the interpretation of national income estimates...the interpretation of national income estimates...

The Interpretation of

National Income Estimates

B. D. Haig and S. S. McBurney

The Interpretation of National Income Estimates

Summaries of the flows of total expenditure and income in the economy and in the principal sectors comprising it have been used in many kinds of economic inquiry. In particular, information of this type helps in the examination of current trends in the level of economic activity.This has led to the preparation of social accounts by official statisticians in many countries.In this book an explanation of the nature and purpose of such statistics is given. Topics considered include the economic design of the social accounts, estimation and reliability of the figures, and the types of question which these data help to answer. Principles are explained, but by liberal use of examples and by constant attention to applications for which the data are intended, their discussion is kept on a practical plane.

The book should be of value to anyone using national income and social accounting figures. It should be of particular interest to Australian readers, as the examples are drawn mostly from Australian data. However, the principles described have a general application, and some references to overseas practice are made where they are needed to keep the discussion in perspective.

This book was published by ANU Press between 1965–1991.

This republication is part of the digitisation project being carried out by Scholarly Information Services/Library and ANU Press.

This project aims to make past scholarly works published by The Australian National University available to

a global audience under its open-access policy.

The Interpretation of National Income Estimates

B. D. Haig and S. S. McBurney

1968Australian National University Press

Canberra

F ir s t published 1968

Copyright in all co u n trie s su b sc rib in g to the B erne Convention; rep roduction in whole o r in p a r t , w ithout w ritten p e rm iss io n of the p u b lish e rs , is forbidden

Typed on IBM Executive Bold F ace No. 2 ty p e w rite r and p rin ted by G illingham P r in te r s P ty . Ltd. , A delaide

P rin te d and m anufactured in A u stra lia

R eg is te red in A u stra lia fo r tra n sm is s io n by post as a book

N ational L ib ra ry of A u s tra lia re g no AUS 67-2601

Preface

The chap ters of th is book w ere originally p repared as papers for a s e r ie s of sem inars in the D epartm ent of Economic H istory, The A ustralian National U niversity, on the meaning and in terpreta tion of national income estim ates . Although the papers have been rev ised in the light of discussion at the sem in ars , and some new m ateria l - including a discussion of quarte rly estim ates - has been incorporated , they re ta in th e ir original function: to d iscuss some of the questions which a r is e in using national income data in both sh o rt-te rm economic analysis.and long-term app ra isa l of economic trends.

This work is therefo re not an attem pt to provide a general introduction to methods of national income accounting or a full account of the sources and methods of estim ation. The fo rm er task is adequately covered for A ustralian re a d e rs in a num ber of other publications, including P ro fe sso r R. I. Downing's National Income and Social Accounts (1966), and chap ters in P ro fe sso r P . H. K arm el's Applied S tatistics for Econom ists (1963). The la tte r task would involve a study much beyond the scope of a volume of the p resen t size .It is hoped that in the absence of a detailed official volume of sources and methods the p resen t work may a s s is t u se rs of national accounting figures by setting out in m ore detail than is at p resen t available the chief considerations which affect the re liab ility and meaning of A ustralian national accounting s ta tis tic s .

The f i r s t four chap ters deal m ainly with the in terpreta tion of the official estim ates of national income and expenditure contained in the annual Commonwealth Bureau of Census and S ta tistics publication, A ustralian National Accounts, National Income and Expenditure. They include a discussion of the trea tm en t of governm ents and financial e n te rp rise s in the social accounts, and the re liab ility of the estim ates. The next chapter outlines featu res of the quarterly estim ates , contained in official Bureau of Census and S tatistics publications of Q uarterly E stim ates of National Income and Expenditure. The following th ree

vi P reface

chap ters cover some of the problem s which a rise in m easuring and using s e r ie s of national product estim ates for purposes of com parisons over tim e and between coun tries. This d iscussion is re levan t, for exam ple, to the use of estim ates set out in P ro fe sso r N .G . ButlinTs A ustralian Domestic P roduct, Investm ent and Foreign Borrowing ( 1962 ) .

The f i r s t four and the la s t four chap ters w ere p repared by different authors and there is unavoidably a difference in approach and in style between these chap ters . No attem pt has been made to incorporate the chap ters into a uniform presen tation . Some topics a re d iscussed in m ore than one chap ter, but these d iscussions a re approached from a slightly different point of view and it is thought that th is may help to clarify different aspects of difficult theore tical problem s in the in terpreta tion of national income estim ates . It also m eans that individual chapters cover the main points about the subject dealt with by the chap ters , and a re thus largely self-contained. Duplication in the orig inal sem inar papers has, however, been deleted where it sim ply re ite ra ted m a tte rs of fact.

The f i r s t four chapters w ere w ritten by S. S. McBurney and the la s t four by B. D. Haig.

We a re grateful to a num ber of people for help during the preparation of th is publication. Comments at the sem inars in the D epartm ent of Economic H istory w ere useful in rev ising the papers, M rs. A. Guenot typed the d ra fts , and the staff of the A ustralian National University P re s s w ere helpful in preparing the m anuscrip t for publication. Finally, the sem in ars for which the papers w ere originally prepared w ere organised by P ro fe sso r N.G. Butlin, and it is m ainly from his suggestion that the papers may be of in te re st to a w ider audience that the p resen t publication originated.

C anberra1967

B. D. H. S. S. McB.

Contents

Page

P re fa c e vIn troduction 1

1 The Concept of P roduction in Social A ccounting 5The n a tu re of soc ia l accounting 5P roduction - g en era l a sp e c ts 6P roduction by governm en ts 8P roduction by financial e n te rp r is e s 11G ro ss and net concep ts 16

2 C lassifica tio n of T ra n sa c tio n s by S ecto rs and by A ccounts 18A ccounts of se p a ra te s e c to rs 18Sub-division of accoun ts w ithin s e c to rs 19O ther fa c to rs affecting the accounts 22F u r th e r developm ents 26

3 E stim ation and R eliab ility of Social A ccountingS ta tis tic s - C oncepts 28

P rin c ip a l s tep s in es tim atio n 28A ccounting re la tio n s and co n sistency 29B asic s ta t is tic a l data - concep ts 33

4 E stim ation and R e liab ility of Social A ccountingS ta tis tic s - C overage and A ccuracy 44

B asic s ta t is t ic a l data - coverage 44B asic s ta t is t ic a l data - re lia b ility 49R eliab ility of soc ia l accounting e s tim a te s 51

5 Q u a rte rly E s tim a te s 59The fo rm and purpose of the q u a rte r ly e s tim a te s 59T im ing d isc re p a n c ie s 62Seasonal ad ju stm en t 67R eliab ility of q u a rte r ly e s tim a te s 72

6 N ational P ro d u ct as a M easu re of Total Output 75C oncepts of national p roduct 77Selection 78

vi i

viii ContentsPage

Duplication 81The valuation of national product 86

7 Deflation of National P roduct 92Methods of deflation 92Investm ent in stocks and depreciation 96The base period 99Quality change 100

8 Com parison of the National Product and Income ofCountries 105

A lternative approaches 106In terpretation of in ternational com parisons 109Sources of inform ation 113

F u rth er Reading 116L ist of R eferences Cited 118

Introduction

The f i r s t official estim ates of the national income and expenditure of A ustralia w ere published in a paper accompanying the Commonwealth Budget in 1945. These gave a detailed descrip tion of the activ ities of the governm ent sec to r as well as the figures of to tal national income and expenditure. Publication of these estim ates has continued annually and in subsequent issues they w ere expanded to provide a social accounting presentation of the economic activ ities of all sec to rs of the economy. In 1963 the Commonwealth Statistician issued the f ir s t com prehensive publication of national income estim ates , which provided a much g rea te r a rra y of s ta tis tica l inform ation about the workings of the economy and. for the f ir s t tim e, gave estim ates adjusted for p rice changes, which sum m arised the A ustralian ra te of economic growth since 1948/49.

At about the sam e tim e as the detailed official publication was being p repared , o ther s e r ie s of national income figures w ere being compiled and issued . In 1960 the Commonwealth S tatistician issued the f ir s t of a now reg u la r s e r ie s of quarterly estim ates of national income and expenditure, and h is to rica l s e r ie s dating from 1860 w ere provided in 1962 in P ro fe sso r N.G. B utlin’s A ustralian Domestic P roduct, Investm ent and Foreign Borrowing (1962). While many attem pts had been made by A ustralian econom ists to m easure A ustralian national product since the la s t century, P ro fe sso r B utlin 's publication was the f ir s t attem pt to provide a com prehensive long-run se r ie s of total national product, using modern methods of com pilation and giving the supporting details needed for the application of the estim ates in h is to rica l in terpreta tion .

The publication of these estim ates - both official and unofficial - has led in recen t y e a rs to a g rea t in c rease in the use of national income figures in the study of economic ac tiv ities. The R eport of the Committee of Economic Enquiry (The Vernon Report) (Commonwealth of A ustralia 1965) used official annual figures to describe the course

1

2 National Income E stim ates

of A ustralian economic growth since World War II and as a b asis for economic projections up to 1974/75. Q uarterly and annual estim ates a re used in cu rren t d iscussions of economic conditions, such as in the Commonwealth T rea su ry ’s annual economic surveys and in regu lar quarterly a rtic le s in the Economic R ecord on the A ustralian economy. In line with developm ents in overseas countries the national income estim ates have been used in the study of economic h isto ry and have, in this use, provided a convenient sum m ary of the main facto rs in A ustralian economic growth.

It seem s true to say, however, that in spite of the im provem ents in basic s ta tis tic s the use of national income estim ates in the in terpre ta tion of economic changes could be much fu rther developed. This is for two main reasons. F ir s t , th e re a re notable gaps in both the official and unofficial s e r ie s which lim it th e ir applications. Thus, while h is to rica l s e r ie s ex ist up to 1938/39, they a re not re la ted to the official post-W orld War II e stim ates e ither in concept or in s ta tis tica l detail; the official quarterly estim ates do not elim inate the influence of p rice changes; annual estim ates do not provide details of capital depreciation in cu rren t replacem ent p rices or the stock of capital a sse ts . Additional estim ates a re needed to improve the adequacy of available figures for the appra isa l of e ither long-term or sh o rt-te rm economic activ ities.

