour and capital
of a country with the help of the natural resources,
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(iv) It excludes the depreciation and debasement of capital goods,

(v) It includes the net foreign investment in the country,

(vi) It excludes all those goods and services which are produced by friends,
relatives or organisations free of costs.

No doubt Prof. Marshall’s definition is theoretically sound,

simple and comprehensive but it has got some serious practical
limitations:
(i) It is not easy to ascertain or make
statistically correct estimate of the total production of goods and services in
an economy,

(ii) The problem of double counting has been ignored,

(iii) How to make allowance for the portion of the produce kept for self-
consumption,

(iv) The problem of current and base year prices is also ignored.

The Pigovian Definition:

Marshall’s follower, A. C. Pigou has in his definition of national income
included that income which can be measured in terms of money. In the
words of Pigou—”National income or National Dividend is that
part of objective income of the community including of course
income derived from abroad which can be measured in money.”
This definition is better than the Marshallian definition. It has proved to be
more practical also. The above definition of Prof. Pigou is classificatory; it
takes into account of those goods and services which can be measured by
the measuring rod of money.

All those goods which are given as gifts, bounties etc. are not included in
the national income, Prof. Pigou’s definition is used in exchange economy
where goods and services are exchanged for money only, The definition
takes into account the net value of goods and services which are exported
and imported.

Criticism:
Although the definition of Prof. Pigou is precise, simple and practical but it
is not free from criticisms.

The important criticisms advanced by economists are:

(i) National income estimate account for only those goods and services
which are exchanged for money. It is not appropriate for an
underdeveloped country where there is barter system is prevalent.

(ii) The measuring rod of money is also defective. This makes the
calculation of national income very faulty. Pigou himself has said that the
services rendered by women enter into the national dividend when they are
rendered in exchange of money whether in the factory or home, but do not
enter into it when they are rendered by the members and wives gratuitously
to their own families.

(iii) Thus, if a man pays to his maid servant for her service, the money
payment will be included in the national income. But if that man marries
the maid-servant then her service will not be included in the national
dividend. Though the services rendered are the same or rather better. Thus,
these services are included in one case and are excluded in the other.

Fisher’s Definition:
Fisher picked up in his study ‘Consumption’ as the criterion of national
income whereas Marshall and Pigou regarded it to be ‘production’.
According to Fisher—”The national dividend or income consists solely of
services as received by ultimate consumers, whether from their material or
from the human environments. Thus, a piano, or an overcoat made for me
this year is not a part of this year’s income, but an addition to the capital,
only the services rendered to me during this year by these things are
income.”

Fisher’s definition has been considered as better than that of Marshall or

Pigou because Fisher’s definition provides an adequate concept of
economic welfare which is dependent on consumption and consumption
represents our standard of living.

Criticism:
But various economists are of other view that from the practical point this
definition is less useful and improper because there are certain difficulties
in measuring the goods and services in terms of money:

(i) It is very difficult to estimate the money value of net consumption than
that of net production,

(ii) Certain consumption goods are durable and last for many years. If we
consider the example of piano or overcoat, as given by Fisher, only the
services rendered to us during one year by them will be included in income,

(iii) Third and the important aspect are regarding the durable goods
generally keep changing hands leading to a change in their ownership and
value. If therefore, becomes difficult to measure in money the service value
of these goods from the point of view of consumption.

Prof. Simon Kuznet’s Definition:

Prof. Simon Kuznets was an expert advisor to the National Income
Estimate Committee of India in 1949. He has the practical experience of
estimating National Income in India and U.S.A. His view was that the
concept of national income may be simple from theoretical point of view
whereas most difficult from the practical point of view.

He has defined national income in practical prospective as:

“The Net Output of Commodities and Services flowing in a year from the
country’s productive system in the hands of ultimate consumers or into net
addition to the country’s capital goods. In practical life, while estimating
national income any of these four definitions may be adopted, because the
same national income would be derived, if different it’s were correctly
included in the estimate.

Which Definition is the Best?

From the above definitions written, the definition of Prof. Simon Kuznets is
more comprehensive and can be considered as the best definition. Because
it is fully equipped with theoretical and practical significance.