Valuation of Stocks and the National Income

THE definition of the national income implicit in the recent White Paper on national income is that of the maximum amount that could have been consumed in any particular year, while maintaining the real amount of capital assets intact.2 From this definition it follows that investment must be defined as the value of the increase in real assets, and that profits must be defined as current receipts less current cost of replacing real factors of production used Up.3 The current value of any increment in stocks should be added to profits or the current value of any decrement deducted. For this purpose the Inland Revenue's definition of profits is not adequate because for income tax purposes profits include the increment in the value of stocks over the period. Stocks are valued either at cost or current price whichever is the lower.4 Profits must be corrected therefore before they can be included in total national income on the definition adopted. This correction was made in the White Paper for 1938 but not for 1940 or I94I.5 It can be shown that this correction is always necessary and not only in those years when prices are falling. i. In order to correct assessments of profits we must know the amount of investment in stocks in real terms. For this purpose a price index of the balance-sheet value of stocks is necessary with the aid of which the estimated balance-sheet value of stocks can be reduced to real terms. For the current value of stocks we constructed a monthly index averaging, in proportion of 2 to I, the Board of Trade wholesale index of all commodities except food and the Ministry of Labour cost of living index. Further, it was necessary to know the period of turnover of stocks in the major industrial groups. This was obtained by taking the proportion of stocks in an industrial group to the average of raw material costs and gross output.6 For any month the price index of

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