The second reason is that up to the p resen t tim e there has been a lack of documentation of sources and methods and of the effect of these on the meaning and re liab ility of the estim ates. The national accounting figures a re an attem pt to provide s ta tis tica l m agnitudes for a num ber of economic concepts. There a re , however, many difficulties in providing the appropriate s e r ie s requ ired for different types of economic analysis. This is partly because many economic concepts, p a rticu la rly those which have originated in ab strac t th eo ries , a re difficult to define in a way which leads to an unambiguous m easure . The re la tionsh ip of any s ta tis tica l estim ate to the ideal theo re tical c o rre la te is , accordingly, often a tenuous one; the concept of production, for exam ple, which is basic in the m easurem ent of national product is defined as much in te rm s of s ta tis tica l conventions as of ab s trac t concepts of economic production; s im ila rly the meaning of consumption and investm ent expenditure, as used in national income accounting, can only be properly assessed by consideration of conventions used in th e ir

Introduction 3

m easurem ent. In addition, national accounting estim ates a re synthetic s ta tis tic s , obtained by sum m arising a g rea t m ass of detailed inform ation into a few p a rticu la r e stim ates. The basic data used in the estim ates vary considerably in re liab ility and thus the resu lting figures differ in th e ir re liab ility , and som etim es, for purely s ta tis tica l reaso n s, they may have featu res which a re not obvious in the sim ple definitions. Thus the in terpre ta tion of the estim ates has to be made in the light of the adequacy and type of basic data used in th e ir estim ation.

This study is largely an ex erc ise in setting out some of the fac to rs in the definition and estim ation of national income figures which a re likely to affect the in terp re ta tion of available A ustralian estim ates .It does not attem pt to add to existing se r ie s or to in te rp re t the figures for any p a rticu la r purpose. It is , however, hoped that the discussion in different chap ters may help in providing inform ation needed in one aspect of the in terp re ta tion of the available figures of A ustralian national product and the social accounting tables in which they a re p resented .

1 The Concept of Production in Social Accounting

The nature of social accountingThe purpose of social accounting is to am algam ate the accounts of individual tra n sac to rs (e .g . p a rticu la r e n te rp rise s , persons, governm ent au thorities) into a set of accounts sum m arising the nation 's business in a form suitable for economic analysis. It is concerned with the preparation of p a rticu la r types of economic s ta tis tic s .

Many other types of economic s ta tis tic s (e .g . life insurance s ta tis tic s , production sta tis tic s) a re also am algam ations of figures re la ting to individual tra n sac to rs . Their purpose d iffers from that of social accounting data in that they a re intended to provide details about p a rticu la r ac tiv ities as such, w hereas social accounting data a re concerned with the perform ance of the en tire economy and the relationship of p a rticu la r activ ities to it. The difference of purpose is reflected in the c lassifications derived from the two types of am algam ation of accounts. For exam ple, life insurance s ta tis tic s contain details about item s such as types of policy, different causes of discontinuance of policy, and c lassifications of prem ium s and c laim s. These a re im portant aspects of life insurance business, but they have no counterparts in o ther types of business and therefo re cannot be added to details for other types of business to obtain s im ila r figures for the en tire economy. In social accounting data som e of the m ore im portant c lassifications a re production, incom e, expenditure, saving, borrowing, lending. F igures of th is type, even if they re la te to d ifferent kinds of tra n sac to r, can be totalled to yield inform ation of the sam e type for im portant sec to rs of the economy or for the en tire economy.

Most social accounting work has been built around the concept of production. As a la rg e pa rt of economic doctrine is concerned with the production, d istribution and exchange of goods and se rv ices , s ta tis tica l data of th is type have had a num ber of applications in applied

5

6 National Income Estim ates

econom ics. Some applications to w elfare econom ics may only requ ire estim ates of total production; o thers may req u ire c lassifications of the to tal, e .g . by industry , by income sh a re , o r by type of expenditure to which it is applied. Since the publication of Keynes’s G eneral Theory (1936), and the growth of attention to analyses of income and expenditure which it prom pted, a need has a risen for m ore detail of the transactions of p a rticu la r sec to rs and th e ir relationship to the national to ta ls . This has led to the publication by government s ta tistic ians of se ts of social accounts showing transactions between m ajor sec to rs of the economy.

In the rem ainder of th is chap ter and in Chapter 2 som e of the basic concepts of social accounting a re review ed brie fly , to provide a basis for the d iscussion in la te r chap ters . Chapter 1 considers the concept of production, which is fundamental in social accounting work, w hether we a re concerned only with the national aggregates and the ir components or whether we a re concerned with in tegrated sets of accounts. Chapter 2 considers the system s of accounts in which the re su lts a re presented .

Production - general aspectsThe definition of production req u ire s decisions on two m atte rs .F irs tly , one m ust decide what item s a re included in production, that is one m ust define the flow of goods and serv ices in rea l te rm s . Secondly, one m ust decide the value to be applied to each item of production; this is essen tially a m atte r of choosing a set of value weights to be applied to the rea l quantities.

If we a re given an estim ate of total production, however defined, we may inquire to what uses the goods and serv ices rep resen ted by it have been put. The principal uses which a re commonly distinguished a re consumption by residen ts or governm ent au thorities , additions to capital a sse ts (whether fixed capital equipment or stocks), and net ex p o rts .1 When expressed in money values the uses a re called ’final expenditures’. Given the estim ate of production, we may also inquire to whom it acc ru es. Division of the product among those who derive the benefit is indicated by a classification of income sh ares . Although production may be defined in various ways, the re la tions noted above a re independent of the definition chosen; total production, the to tal of

The sam e id en tity is frequen tly rew ritten to show production plus im ports a llo c a te d betw een the follow ing uses: consum ption by residen ts and g o vernm en t au thorities, additions to c a p ita l assets, and to ta l exports.

Production in Social Accounting 7

the corresponding final expenditures, and the total of the corresponding income shares a re n ecessa rily identical.

One of the conventions adopted in defining production for social accounting purposes is to include goods and serv ices bought and sold in the m arket, and to value them at th e ir m arket p rice s . In o rder to avoid m ultiple counting of goods which pass through sev era l stages of production, a distinction is drawn between ’fina l’ and ’in te rm ed ia te ’ goods. Thus if a loaf of bread se lls for twenty cents, it would not be c o rre c t to include in the estim ate of production the p rice of the flour used in producing the bread and the p rice of the wheat used in producing the flour in addition to the twenty cents for which the loaf of b read itse lf se lls . To obtain the co rre c t figure, one may add up the values of the ’final' output ( i.e . amounts corresponding to the value of the b read , but not to the wheat or flour which have gone into its production), o r one may add up each p ro d u cer's contribution to the final product ( i.e . the value added by his business, which is the value of his total sa les le ss the value of in term ediate products purchased by him ), or one may add up the income shares obtained when the value added by each producer is d istributed.

Another im portant concept, 'fac to r co s t’, is derived from an analysis of the income sh ares . R eferring to the example of the preceding paragraph , every loaf of b read produced gives r is e to incomes of twenty cents (other things, such as im ports and stocks of wheat and flour, being equal). Some of the income is paid to the governm ent as ind irec t taxes (e. g. payroll tax) and the re s t is paid to the owners of productive re so u rce s , e ither in the form of wages and sa la r ie s , o r as the various income sh ares making up the g ross operating surplus of the en te rp rises the activ ities of which contribute to the production of the b read . The paym ents to the owners of productive re so u rces a re the factor cost corresponding to the output of bread. The im portance of the concept a r is e s from the fact that it is the m arket p rice paid for the se rv ices of the productive re so u rce s . It is therefo re a useful concept in applications involving examination of the demand for re so u rc e s , e .g . Keynesian a n a ly s is .2 In the case of trad ing2

This term is used here to describe analyses of aggregate incom e and expenditure and their determinants which have developed since the publication of Keynes's General Theory (1936); it is not restricted to the m odel used in the General Theory,,

3'Trading' enterprise is here used in its wide socia l accounting sense: any enterprise other

than a financia l enterprise.

8 National Incom e E s tim a te s

e n te rp r is e s , fa c to r co st b e a rs a s im p le re la tio n sh ip to the m a rk e t p r ic e of production ( i .e . s a le s of output le s s p u rch ases of goods and se rv ic e s from o th e r p ro d u c e rs ) , as the two d iffer only by the am ounts of in d ire c t ta x es (net of su b sid ies). H ow ever, as la te r p a r ts of th is ch ap te r w ill show, m o re fundam ental d iffe ren ces a r is e in connection with the output of governm en ts and financial e n te rp r is e s (and th e re fo re in connection w ith the output of the econom y a s a whole): the definition of th e ir output m u st be chosen with c a re if it is to be c lo se ly re la te d to the fac to r co st of re s o u rc e s used .

N on-m arket item s of c e r ta in types a re included in production at im puted va lues. E xam ples a re the re n ta l value of ow ner-occupied houses and consum ption of fa rm produce by the fa rm e rs . C orresponding to the im puted p roduction , th e re a re im puted incom es d is trib u ted to the o w n er-o ccu p ie r and the fa rm e r re sp e c tiv e ly , and th e re a re a lso final expend itu res re p re se n tin g th e ir im puted p u rch ases from th em se lv es . T hese item s a re d iscu ssed in C hapter 6.

P roduction by governm entsThe tre a tm e n t of governm ent e n te rp r is e s , which se ll goods o r s e rv ic e s at a p r ic e , is co v ered by e a r l ie r com m ents. Leaving th e se a s id e , th e re a re d iffe ren ces of opinion as to the ideal tre a tm e n t of g en era l governm ent ac tiv ity . The p ra c tic e s followed d iffer le s s than opinions about th e ir adequacy, p a rtly because s ta t is tic a l co n s id e ra tio n s lim it the freedom of p rac tice if e s tim a te s of definable concepts a re to be obtained. The debate about the adequacy of the conventional tre a tm e n t has not suggested an a lte rn a tiv e which is both c le a rly defined and m o re ap p ro p ria te fo r all of the m ain app lica tions.

The m ark e t p r ic e of m o st g en e ra l governm ent ac tiv ity is n il, a s it is not sold on the m a rk e t (there a re excep tions, such as fees of h o sp ita ls , sch o o ls , com pany r e g i s t r a r s , and o ther m isce llaneous ch a rg e s of governm en ts). C onsequently , if m a rk e t p r ic e valuation w ere used fo r g en e ra l governm ent activ ity in the sam e way as for b u s in ess ac tiv ity , the p roduct ( i .e . value added) in the g en era l governm ent se c to r would be a su b stan tia l negative am ount because its p u rch ases of in te rm ed ia te goods and se rv ic e s from o th e r s e c to rs would exceed its s a le s to o th e r s e c to rs (the fees and m isce llaneous ch a rg e s noted above). The incom e s h a re s co rresp o n d in g to that


negative product would consist of: (i) ind irect taxes paid by the general governm ent s e c to r ,4 (ii) the wages and sa la r ie s paid to employees engaged in general governm ent, and (iii) a much la rg e r negative item rep resen ting the operating loss on general governm ent activity (this lo ss is paid fo r, of cou rse , from taxation and other revenue tra n s fe rre d to the governm ent). This is illu s tra ted in the following example. Suppose that the governm ent purchases $100 m illion of goods and serv ices from other sec to rs , pays wages of $50 m illion and indirect taxes of $5 m illion, and charges other sec to rs $10 m illion by way of fees and other m iscellaneous charges. Then m arket p rice valuation of output would yield the following production account for the general governm ent secto r:

Production Account (m arket p rice basis)

Expenditure $m Receipts $m

Interm ediate purchases 100 Sales (fees, e tc .) 10

Value added:wages 50operating surp lus -145ind irec t taxes 5 -90

Output (m arket price) 10 Output (m arket price) 10

In p rac tice the m arket p rice valuation is not re ta ined for the general governm ent sec to r. The reason for government functions having no selling p rice (or only a nominal one) is in many cases quite unrelated to the valuation of the product. Several governm ent se rv ices a re provided as communal ra th e r than individual se rv ices (e .g . roads, parks) and this ren d e rs the collection of a p rice im practicable. Also som e serv ices (e .g . education) a re deliberately made available to individuals free of charge (or for nominal fees) for social or political reaso n s , and not because it is considered the serv ice is worth no m ore. If the figures a re being used for w elfare analysis a m ore appropria te value weight should be applied to such se rv ices . If the figu res a re being used for Keynesian analysis of the relation between4

In d ire c t taxes m ay be paid from one au tho rity to ano ther w ith in the g en e ra l go v ern m en t sec to r, e . g . s ta te governm ents pay p ay ro ll ta x to the C om m onw ealth go v ern m en t in A u stra lia .


to tal employm ent and total expenditure, the concepts should be defined in such a way that an increase in the employment of, say, teach e rs will be m atched by an in crease in final expenditure on education. E ither type of application calls for a varia tion of the m arket p rice basis for valuing output of the general governm ent sec to r.

