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The Mahalanobis Model

Mahalanobis, (1953 & 1955) developed a single-sector, two-sector, and a four-sector


model that fit into development planning of the Indian economy. Initially making national
income and investment the variables in his single model, Mahalanobis (1953) further
developed a two-sector model where the entire net output of the economy was to be produced
in the investment goods sector and the consumer goods sector. The model assumes an
economy that is related to a closed economy; non-shiftable capital equipment once installed
in any of the sector; a full capacity production in both the consumer and capital goods
sectors; determination of investment by the supply of capital goods; and no changes in prices.
On the basis of the above assumptions, the economy is divided into i, that is, the
proportion of net investment used in the capital goods sector; and c, the proportion of net
investment used in the consumer goods sector. Thus,
c + i = 1
(1)
Further, at any point of time (t), net investment (I) is divided into cIi, the part that
increases the productive capacity of the capital goods sector, and cIc the part that increases
the productive capacity of the consumer goods sector. In the form that
It = cIt + iIt
(2)
If taking as the total productivity coefficient when i and c are the capital-output
ratio of the capital goods sector and consumer goods sector, then it can be shown that
i Ii + c I c
=
i + c

(3)

The income identity equation for the entire economy is


Y t = It + Ct
(4)
As national income changes, investment and consumption also change. The change in
investment depends upon previous years investment (
depends on previous years consumption (
period t, is

It = It

It-1

) and so does consumption

). Hence, the increase in investment in

(5)

and increase in consumption is


C = C C
t

Ct 1

I t 1

t-1

(6)

Essentially, the increase in the two sectors is related to the liniing up of productive
capacity of investment and the output-capital ratio. Initially, the investment growth path is

determined by the productive capacity of investment in the capital goods sector (i Ii) and its
output-capital ratio (i), such that
I I = I
t

t-1

(7)

i i t-1

It = It-1 + iiIt-1
(8)
It = (1 + ii) It-1
(9)
Inserting different value for t (t= 1, 2, 3, . . .,) the solutions to equation (7) become
I1 = (1 + ii) I0
(10)
I2 = (1 + ii) I1
(11)
I2 = (1 + ii) (1 + ii) I0
(12)
I2 = (1 + ii)2 I0
(13)
Similarly, by putting the value of t in equation (13), it gives
It = I0 (1 + ii)t
(14)
I I = I (1 + )t I
t

It

i i

I0 = I0 (1 + ii)t

(15)

(16)

Also, by inserting the value of t (t= 1, 2, 3, . . .,) in the consumption growth path, as
C C =I
(17)
t

c c 0

C2

C1 = ccI1

(18)

Ct

C0 = cc (I0 + I1 + I2 + . . . + It)

(19)

By substituting the values of I1, I2, . . ., It in equation (19) and its related equations, it
can be solved as below
Ct C0 = cc [I0 + (1 + ii)I0 + (1 + ii)2I0 + . . . + (1 + ii)t I0]
C C = I [1+ (1 + ) + (1 + )2 + . . . + (1 + )t]
t

or

Ct

Ct

c c 0

C0 = ccI0

C0 = ccI0

i i

[
[

( 1+ i i )t1
(1+ i i ) 1
( 1+ i i )t1
i i

i i

i i

(20)
(21)

]
]

(22)

(23)

As such, the growth path of income for the whole economy, given equation (4), is
Yt = It + Ct
(24)

Yt
Y0
=
(It
I0)
+
(Ct
C0)

(25)
By substituting the values of equations (16) and (23) in equation (25), it gives
(1+ i i )t1

Yt
Y0 = [I0 (1 + ii)t
1] + ccI0
i i i

Yt

Y0 = I0[(1 + ii)t

1]

1+

c c
i i

(26)

(27)

Yt Y0 = I0 [(1 + ii)t

1]

i i + c c
i i

(28)

Supposing that I0 = 0Y0 and substituting it in equation (28) above, it gives


i i + c c
Yt Y0 = 0Y0 [(1 + ii)t 1]
i i

Yt = 0Y0 [(1 + ii)

Yt = Y0

1+ 0

1]

i i+ c c
i i

i i + c c
i i

[(1 + ii)t

+ Y0

1)

(29)

(30)

(31)

where 0 is the rate of investment in the base year, Y0 and Yt are the gross national income in
the base year and year t, respectively.
k i + c c
Intuitively, the ratio
i i

of the above equation is the overall capital

coefficient. If, on assumption that i and c are given, the growth rate of income will depend
upon 0 and i. Assuming further that 0 to be constant, the growth rate of income depends
upon the policy instrument, i.
In the economy, if c i, it implies that the larger the percentage investment in
consumer goods industries, the larger will be the income generated. However, the expression
(1 + ii)t in equation (54), shows that after a critical range of time, the larger the investment
in capital goods industries, the larger will be the income generated. Thus, initially a high
value of i increases the magnitude (1 + ii)t., and lower the overall capital coefficient
i i + c c
i i

. But as time passes, a higher value of i would lead to higher growth rate of

income in the long run.


On the other hand, if c = i, then the reciprocal of the overall capital coefficient, that

is,

i i
i i + c c

= i equals marginal rate of saving. By extension, the important policy

implication of the model is that for a higher rate of investment (i), the marginal rate of
saving must also be higher. Thus, a higher rate of investment on capital goods in the short run
would make available a smaller volume of output for consumption. But in the long run, it
would lead to a higher growth rate of consumption. See Jones (1975).