Income Velocity and Pakistan’s Second Plan

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.