The convention usually adopted in p rac tice is to value the output of the general government sec to r at cost, that is to value it at such a sum that the operating surp lus on governm ent activity is zero . The data used above would yield the following production account of the general governm ent sec to r if the output w ere valued at cost:

Production Account (cost basis)

Expenditure $m R eceipts $m

Interm ediate purchases

Value added:wages 50ind irec t taxes 5

100 Sales:to other sec to rs 10

55

to government 145

Output (cost) 155 Output (cost) 155

In these exam ples $145 m illion of expenditure has to be m et from taxation and other general governm ent funds, however it is c lassified . When the cost basis is used, the $145 m illion is regarded as an imputed purchase of its own output by the governm ent on behalf of the com m unity, but when the m arket p rice basis is used th e re is no output corresponding to the $145 m illion. The cost basis yields higher figures of governm ent product and national product than the m arket p rice basis - the difference is equal to the net adm inistra tive expenditure by governm ents ( i .e . total expenditure le ss fees, charges, e t c . ). Corresponding to th is it also yields higher figures of incom es (operating surplus is zero instead of a negative amount) and of final expenditure (sales of governm ent output to the governm ent itse lf).

The p rac tice of valuing the whole of general governm ent output at cost is often c ritic ised on the grounds that some serv ices provided by governm ents a re in term ediate output ra th e r than final output (e .g . defence, police fo rces, general adm inistration) and that the

P roduction in Social A ccounting 11

in te rm ed ia te s e rv ic e s a re dup licated in the national p roduct e s tim a te s if the c o s t of a ll governm ent functions is included. The extent of th is duplication p ro b lem , its co n sequences, and a p a r tia l so lution a re investiga ted in C hapter 6. H ere it is su ffic ien t to note th a t, w hatever the m e r i ts o r d e m e rits of the conventional tre a tm e n t fo r w elfare a n a ly s is , it p rov ides a s a tis fa c to ry concept of production fo r use in K eynesian a n a ly s is , s ince it m a tch es an in c re a se in em ploym ent in governm ent ac tiv ity with an in c re a se in final expenditu re on the ’p roduction ' to which the em ploym ent gives r i s e . A fter deducting in d ire c t tax es paid , th is valuation of governm ent output, like m a rk e t p r ic e valuation of trad in g e n te rp r is e s ' output, y ie ld s the fac to r co st of the output. As noted above, fa c to r co st is a m e a su re of the dem and fo r produotive re s o u rc e s valued a t th e ir own m a rk e t p r ic e . A lte rna tive valuations of governm ent output (e .g . m a rk e t p r ic e s , o r the co s t of s e rv ic e s o th e r than those re g a rd e d a s in te rm ed ia te output) would not y ie ld the fac to r co st a f te r deducting in d irec t tax es (net of su b s id ie s ) .^

P roduction by financial e n te rp r is e sThe p rin c ip a l ac tiv ity of th is group of e n te rp r is e s is borrow ing and lending of m oney, and th e ir m ain so u rce of incom e is the m arg in betw een re c e ip ts of in te re s t and paym ents of in te re s t and a d m in is tra tiv e expen ses . The e n te rp r is e s include banks, money m a rk e t d e a le r s , life in su ran ce co m p an ies’, superannuation funds, in s ta lm en t c re d it co m pan ies , building so c ie tie s , and the m ortgage lending d ep a rtm en ts of housing com m issio n s and of o th e r public a u th o ritie s such as the W ar S erv ice H om es D ivision of the D epartm ent of H ousing. T hese e n te rp r is e s ca ll for sp ec ia l m ention in th is d iscu ss io n of p roduction , not p r im a r ily because of the s ize of th e ir bo rrow ing and lending and th e ir re c e ip ts and paym ents of in te re s t , but because the valuation of the p roduct of som e of them poses a p rob lem s im ila r to th a t posed by governm en ts. They have su b stan tia l running c o s ts to pay and, like governm en ts , they m eet them la rg e ly out of t r a n s f e r incom e ra th e r than out of se lling p r ic e s ch arg ed fo r th e ir s e rv ic e s . The conventional m ethods of tre a tin g

It is, of course, possible to derive a gross operating surplus consistent w ith any valuation of output m erely by balancing the production account. The resulting surplus, however, need not be a com ponent of factor cost even though its derivation is form ally sim ilar to that of the gross operating surplus of a trading enterprise (w hich is a com ponent of factor cost). For instance our first exam ple production account illustrates market price valuation of governm ent output; the negative operating surplus of -$145 m illion is not a factor cost as it is not in any sense a remuneration to attract productive resources into serv ice.

12 N ational Incom e E stim a tes

such e n te rp r is e s in the soc ia l accounts a re le s s s tan d ard ised than the m ethods of tre a tin g governm en ts; in p a r tic u la r , the p ra c tic e followed in the A u stra lian official e s tim a te s d iffe rs from the p ra c tic e s m ost com m only followed by o th e r co u n trie s .

The a d m in is tra tiv e expenses a ttr ib u tab le to som e e n te rp r is e s w ithin th is s e c to r m ay not be ch arged again st th e ir ea rn in g s, but m ay be tre a te d a s expenditu re by ano ther en tity . Thus the expenses of the W ar Serv ice H om es D ivision and of som e governm ent superannuation funds a re included in the output of and final expenditu re by public a u th o ritie s . The expenses of p riv a te superannuation funds m ay also be charged as expenses of the b u s in ess which o p e ra te s them , and may thereby be included in the value of its output. No specia l p ro b lem s a re caused by th is group of financia l e n te rp r is e s .

The p rem iu m s paid to life in su ran ce com panies and the con tribu tions paid to superannuation funds (o ther than those m entioned in the la s t p a rag rap h ) have to co v er not only the a c tu a r ia l co s t of the benefits p rov ided , but a lso the a d m in is tra tiv e ex penses of the life o ffices o r the superannuation funds. In the soc ia l accounts the p rem iu m s and con tribu tions a re b roken into an expense com ponent (equal to the ac tua l expenses) and the balance (which is tre a te d a s p e rso n a l saving). The expense com ponent is tre a te d as a sa le of output by financial e n te rp r is e s to p e rso n s , and is included in p e rso n a l consum ption expend itu re . As the value of the sa le is equal to the actual expenses th e re is no opera ting su rp lu s , and the value added (at fac to r cost) by th is group of financ ia l e n te rp r is e s is equal to th e ir wage and sa la ry b ill.

The rem ain ing e n te rp r is e s ch arg e le s s fo r th e ir se rv ic e s than they pay fo r a d m in is tra tiv e ex p en ses , and th e re is th e re fo re an operating lo ss to be m et from th e ir net in te re s t e a rn in g s. In the re m a in d e r of th is ch ap te r the tre a tm e n t of th e se e n te rp r is e s is illu s tra te d by specific re fe re n c e to th e ir m o st im portan t type (the banks), but the p rin c ip le s also apply to o the r e n te rp r is e s in th is group.

If banks ch arg e c u s to m e rs $2 m illion in fees and com m ission for keeping c u rre n t accounts and fo r c e r ta in o th e r s e rv ic e s , pay $5 m illion fo r goods and s e rv ic e s pu rch ased from o the r b u s in e s se s , $5 m illion in wages and s a la r ie s and $1 m illion in in d irec t ta x e s , th e ir p roduction account would appear as fo llow s, if th e ir output w ere valued a t m a rk e t p r ic e s :


Production Account of Banks (m arket p rice basis)


Interm ediate purchases 5 Sales (fees) 2

Value added:wages 5operating surp lus -9indirect taxes JL -3

Output (m arket price) 2 Output (m arket price) 2

This b asis is generally considered to have some unsatisfactory fea tu res which have prom pted a search for a lte rnative bases of valuation. It is objected that in o rd er to a ttra c t funds from which the ir in te re s t earnings a re derived, banks provide se rv ices to custom ers at le ss than cost (and at le ss than th e ir true value). It is also objected that it is unreal to rep resen t th is industry as paying expenses g re a te r than the value of its output, even when it is p rospering . For these reasons it is held that the m arket p rice undervalues the output of these en te rp rises just as it undervalues the output of governm ents - the banks, like the governm ents, can afford to ignore the m arket m echanism in pricing th e ir output o r se rv ices because they have substantial tra n s fe r income to cover deficiencies in tjie serv ice charges. An a lternative to m arket p rice valuation is therefo re sought for the output of banks, ju st as it was sought for the output of governm ents.

In the B ritish official e stim ates the m arket p rice basis is re ta ined , as the a lternatives a re not en tire ly sa tisfac to ry in p rincip le , and they pose some difficult s ta tis tic a l problem s. The figures of value added in the official estim ates a re p resen ted , how ever, not as the sum of wages and the negative operating surp lus (as in the account above) but as the sum of w ages, bank profits (as ord inarily understood), and a negative adjustm ent equal to net in te re s t received by the banks. The sam e bank product and national product figures a re obtained from either p resentation , but this procedure has the effect of setting out details of the total in a form which can be m ore readily re la ted to o ther data on incom es of e n te rp rise s .

In the A ustralian official e stim ates the convention adopted is to value


the output of banks at cost (i. e. to value it at such a sum that the operating surplus of banks is zero), and to impute a sale of p a rt of the output to the banks them selves. The data for the exam ple given in the previous table then yield the following production account:

Production Account of Banks (cost basis)


Interm ediate purchases 5

Value added: wagesindirect taxes

51 6

Sales:to other sec to rs to banks

29


The trea tm en t is the sam e as that adopted for valuing the output of governm ents. That basis is adopted because the se rv ice provided by banks (keeping cu sto m ers ' accounts, exchanging cheques, e tc .) , like some adm inistrative functions of governm ents, is a n ecessa ry expense of keeping the economy running. Because of the s im ila rity to those functions of governm ent, the sam e basis of valuation seem s appropriate . The objections to, and defence of, the conventional trea tm en t of governm ent also apply to this trea tm en t of banks. The replacem ent of m arket p rice valuation by valuation at cost has the effect of ra is ing the estim ates of bank product and national product by the net expenses of banks ( i .e . th e ir adm in istra tive expenses le ss serv ice charges). Corresponding to th is , there a re higher incomes (operating surp lus is zero instead of a negative amount) and higher final expenditures (sales of banking output to the banks them selves on behalf of th e ir custom ers). Value added (at factor cost) by banks, according to this trea tm en t, is equal to th e ir wage and sa la ry b ill.

The p rac tice followed in the official estim ates of many countries is to add to the actual se rv ice charge by the banks an additional imputed serv ice charge which brings the value of banking output up to what is considered a m ore appropria te figure, and to b reak up the imputed charge among p a rticu la r c la sses of custom ers and derive the

P roduction in Social A ccounting 15

consequential effect on the national p roduct f ig u re s . ® One effect of im puting such a ch arg e is to r a is e the p roduct of banks above the m ark e t p r ic e valuation by the am ount of the im puted ch a rg e . In so fa r as the im puted charge is tre a te d as a paym ent by p e rso n s o r by governm ents it is added to final expenditu re (personal consum ption, or expenditure on goods and s e rv ic e s by public au th o ritie s) . In so fa r as it is tre a te d as a paym ent by e n te rp r is e s it is im puted in te rm ed ia te expenditu re , and the p roduct of o th e r in d u s tr ie s is to th a t ex ten t reduced. The effects of su bstitu ting th is b a s is of valuation fo r the m ark e t p r ic e b a s is a re th e re fo re as follows:(i) national p roduct is in c re a se d by the im puted charge to p e rso n s or governm ents;(ii) final expenditu re is a lso in c re a se d by th a t am ount;(iii) the p roduct of banks is in c re a se d by the to ta l am ount of the se rv ice ch arg e to all c u s to m e rs , and the p roduct of o th e r in d u s tr ie s is reduced by the am ount of the im puted ch arg e to o th e r e n te rp r is e s . T here is thus som e re d is tr ib u tio n of product to banks from o ther in d u s tr ie s .

The im putation could take any one of se v e ra l fo rm s . C onsider the following exam ple: banks re c e iv e in te re s t of $50 m illion and actual se rv ice ch a rg e s of $3 m illion ; they pay in te re s t of $22 m illion , in d irec t tax es of $1 m illion , and o ther expenses (including w ages and sa la r ie s ) of $10 m illion , and m ake a p ro fit of $20 m illion . If the output of banks w ere valued a t co s t the im puted ch arg e would be $8 m illion (expenses and tax es $11 m illion , le s s ac tua l ch a rg e s of $3 m illion); if it w ere valued at c o s t p lus p ro fit, the im puted ch arg e would be $28 m illion (expenses and ta x es of $11 m illion , plus p ro fit of $20 m illion , le ss ac tua l ch a rg e s of $3 m illion). The ch a rg e s could be im puted en tire ly to b o r ro w e rs , en tire ly to d e p o s ito rs , o r p a rtly to each. If an im puted ch arg e of $8 m illion w ere co n sid e red as paid en tire ly by b o rro w e rs , the ac tu a l in te re s t of $50 m illion paid by them would be reg a rd ed as equ ivalen t to paym ents of $8 m illion of im puted se rv ice ch a rg e s and $42 m illion of in te re s t p ro p e r . If an im puted charge of $8 m illion w ere co n sid e red as paid en tire ly by d ep o s ito rs , the actual in te re s t of $22 m illion rece iv ed by them would be reg a rd ed a s equivalent to in te re s t p ro p e r of $30 m illion (actual $22 m illion plus im puted $8 m illion), le s s im puted se rv ic e ch a rg e s of $8 m illion . The

^ The A ustra lian p rac tic e (described in the p reced ing paragraph) im putes a sale by banks to them selves ra th e r than to custom ers.


p ractice recom m ended by the United Nations S tatistical Office in A System of National Accounts and Supporting Tables (U.N. 1964b), and followed by a num ber of coun tries, is to value the se rv ices of banks, like the output of other e n te rp rise s , at cost plus profit, and to reg ard the imputed charge as paid en tire ly by deposito rs. In te rm s of the example above, th is would involve regard ing the actual in te re s t of $22 m illion received by depositors as equivalent to in te re st proper of $50 m illion, le ss imputed serv ice charges of $28 m illion. This p rac tice leads to a higher figure for the product of banks and a sm aller figure for the product of other en te rp rises than does the A ustralian p rac tice . Their re la tiv e effects on to tal national product depend on how much of the $28 million of imputed charges is attributed to en te rp rises and how much to persons and governm ents, as the United Nations p rac tice adds the la tte r component to the m arket p rice estim ate of national product, while the A ustralian p rac tice adds the net expenses of banks (total expenses le ss actual charges, amounting to $8 million in the example above) to the m arket p rice estim ate . 7

G ross and net conceptsThe estim ates of product and of capital expenditure may be m easured e ither before or a fte r deducting depreciation as a cost. In the fo rm er case g ross figures a re obtained, in the la tte r net figures. D epreciation is considered fu rther in Chapter 6, and exam ination of the nature of the concept is left until then. The g ross and net concepts a re mentioned here solely for the purpose of noting th e ir relevance to two of the principal applications of social accounting data - w elfare analysis and Keynesian analysis.

The net product is the value of goods and serv ices left a fter maintaining capital intact, and it m easu res the nation’s income, in the sense of the amount which it could consume or tra n s fe r overseas without living on its capital. The net concept appears to be the one m ore suited to w elfare applications such as studies of income per head and the study of income sh ares .

In Keynesian applications involving study of the level of demand the g ross concepts a re m ore appropria te , because the construction of new

7N atio n a l A ccounting P ractices in S ixty C ountries ( U. N. 1964a) sta tes th a t th e A ustralian

procedure 'results in h igher incom e, p roduct and expend itu re aggregates £fhan in the U nited N ations system )to the ex ten t th a t serv ice charges are im p u ted to en terprises under the U nited N ations sy s tem '. This co m m e n t overlooks the f a c t th a t the U nited N ations p rac tic e values the ou tpu t of banks a t a h igher figure th a n does the A ustralian p rac tic e (cost plus p ro fit in the fo rm er case , co st on ly in the la t te r ) .


asse ts calls forth a demand for labour and other re so u rce s , w hereas the wearing out of old a sse ts does not involve a diminution of that demand. For exam ple, if 100 new buildings w ere erected , partly for replacem ent and partly for expansion of the stock of buildings, there would be a demand for labour and other re so u rce s used in th e ir construction, and that demand would be the sam e irresp ec tiv e of whether old buildings w ere w earing out at a ra te of 10 per y ear, 20 per y ea r, or some other ra te . The 100 corresponds to the g ross product, which is therefo re the m ore im portant concept for studies of aggregate demand.

2 Classification of Transactions by Sectors and by Accounts

In Chapter 1 the definition of the national product and the corresponding expenditures and income sh ares w ere considered. The national to ta ls may be c lassified by industry , by type of incom e, or by type of final expenditure. Many applications of social accounting, however, requ ire m ore inform ation than we can obtain from such sum m aries.

Accounts of separa te sec to rsThe national expenditure estim ates provide figures for some of the im portant Keynesian aggregates, such as personal consumption, private investm ent, and public authority expenditure. In o rd er to explain the varia tions in these expenditures it is often n ecessa ry to consider other re la ted aggregates which a re not provided in sum m ary tables of national product and expenditure. For exam ple, personal consumption is influenced by the level of personal incom e, and the la tte r figure is not contained in the national product or expenditure sum m aries. An in crease in final expenditure by public au thorities may be financed by taxation o r by borrow ing, but the fo rm er is likely to re s tr ic t p rivate expenditure to a g rea te r extent than the la tte r; as the national product and expenditure sum m aries do not indicate the method of financing p a rticu la r expenditures, some supplem entary inform ation is again needed.

In o rd er to throw light on these m a tte rs the s ta tis tic a l data m ust show not only the amount produced and the uses to which the product is put, but also the sources of funds used by the p u rch ase rs to finance each of the main types of final expenditure. This involves presenting details of tra n s fe rs from those who in itially receive the proceeds of production to those who make the final expenditures. The two groups overlap to a considerable extent (e. g. wages and sa la r ie s a re im m ediate proceeds of production, and the wage and sa la ry ea rn e rs them selves devote a large p a rt of th e ir earnings to final expenditure

18

C lassification of T ransactions 19

on goods and serv ices), but th e re rem ains a substantial amount of expenditure financed from cu rren t tra n s fe rs such as tax revenue, pensions, property incom e, o r from borrowing, ra th e r than directly from the im m ediate proceeds of production.

F or this reason official s ta tis tic ian s supplem ent the national product and expenditure estim ates with se ts of social accounts showing transac tions between the m ajor sec to rs of the economy. T ran sac to rs a re grouped into a sm all num ber of sec to rs according to the nature of th e ir activities". Each s e c to r’s share of the im m ediate proceeds of production is c red ited to its account, and so also a re tra n s fe rs from o ther sec to rs . On the o ther side of the account is shown the use made of the funds - tra n s fe rs to o ther sec to rs and final expenditure by the sec to r in question a re the m ajor u ses , and each is broken up into suitable item s.

The num ber of sec to rs for which accounts a re shown can be large or sm all. The minimum detail needed for Keynesian analysis req u ires separa te accounts for pe rso n s, governm ents, en te rp rise s , and overseas tra n sa c to rs , because of the very different influences affecting the expenditures by those four groups.

F u rth er break-dow ns of sec to rs can be useful if the transactions of the separa te groups a re d iss im ila r and substantial. In that case significant inform ation on p a rticu la r expenditures and the ir determ inants is revealed by the m ore detailed c lassification . In accordance with th is principle the tran sac tio n s of the Commonwealth governm ent and of the state and local governm ents a re shown separa te ly in the A ustralian e s tim ates , because of th e ir different functions and sources of revenue and because of the im portance of the financial re la tions between them . Financial e n te rp rise s have also been separated from other en te rp rise s because of the special nature of th e ir business (which is p rim arily concerned with borrowing and lending and tra n s fe rs of in te re s t ra th e r than with production) and because of the special method of valuing th e ir product.

Sub-division of accounts within sec to rsAccounts derived in the m anner described above would each contain details of many different kinds of transaction re la ting , for exam ple, to production of goods and se rv ice s , to tra n s fe rs of incom e, to cu rren t and capital expenditure on goods and se rv ice s , and to borrowing and lending. A c le a re r p icture of each s e c to r 's business could be obtained

20 National Income E stim a tes

if som e of these ac t iv i t ie s w ere p resen ted separa te ly ; th is could be done by break ing up the se c to r account into a num ber of accoun ts , each of which covered a genera l c la ss of t r a n sa c t io n s . F or exam ple , each s e c to r account could be broken into accounts , such as the following th re e , dealing re spec t ive ly with production, o ther c u r re n t t r a n s a c t io n s , and capita l t ran sac tio n s :

Production Account

Expenditure $ R ece ip ts $

P u rc h a s e s of in te rm ed ia te output of o ther s e c to rs

Sales of in te rm ed ia te output 1o o ther s e c to r s

Wages, s a la r i e s , and supplem ents

G ross operating su rp lus

Ind irec t taxes le s s subsid ies

Sales of final output- c u r re n t- fixed capital- in c re a s e in value

of s tocks

Total Total

C u rren t Account

Expenditure $ R ece ip ts $

C u rren t expenditure on final output

C u rren t t r a n s f e r s to o ther s e c to rs

G ross saving

W ages, s a la r ie s and supplem ents (personal s e c to r only)

G ro ss operating su rp lu s

Indirec t taxes le s s subsid ies (public au thority sec to r only)

C urren t t r a n s f e r s from o ther s e c to r s

Total Total

C lassifica tio n of T ran sac tio n s 21

C apital Account

E xpenditu re $ R ece ip ts $

C apital expend itu re G ro ss sav ingon final output- fixed cap ita l- in c re a se in value of

Sales of ex isting cap ita l a s s e ts

stocks T ra n s fe rs of saving

P u rc h a se s of ex istingfrom o th e r s e c to rs

cap ita l a s s e ts

T ra n s fe rs of sav ing too th e r s e c to rs

T otal Total

The value of the s e c to r 's production is se t out in its p roduction account. That account a lso shows the use m ade of its output, and the m anner in w hich the incom e produced by the s e c to r is d is tr ib u ted am ong its im m ediate re c ip ie n ts . The incom e is taken to the c u r re n t accounts of the v a rio u s s e c to rs , w here it is supplem ented by incom e re d is tr ib u te d from o the r s e c to rs in the form of c u r re n t tr a n s fe r s such as ta x e s , in te re s t , d iv idends, and pensions. P a r t of the incom e is used fo r c u r re n t expenditu re on goods and s e rv ic e s , p a r t of it m ay be re d is tr ib u te d to o ther s e c to rs by m eans of c u r re n t t r a n s f e r s , and the ba lance is the s e c to r 's g ro ss sav ing . The g ro s s saving is taken to the s e c to r 's cap ita l account, which shows its final cap ita l expenditu re on new a s s e ts and s to ck s , and the so u rc e s of funds used to finance it. T hese funds include, in addition to the g ro ss sav ing of the s e c to r , its bo rrow ing from o the r s e c to rs and its s a le s of second-hand a s s e ts to o th e r s e c to rs , le s s its lending to o the r s e c to rs and p u rch ases of second-hand a s s e ts from o th e r s e c to rs .

The pu rpose to be se rv ed by the se t of accounts re q u ire s tha t they include som e im puted tra n sa c tio n s . F o r exam ple, if a b u s in ess does not se ll its e n tire output its s tocks of fin ished goods in c re a se . In the soc ia l accoun ts the e s tim a te of production should include the value of a ll goods and s e rv ic e s produced , w hether sold o r not, and the u ses to which the production is put a re shown as re c e ip ts of the production account. In th is exam ple the p ro d u cer adds the unsold production to


his stocks, and this use of the output is rep resen ted as an imputed sale from the b u s in ess 's production account to its capital account.The conventional definition of government output and the A ustralian and the United Nations definitions of the output of financial e n te rp rise s (described in Chapter 1) also req u ire the record ing of imputed sales in o rd er to rep resen t the use made of certa in outputs.

Other fac to rs affecting the accountsIf the form of accounts shown abovel w ere adopted as the basic s tru c tu re , different choices about a num ber of other m a tte rs could s till lead to differences of detail in the contents of the accounts. For exam ple, some of the headings could be fu rth er divided. Production item s could be broken up by industry o r by type of e n te rp rise , expenditures by function, and tra n s fe rs by type (e .g . into in te re s t, dividends, taxes, pensions, etc. , in the case of cu rren t tra n s fe rs , and into various fo rm s of borrowing and lending in the case of capital tra n s fe rs ) . However, the various choices which could be made regard ing such d issections would m erely sp lit the to ta ls in various ways without a lte ring the to ta ls them selves. More fundamental changes, which would a lte r some of the to ta ls , would be brought about by choices between a lternative groupings of tra n sac to rs into sec to rs and between alternative concepts of production.

D ifferent groupings of tra n sac to rs into sec to rs generally requ ire different sets of basic data to p rep are estim ates of item s in the accounts, and the lack of certa in types of data may therefo re influence the choice of sec to r groupings. A sec to r account is a consolidation of the accounts of tra n sac to rs included in the sec to r, and, like all consolidated accounts, shows transactions between the group which it covers and those outside the group, but excludes details of transactions between different m em bers within the group. Consequently, if data a re lacking on transac tions between two groups of tra n sac to rs it may s till be possible to p rep are estim ates of the item s in a consolidated account of the combined group, as the m issing details would re la te to in ternal transactions which a re not shown in the consolidated account.

The trea tm en t of non-profit-m aking organisations such as clubs, churches, and private schools illu s tra te s this point. Data on m ost transactions between these organisations and persons a re not available

A lternative analyses of each sector's transactions among different accounts are described in Karmel (1963: Ch. 11) and Mathews (1962: Ch. 18).


but some of the basic s ta tis tic s , such as re ta il sa les figu res, include transac tions of the combined group (persons and the clubs, e tc .) with other sec to rs . If such organisations a re grouped with persons it is not n ecessa ry to estim ate the transactions between them , and the consolidated account shows th e ir combined transac tions with other sec to rs .

Some a lternative concepts of production w ere considered in Chapter 1. The choice between them obviously affects the contents of one or m ore of the production accounts in the com plete set of sec to r accounts. In addition, as the choice of a concept of production involves the choice of corresponding income sh ares and final expenditures, it also affects other accounts in the set. Consider the valuation of government output as it affects the following exam ple. Suppose that the governm ent's cu rren t purchases of in term ediate output from other sec to rs a re $100 m illion, that it pays wages of $50 m illion and ind irect taxes of $5 m illion, that fees and charges to other sec to rs a re $10 million and taxation is $150 m illion, that $20 m illion of the in term ediate purchases and wages go into governm ent construction, that a fu rth er $50 m illion of capital goods a re purchased from other sec to rs , and that $45 m illion is borrow ed. Using the usual convention of valuing governm ent output at cost, the accounts of the government sec to r would be as follows:

Production Account


Interm ediate purchases 100 Sales:

Value added:wages 50ind irec t taxes 5 55

to other sec to rs to government

- cu rren t- capital

10

12520



C urren t Account


C urrent expenditure on final Taxation 150output 125

Saving 25

Total 150 Total 150

Capital Account


Capital expenditure on final Saving 25output- of government 20

Borrowing 45

- of other sec to rs 50

Total 70 Total 70

If expenditure on cu rren t operations w ere valued at m arket p rice instead of cost, the accounts would take the following form:

Production Account


Interm ediate purchases 100 Sales:

Value added:wages 50

to o ther sec to rs 10to governm ent (capital) 20

operating surplus -125 indirect taxes 5 -70

Output 30 Output 30


C urrent Account


Saving 25 Operating surplus -125

Taxation 150

Total 25 Total 25

Capital Account


Capital expenditure on final Saving 25output- of government 20 Borrowing 45

- of other sec to rs 50

Total 70 Total 70

If the se ts of accounts corresponding to the a lternative valuations of financial e n te rp rise s ' output described in Chapter 1 w ere considered, those corresponding to the m arket p rice basis and the cost basis would differ in th e ir classification of transac tions of the financial e n te rp rises sec to r. The d ifferences between them would be form ally s im ila r to those between the two se ts of governm ent accounts derived from those bases and set out in the la s t paragraph. The differences between e ither of those trea tm en ts of financial en te rp rise s and the trea tm en t recom m ended by the United Nations S tatistical Office would, however, extend beyond the financial e n te rp rise s sec to r. The United Nations p rac tice involves imputing sa les by financial e n te rp rises to trading e n te rp rise s and persons. When com pared with the m arket p rice or cost b a s is , th e re fo re , th is trea tm en t re c la ss if ie s not only the financial e n te rp rise s s e c to r 's accounts, but also the production and appropriation accounts of the trad ing e n te rp rise s sec to r and the cu rren t account of the personal sec to r.

A large num ber of accounts (three for each sector) would be requ ired to set out the details described in the preceding paragraphs. It may be possible to sim plify the p resentation without sacrificing


essen tia l inform ation if som e, but not a ll, of the accounts a re consolidated. The reason given at the beginning of th is chapter for presenting sep ara te accounts for each sec to r was that they showed the tra n s fe rs of income and savings from which some final expenditure is financed. Although separa te cu rren t and capital accounts for each sec to r a re needed for that purpose, separa te production accounts are not. Separate production accounts a re not shown for each sec to r in A ustralian National A ccounts, but only the national production account obtained by consolidation. This leaves final, but not in term ediate , expenditures in the national production account.

F u rth er developm entsTwo specialised developm ents a re re fe rre d to h e re because of th e ir relationship to the sec to r accounts, although they a re not pursued at any length in th is book. Input-output tab les aim to show the relationship between the output of each industry and its demand for the output of other industries; th is a s s is ts in trac ing the ultim ate im pact on different industries of changes in the com position of final demand.Such tab les may be p repared in various form s - the figures may be expressed in physical o r in money te rm s , and the la tte r may be constructed on sev era l d ifferent bases. Tables expressed in money te rm s a re obtained by breaking up the national production account in the social accounts into separa te production accounts for a num ber of in d ustries , and showing not only final expenditure on the output of each industry but also the in term ediate purchases and sa les between each pa ir of in d u strie s . 2 The re su lts may be p resen ted m ore conveniently in the form of a m atrix than a set of accounts.

The capital account of each sec to r shows the s e c to r’s saving (i.e . income le ss cu rren t expenditure and cu rren t tra n s fe rs to o ther sec to rs), its capital expenditure, and its borrowing and lending. For some purposes it may be n ecessa ry to concentrate on the borrowing and lending item s and to provide m ore detail of them . One method of doing th is , used in flow-of-funds data, is to break each se c to r 's borrowing and lending up among the c la sses of financial a sse t involved in the transac tions. 3 The one lis t of c lasses of financial a sse t is used in the 2

For an exposition of the relationship between the social accounts and the input-output matrix see Stone and Croft-Murray (1959: Ch. 2). The Commonwealth Statistician has published tables for Australia for 1958/59, and the introduction to the tables describes their relationship to the social accounting data published in the Australian National Accounts.3

For Australian estimates see Reserve Bank of Australia (1965, 1966).


analysis of all sec to rs; consequently, the sources and uses of funds shown under each c lass of a sse t balance when totalled over all sec to rs , and an analysis of transac tions in each c lass of financial a sse t throughout the economy can be derived from the s ta tis tic s . Because of the magnitude of transactions of this type by financial e n te rp rise s , the financial en te rp rises sec to r can, with advantage, be broken into a num ber of p a rts corresponding to p a rticu la r types of en te rp rise (e .g . banks, life insurance com panies, pension funds, instalm ent c red it com panies, e tc .) in flow-of-funds s ta tis tic s , w hereas the magnitude of the s e c to r 's production is not g rea t enough to w arran t a break-up in that detail for social accounting purposes in general.

3 Estimation and Reliability of Social Accounting Statistics — Concepts

Before attem pting to p rep a re estim ates of item s in the social accounts, decisions must be reached on the definition of production and on the general scheme of accounts (including the sec to r groupings, the types of accounts, and the transaction headings within the accounts). These m a tte rs have been considered in Chapters 1 and 2.

P rincipal steps in estim ationGiven the definition of production and the general schem e of accounts, the principal steps involved in p reparing estim ates are:(i) Examination of the accounting re la tions between the item s listed in the accounts, to see in what ways the choice of a p a rticu la r definition for one item determ ines the definition which m ust be used for other item s. F ailu re to c a rry out th is step could lead to inconsistencies (and thus to e r ro rs ) in the estim ates . After com pleting th is step we could still be free to choose between severa l alternative se ts of consisten t concepts.(ii) Examination of the basic s ta tis tic s available, and assessm en t of the extent to which the concepts used in them m atch the concepts used in the social accounts. When the accounts a re confronted by the data, it may prove im practicable to use some of the a lternative se ts of consisten t concepts which a re s till open to us at the end of step (i).(iii) The re liab ility of the data and the com pleteness of its coverage m ust also be considered. Adjustm ents m ust be made to the estim ates to c o rre c t known differences of coverage between the data and the accounts.

In p rac tice these th ree steps a re usually c a rr ie d out together, but as they involve different aspects of the analysis they a re here considered separa te ly . This chapter is concerned p rim arily with steps (i) and (ii), while Chapter 4 is concerned with step (iii) and with the assessm en t of the re liab ility of the estim ates of the social accounts. A com prehensive survey of the estim ates could not be attem pted in the

Estim ation - Concepts 29

space available. The exam ples given in these two chap ters are therefo re illu stra tive only, although p a rticu la r attention is given to one group of item s in the A ustralian estim ates (the business income item s) in o rder to illu s tra te how the estim ates for one section of the accounts a re affected by the th ree steps in the procedure.

Accounting re la tions and consistencyThe social accounts a re a consolidation of accounts of individual tran sac to rs . The nature of the re s tr ic tio n s im posed by the accounting re la tions can be seen by considering the derivation of item s in the accounts of the tra n sac to rs . Several of the exam ples below re fe r to the production account of a trad ing en te rp rise in one of the following equivalent form s:

Production Account of a Trading E n terp riseF ir s t Form

Expenditure $ R eceipts $

Opening stocks Sales

C urrent purchases Closing stocks

Wages and sa la rie s Subsidies

Indirect taxes

G ross operating surplus

Total Total

Second Form

Expenditure $ R eceipts $

C urrent purchases Sales

Wages and sa la rie s Increase in value of

Indirect taxes le ss stocks

subsidies

G ross operating surplus

Total Total


Consider the re la tion between the g ross operating surp lus and the increase in value of stocks. The gross operating surplus is the balance of the production account. D ifferent methods of valuing stocks therefo re lead to d ifferent g ross operating su rp luses. A s im ila r relation applies to consolidated figures for all trading e n te rp rise s . If the g ross operating surp lus of all trading e n te rp rise s , as shown in th e ir consolidated production account, is estim ated from one of the available sources of data, certa in opening and closing stocks figures will have gone into the derivation of that operating surplus.Consistency req u ire s that those opening and closing stocks figures also be used to estim ate the in c rease in the value of stocks in the consolidated production account, otherw ise the account does not balance.

A consequence of the point ju st noted is that unless the g ross operating surplus has been calculated in a special way, the associated increase in the value of stocks contains elem ents of p rice change as well as quantity change. The data used as a basis for estim ates of operating surplus would not usually be derived from opening and closing stocks figures valued at identical p rice s , and therefo re the increase in the value of stocks would not be equal to the physical increase in stocks m ultiplied by the average p rice for the year.Except when the g ro ss operating surplus has been calculated in a special way, th e re fo re , the in c rease in value of stocks is d ifferent in nature from the other item s of final expenditure (personal consumption, governm ent expenditure on goods and se rv ices , private expenditure on fixed capital a s se ts , exports, e tc .) which can be thought of as physical flows of goods and serv ices m ultiplied by the average p rice . There is no objection, of cou rse , to breaking the in crease in value of stocks into two components (the value of the physical in crease and the change in valuation) if the data perm it it. The official A ustralian estim ates attem pt such a b reak-up as a step in the calculation of constant p rice figu res, but, as the com m ents in A ustralian National Accounts indicate, it is based on m eagre data.

The gross operating surp lus can be broken into a num ber of components, for example depreciation; net in te re s t, ren t and royalty payments: and the net income of the trading en te rp rise . The net income then becom es the balance of the production account. If an estim ate of net income of a group of en te rp rises is made from one of the available sou rces of data (e .g . income tax s ta tis tic s ) , the estim ate of the depreciation item for the production account m ust equal


the depreciation allow ances deducted in the data, otherw ise the production account would not balance. The provisions of the income tax legislation regard ing amounts deductible for depreciation may be amended from tim e to tim e . Amendments to those provisions affect the estim ates of both depreciation and net income if the la tte r is based on income tax s ta tis tic s (as it is for companies and for non-farm unincorporated businesses in the A ustralian official estim ates). The A ustralian income tax s ta tis tic s do not tabulate figures of depreciation every y ear, and for some y ea rs it is therefo re necessa ry to make estim ates of the amounts allowed as deductions in the income tax data.

The ’cu rren t p u rch ase s ', shown in the production account, do not include purchases of fixed capital a sse ts . Consequently the concept of g ro ss operating surp lus cannot be selected independently of the distinction drawn between c u rren t and capital expenditure, as the la tte r distinction determ ines the item s which a re deducted to a rr iv e at the g ross operating surp lus. In the A ustralian income tax legislation certa in types of capital expenditure by fa rm ers (e .g . on dam s and on som e kinds of fencing) a re deductible in the sam e way as operating expenses. If we wished to include the cost of dam s and fences in capital expenditure and if we w ere relying on income tax data as the b asis of the estim ate of g ross operating su rp lus, we would be obliged to adjust the income figures upwards by the amount of the expenditure on dam s and fences, o therw ise the production account would not balance.

C urrent expenses paid by a trad ing en te rp rise a re included in the expenditures shown in the production account, except for tra n s fe rs such as in te re s t paym ents which, in the schem e of accounts considered h e re , a re regarded as a disposition of the operating surp lus ra th e r than as a cost deducted to a rr iv e at it. Some cu rren t expenditures, such as em ployers' contributions to superannuation funds on behalf of em ployees, do not appear to be covered by any of the headings lis ted in the production account above. It is necessa ry fo r these transac tions to be accom m odated in the schem e of accounts, and fu rther exam ination of the headings o r th e ir definition is required . Superannuation contributions a re an allowable deduction by the em ployer for income tax purposes. This im plies that if the operating surp lus is based on income tax data the contributions a re deducted as a cost before a rriv in g at the operating surp lus. In the A ustralian official e stim ates the contributions a re trea ted as supplem ents to wages and sa la r ie s and they a re added to that item - a consequence of


th is is that the contributions a re included in personal income even though they a re paid by the em ployer d irec t to the superannuation fund without passing through the em ployees' hands.

The Commonwealth governm ent m akes fimds available to finance the distribution to persons of certa in benefits in kind (e .g . free m ilk for school children, pharm aceutical benefits). Because the benefits are received by persons, the sum s involved a re included in personal income under the item 'Cash benefits from public au th o ritie s '. Consequently the purchases of goods (milk and pharm aceutical products) out of the funds a re shown in the personal account ra th e r than the public au thorities account, and a re included in personal consumption expenditure.

The farm income component of personal income could be defined as the produced incom e, including stocks and other a sse ts s till held by m arketing au thorities, o r as the cash incom e, excluding a sse ts still held by m arketing au thorities. In the fo rm er case the increase in a sse ts held by m arketing au thorities would be a disposition of personal income and should be included in personal savings. In the la tte r case the in crease in a sse ts held by m arketing au thorities would not be a disposition of personal incom e, and it should not be included in personal savings but in institutional savings. The fo rm er trea tm en t is followed in A ustralian National A ccounts.

Some headings in the accounts a re estim ated as balancing item s ra th e r than d irectly from other data. The only way of defining what is included in such balancing item s is to have re s o r t to accounting re la tions. For exam ple, personal saving is a balancing item in the personal cu rren t account in the A ustralian official e stim ates, and it follows from the s tru c tu re of the account that personal saving consists of all personal income which is not used to pay taxes, consumption, in te re s t, o r overseas rem ittan ces . P ersonal income includes em ployers’ contributions to superannuation funds; the disposal of the contributions is not in taxes, consum ption, in te re s t or overseas rem ittances, and it is th e re fo re included in personal saving even though the money has not actually passed through the hands of the em ployees concerned.

In some applications of social accounting data we may be in te rested in using (and estim ating) only the main aggregates from the sum m ary national production account (e .g . national incom e, g ross national product). D etailed consideration of sec to r accounts may seem


superfluous for that purpose. However, p roper definition and estim ation of the main aggregates, as well as the sec to r accounts, req u ire s that sev era l of the points noted above receive attention. C onsideration of the accounting re la tions helps in the system atic exam ination of the re la tionsh ips between concepts, and the estim ation of the broad aggregates as well as the detailed accounts is improved by the c larification which th is can bring. For exam ple, to bring out th e ir significance for estim ation of the main aggregates in the sum m ary tab le , a few of the points noted in the preceding paragraphs could be re s ta ted as follows:(i) If we have estim ated g ross national product at m arket p r ic e s l by to talling incom es, it is n ecessa ry to be aw are of the nature of the stocks component which is built into the estim ate via the business income figures - unless the la tte r have been calculated in a special way, the stocks component of the estim ate of production is not the physical in crease in stocks valued at cu rren t m arket p rices .(ii) If income tax data a re used as the basis of som e of the business income estim ates included in the g ross national product, we m ust ensure that superannuation contributions by em ployers a re included som ew here in the lis t of income item s if the g ross national product is to equal the value added by producers (i.e . sa le s plus increase in stocks le ss in term ediate purchases).(iii) Depending on how the final expenditure by public au thorities is defined, it may be n ecessa ry to include in personal consumption some imputed purchases financed by public au thorities (e .g . free m ilk for school ch ildren , pharm aceutical benefits) if the estim ates of g ross national expenditure a re to be com plete.

Basic s ta tis tic a l data - conceptsThe item s lis ted in the social accounts include a wide range of tran sac tio n s concerned with production and with the distribution and expenditure of the proceeds of production. The estim ates aim to provide com prehensive to ta ls for transac tions of each type. Because of the extensive coverage of the accounts it is necessa ry to use a large p a rt of the available s ta tis tic a l data to p rep are the estim ates. These data consist of a num ber of collections and o ther sources (e .g .* One of the im p o rtan t aggregates in the so c ia l accounts is com m on ly re fe rred to as 'G .N . P. a t m ark e t p ric e s ', even though i t includes go v ern m en t ou tpu t v a lu ed a t cost.A c tu a l m a rk e t p rices are used only for the o u tpu t of en terp rises, but i t has b ecom e co n v en tio n a l usage to describe G .N . P. a t fa c to r co st plus in d ire c t taxes (n e t of subsidies) as G .N .P , a t m a rk e t p rices.

34 N ational Incom e E s tim a tes

governm ent accounts) w hich a re p re p a re d m ore o r le s s independently of one ano ther and independently of the socia l accoun ts . It can th e re fo re be expected tha t they w ill not p re c ise ly m atch the concepts in the so c ia l accoun ts , and w ill not be co n sis te n t with one ano ther but w ill overlap in som e p laces and have incom plete co verage in o th e rs . When p re p a rin g e s tim a te s of the so c ia l accoun ts , a ca re fu l co m parison m ust be m ade of the concep ts in the data and the concep ts re q u ire d fo r the accoun ts , and the two m u st be brought toge ther by m eans of ad ju stm en ts to the data.

The basic s ta t is t ic a l data fa ll into two m ain c a te g o rie s . The f i r s t ca tegory c o n s is ts of co llec tions in itia ted so lely fo r s ta tis tic a l p u rp o ses (e .g . the cen su s , p r im a ry and secondary production s ta t is t ic s , r e ta i l s a le s s ta t is t ic s ) . The second c o n s is ts of data derived from official r e tu rn s supplied for a d m in is tra tiv e ra th e r than s ta t is t ic a l p u rp o ses (e .g . incom e tax and p ay ro ll tax d a ta , o v e rse a s tra d e fig u res). The la t te r ca tegory often has spec ia l a sp e c ts , and perh ap s sudden changes of concept, which a r is e from the leg is la tio n governing them 2and from the s tep s which the re tu rn s p a ss through befo re being to ta lled fo r s ta t is t ic a l pu rp o ses . ^ in p a r tic u la r , th e re a re spec ia l a sp e c ts of th is type affecting the incom e tax d a ta , which play an im p o rtan t ro le in the p re p a ra tio n of e s tim a te s fo r the A u stra lian so c ia l accounts.

B efore exam ining the incom e tax data in d e ta il, le t us co n sid e r in g en era l te rm s the e s tim atio n of the g ro ss opera ting su rp lu s from any of the availab le so u rc e s of data (e .g . production d a ta , incom e tax data). The g ro ss o pera ting su rp lu s is the balance of the production account and, a s a p e ru sa l of tha t account re v e a ls , is equal to the to tal ,of c e rta in spec ified c la s s e s of re c e ip ts , nam ely:

(i) a ll s a le s of the p ro d u c e r 's output, and(ii) the in c re a s e in the value of h is s to ck s ,

le s s the to ta l of c e r ta in specified c la s s e s of expend itu re , nam ely:(i) in te rm ed ia te p u rc h a se s , w hich do not include p u rch ases of fixed

a s s e ts ,(ii) w ages and s a la r ie s (including supp lem en ts), and

(iii) in d ire c t taxes le s s su b sid ie s .To p re p a re an e s tim a te of the g ro ss opera ting su rp lu s based on a

2See, for ex am p le , the co m m en t1' on d ep rec ia tio n in the fina l parag raph of this ch ap te r.

3 See, for ex am p le , the co m m e n t on the re la tio n sh ip betw een incom e ta x s ta tis tic s for partnerships and trusts and those for ind iv idua ls in foo tno te 7 of this ch a p te r. See also the co m m e n t on th e c la s s if ic a tio n of tax ab le incom e of ind iv idua ls by type of incom e on p. 40 .

E stim atio n - Concepts 35

given type of data it is n e c e ssa ry to check the l i s t of re c e ip ts and ex p en d itu res which have gone into the data ag a in st the l i s t s e t out in the production account. If the two l is ts do not a g ree p re c ise ly , som e ad ju stm en t of the data is re q u ire d to obtain an e s tim a te of the re q u ire d concept.

If one w ished to use fac to ry cen su s data as the b a s is of an e s tim a te of g ro s s o pera ting su rp lu s of m anufacturing in d u stry , one would begin with the f ig u re s of 'value of p roduction ' and deduct fac to ry w ages and s a la r ie s from them . Value of production , as defined in the A u stra lian fac to ry c e n su s , is equal to the value of output le s s the co st of r e p a ir s and specified c la s s e s of goods used in production (the specified c la s s e s a re pow er, fuel and light; w ater; oil; co n ta in e rs ; and m a te r ia ls u sed , tr e a te d , opera ted upon, o r w orked up). C om parison of th e se re c e ip ts and ex pend itu res with those lis te d in the production account ind ica tes som e of the m ore obvious ad ju stm en ts re q u ire d to convert value of p roduction le s s w ages and s a la r ie s to g ro s s operating su rp lu s; for exam ple:(i) C osts of s e rv ic e s (e .g . in su ran ce , ad v ertis ing ) a re not deducted. An ad ju stm en t would be re q u ire d to avoid duplicating the value added in the se rv ic e in d u s tr ie s .(ii) In d irec t ta x es le s s su b sid ies a re not am ong the l i s t of item s deducted from the value of output to a r r iv e a t value of production.Some of them have a lread y been deducted befo re a rr iv in g a t the value of output, as tha t concept excludes excise and s a le s ta x e s , and inc ludes bounties and su b sid ies . A part from those specific excep tions, the value of production includes in d ire c t tax es w h ereas the g ro ss o p era tin g su rp lu s does not.(iii) C osts of se lling and d is trib u tio n a re deducted from the se lling value to d eriv e the value of output, and so a lso a re ch a rg es for t r a n s p o r t and in s ta lla tio n . H ow ever, the w ages and s a la r ie s and the m a te r ia ls used a lso exclude m ost am ounts re la tin g to those a c tiv it ie s , and consequently no m a jo r ad ju stm en t to the value of production le ss w ages and s a la r ie s is needed on account of th e se item s . It could be noted in p ass in g , how ever, th a t if the wage and sa la ry f ig u re ,a s w ell a s the g ro s s opera ting su rp lu s , fo r the production account w ere being d eriv ed from the fac to ry c e n su s , and if such ac tiv itie s as se llin g , d is tr ib u tio n , and in s ta lla tio n , c a r r ie d out by m a n u fa c tu re rs , w ere to be c la ss if ie d as a c tiv itie s of m anufactu ring in d u stry (as they a re in A u stra lia n N ational A ccoun ts), an upw ard ad justm en t to the fac to ry


census wage and sa la ry figure would be requ ired in o rder to give it the required coverage.(iv) The factory census wage and sa la ry figure does not include em ployers' contributions to superannuation schem es on behalf of em ployees. The value of production le ss wages and sa la rie s therefo re includes contributions on behalf of factory em ployees, w hereas the g ross operating surplus does not.Although the factory census is not used as the basis of the official estim ates of g ross operating su rp lu s, its relationship to the official estim ates becom es im portant if one w ishes to link the two se ts of data, as one does when p reparing input-output tab les.

Income tax s ta tis tic s a re the m ajor source of data for the estim ates of g ross operating surplus of com panies and of non-farm unincorporated businesses. E stim ates a re f ir s t made of net income (i.e . g ro ss operating surplus le ss depreciation and net in te re s t, ren t and royalties paid) and these a re based en tire ly on income tax s ta tis tic s in the case of com panies, and principally on them in the case of non-farm unincorporated businesses. 4 D epreciation and net in te re s t, ren t and royalty payments a re estim ated partly from other sources (principally from other sources in the case of net in te re s t, e tc . ) and a re added to the net income to obtain the g ross operating surp lus. In the following paragraphs the matching of the income tax data to the concept of net income is considered.

The basic income figures which a re obtained from income tax re tu rn s a re 'taxable incom es', as defined by the legislation which applies to the y ear under consideration. Taxable income is not a satisfac to ry concept for economic analysis in general or social accounting in p a rticu la r. The following a re some of the principal reasons:(i) Taxable income excludes certa in types of income which a re exempt from tax. The en tire income of certa in types of organisation is exempt (e .g . superannuation funds; state and tru s tee savings banks; m unicipal corporations; re lig ious, charitab le and certain o ther nonprofit organisations). Income derived from some c lasses of mining and dividends paid out of such income a re also exempt. The Act also contains a la rge num ber of o ther exem ptions, many of which re la te to p a rticu la r kinds of personal incom e.

As there is a tim e lag of two years in p reparing the incom e tax sta tistics, this co m m en t does no t apply to figures for the la s t two c o m p le ted years.


(ii) C ertain item s deducted from actual income to obtain taxable income a re not operating expenses during the y ear in question, but a re m erely allowable deductions of a concessional natu re . Many of these a re of a personal na tu re (e .g . deductions for dependants, life insurance, m edical and dental expenses). O thers a re business deductions (e .g . expenditure by fa rm ers on dam s and certa in types of fencing mentioned on page 31; investm ent allowances; lo sses made during the previous seven y e a r s ) . In periods when there a re fluctuations in incom e, the deduction of previous y e a rs ' lo sses can lead to m arked differences between movements in taxable and actual income. 5(iii) If a business m akes a loss during the y ea r , its taxable income is n il, not a negative amount. This also can cause substantial d ifferences between the m ovem ents in taxable and actual income. 5(iv) T here is a good deal of double counting of company income,

5 The n o rm a l re la tio n sh ip betw een a c tu a l incom e and tax ab le incom e is d isturbed in years when losses are incu rred and in years "when th ey are w ritten off. The d istu rbed re la tio n sh ip m ay re m a in for som e years a fte r the a c tu a l incom e shows a re tu rn from losses to profits, as the ex am p le rep resen ted in the fo llow ing graph shows. In this ex am p le i t is assum ed th a t the co m p an y rece iv es no dividends or ex em p t incom e and has no deductions of a concess iona l na tu re apart from previous losses; consequen tly a c tu a l incom e and taxab le incom e should n o rm a lly be eq u a l.

INCOME

7 YEAR

In year 3 losses are incurred; som e of th em are w ritten off in y ear 4 and the b a lan ce in year 5 . A lthough profits are earn ed ag a in in y ear 4, the no rm al re la tio n sh ip betw een a c tu a l in co m e and tax ab le incom e does n o t re tu rn u n til y ea r 6, and the y e a r- to -year m ovem en ts are n o t back in step u n til y ea r 7 (i. e . u n til two years a fte r the la s t of the losses are w ritte n off).


because dividends received by com panies (except for a few c la sses of exempt dividends) a re included in th e ir taxable incom es. . The one original source of income may be tra n s fe rre d from company to company as dividends, and may thus be included in the taxable incom es of two o r m ore com panies. R esident com panies receive a rebate on dividends included in th e ir taxable incom e, and as a re su lt of th is they do not actually pay tax on the dividends (apart from sm all amounts a ris in g from differences between the ra te of rebate and the ra te used for the initial assessm en t). N evertheless, the taxable income includes the dividends; tax is f i r s t a sse ssed on that figure, and the rebate is deducted at a la te r stage in the calculation. It is c lea r from th is that the s ta tis tica l im plications of reba tes a re quite different from those of exem ptions, however s im ila r th e ir effects on tax paym ents.(v) Amounts deductible for depreciation differ from ordinary usage in many resp ec ts (e .g . m ost buildings a re not depreciable).(vi) The provisions of the legislation a re amended from tim e to tim e .6 In p a rticu la r, the lis t of exemptions and allowable deductions has been subject to change.

In the income tax tabulations re la ting to com panies, the item s mentioned in sections (i) to (iv) of the preceding paragraph a retabulated each year. Net income (i.e . g ross operating surplus le ss depreciation less net in te re s t, e tc . ) can be derived from the following calculation:

taxable income

plusplus

exempt income (other than dividends) concessional deductions

lessle ss

lo sses incurreddividends included in a ssessab le income

equals net income

To a rriv e at the net income of trad ing com panies it is necessa ry to deduct amounts c lassified as financial en te rp rise income in the social accounts.

To obtain income tax data re la ting to unincorporated businesses5

For a lis t of the p rin c ip a l changes in the leg is la tio n w hich a ffec t the d ep rec ia tio n estim a tes , see the defin itions and descrip tions of the re le v a n t tab les in A ustralian N ational A ccounts ( e .g . p . 97 o f A ustra lian N atio n a l A ccounts - N ationa l Incom e and Expenditure 1953-54 to 1 9 6 5 -66 ).


one m ust re fe r to the tabulations of a ssessm en ts of ’individuals'. 7 They contain s ta tis tic s of ’actual incom e’ as well as taxable income. Actual income is defined as 'g ro ss income (including exempt income) other than social serv ice benefits and w ar and serv ice pensions, le ss expenses incurred in gaining that incom e'. It is also equivalent, in the case of taxable assessm en ts , to taxable income plus exempt income plus concessional deductions; in the case of non-taxable assessm en ts the definition would appear to be equivalent to the sum of those th ree item s le ss lo sses incu rred , but the annual income tax tabulations do not cover non-taxable assessm en ts of individuals.Three main components of the incomes of individuals are distinguished: wages and sa la r ie s , other income from personal exertion, and property income. The other personal exertion component of actual income (i. e. g ross income from personal exertion other than wages and sa la r ie s , le ss expenses incurred in gaining that income) m atches the concept of net income of unincorporated businesses.

The detail contained in the tabulations of individuals is le ss com plete than that contained in the tabulations of com panies, and it is n ecessa ry to estim ate some of the item s involved in the calculation of unincorporated business income. In p a rticu la r, estim ation is7

T he re la tio n sh ip of the 'partnerships and trusts ' tab u la tio n s to the 'in d iv id u a ls ' tab u la tio n s ca lls for som e co m m en t. Each partnersh ip and trust subm its a ta x a tio n re turn , bu t does no t itse lf pay tax ; the assessed incom e is d iv ided am ong the partners or b en e fic ia r ie s and in c lu d ed in th e ir personal retu rns. This ensures th a t s ta tis tic s of to ta l tax ab le incom e d erived from the personal returns inc lude the incom e re ce iv ed from partnerships or trusts. H ow ever, the sam e conclusion does n o t necessarily app ly to s ta tis tics of p a rtic u la r com ponents of tax ab le incom e or to o ther item s such as stocks or d ep rec ia tio n , e .g . d iv idends rece iv ed by a partnersh ip or trust and d iv ided am ong the partners or b en e fic ia r ie s are no t en te red under the heading 'd iv idends ' on the personal returns - th ey are en te red under the headings 'share in partnersh ip in co m e ' or 'in co m e as b en e fic ia ry under w ill, s e ttle m e n t, deed of g if t or in s tru m en t of tru s t '. S pec ia l a rrangem ents w ould there fo re be necessary if the s ta tis tics of item s o ther than to ta l tax ab le incom e were to inc lude am ounts en te red in the first in stance on partnersh ip or trust returns; such a rrangem ents w ould involve a scerta in ing from the partnersh ip or trust re tu rn the am o u n t of, say, d iv idends transferred to the personal re tu rn of a partner or b en e fic ia ry , and adding i t to the figure en te red under the head ing d iv idends' on his personal re tu rn .For assessm ent purposes such arrangem ents have to be m ade for item s of incom e su b jec t to a d if fe re n tia l ra te of tax (though there have been none since 30 June 1954) or sub jec t to reba tes ( e .g . in te re s t on C om m onw ealth g overnm en t secu ritie s) . For s ta tis tic a l purposes i t is also the p rac tic e to m ake such arrangem ents for the p roperty incom e and the o ther personal ex ertio n incom e com ponents of tax ab le incom e, and for to ta l a c tu a l incom e and the item s requ ired to derive i t (ex em p t incom e and business deductions of a concessional nature such as expend itu re on dam s and fences d ed u c tib le under Sections 75 and 76). It is n o t the p rac tic e to m ake such arrangem ents for s ta tis tics of o ther item s of incom e (although they have been m ade on som e, b u t no t a ll, occasions for div idends), or for item s such as d e p re c ia tio n or stocks. Figures for these item s can be taken from the partnersh ip and tru st tab u la tio n s and added to figures from the ind iv iduals tab u la tio n s to o b ta in the to ta ls .


necessa ry at th ree main steps:(i) The annual tabulations do not cover non-taxable a ssessm en ts of individuals, although some details have been tabulated for y ears adjacent to Commonwealth census y ea rs . This group includes persons who have made business lo sses during the year and persons who have w ritten off sufficient previous lo sses during the y ear to bring th e ir taxable income below the exemption lim it. It also includes other persons receiving significant amounts of actual income but who do not incur tax e ither because th e ir actual income itse lf is below the exemption lim it or because, though th e ir actual income is h igher, th e ir exempt income and concessional deductions fo r dependants,life insurance, etc. , bring th e ir taxable income below the exemption lim it. To a rriv e at a business income figure for th is group the num ber of non-taxable assessm en ts is estim ated and is m ultiplied by an assum ed average income.(ii) The figure we wish to estim ate is the other personal exertion component of actual income. The s ta tis tic s of actual income a re not c lassified by type of incom e, but taxable income is broken into th ree components (wages and s a la r ie s , other personal exertion , property) every th ird year, and in the o ther two y ears out of every th ree it is broken into two components (wages and sa la r ie s , other). The classification of taxable income is p repared by offsetting concessional deductions against each type of actual income in a definite o rder. The deductions a re offset f ir s t against wage and sa la ry incom e, if there a re still some deductions left they a re then offset against other personal exertion income, and if there a re s till some left a fte r that they a re offset against p roperty income. The re tu rn s a re then classified into seven 'g rades of occupation’, partly on the b asis of the types of taxable income received . Given th is data, if we s ta r t with the c lassification of taxable income for the grades of occupation which receive some 'o ther personal exertion ’ incom e, it is then n ecessa ry to re tra c e approxim ately the steps which went into deriving the components of taxable incom e, and thus to a rr iv e at an estim ate of the other personal exertion component of actual income (in the y ears when all th ree components of taxable income a re tabu lated).(iii) In the two y ears out of every th ree when taxable income is broken into only two com ponents, the re trac in g of steps noted in (ii) above leads to an estim ate , not of the o ther personal exertion component of actual income, but of that component combined with the property

E stim ation - C oncepts 41

incom e rece iv ed by the sam e group of ta x p ay e rs . It is th e re fo re n e c e s sa ry to e lim inate p ro p e rty incom e from th a t fig u re . In the so c ia l accounts the e s tim a te s of p ro p erty incom e rece iv ed by p e rso n s a re not based on the incom e tax tabu la tions fo r ind iv iduals, but a re d e riv ed from a num ber of o th e r s ta t is t ic a l so u rc e s , m o s t of w hich a re availab le annually . The annual e s tim a te s reco n c ile with the incom e tax data well enough to s e rv e a s a b a s is fo r e s tim a te s of m ovem ents in the p ro p erty incom e to be e lim inated .

The fa rm incom e fig u re s used in A u stra lian N ational A ccounts a re based on p rim a ry production s ta t is t ic s ra th e r than on incom e tax data. T h is au tom atically m akes som e allow ance fo r u n d ers ta tem e n t and noncoverage which would have to be independently e s tim a ted if incom e tax data w ere used . B asing the e s tim a te on tha t so u rc e , how ever, m akes it n e c e ssa ry to e lim in a te the fa rm incom e com ponent of the incom e tax data from the ca lcu la tio n of u n in co rpo ra ted b u s in ess incom e d esc rib e d above, leav ing fig u res fo r 'o th e r1 un inco rpo ra ted b u s in e sse s . Although the incom e tax s ta t is t ic s a re c la ss if ie d by in d u stry , a ta x p a y e r 's e n tire incom e is c la ss if ie d to the industry of h is m ain activ ity . Many ta x p ay e rs c la ss if ie d as p r im a ry p ro d u ce rs e a rn p a r t of th e ir incom e from o th e r so u rc e s , and many ta x p ay ers c la ss if ie d to o the r in d u s tr ie s ea rn p a rt of th e ir incom e from fa rm in g . The fa rm incom e figu re b ased on p rim a ry production s ta t is t ic s , how ever, r e la te s so lely to incom e from farm ing . Some ad justm en t has to be m ade to the incom e tax industry c la ss ific a tio n to deal with m inor so u rces of incom e, in o rd e r to en su re tha t the fa rm incom e e lim inated from the tax data has the ap p ro p ria te industry coverage .

Some points of concept can be m o re read ily analysed by exam ining the re la tio n sh ip s betw een the accounts of d iffe ren t p ro d u ce rs and the consolidation of those accoun ts . C onsider, fo r exam ple, the tra n sa c tio n s of genera l in su ran ce com panies (excluding life in su ran ce com panies). T h e ir p ro fit, fo r incom e tax p u rp o ses , is equal to p rem iu m s le s s c la im s and o the r deductib le ex p en ses , plus investm ent incom e. P rem iu m s le s s c la im s is , in e ffect, the charge to the r e s t of the econom y fo r th e ir output. In so fa r as the s e rv ic e s a re sold to o th e r b u s in e s se s , consis ten cy re q u ire s tha t the sam e ch arg e be deducted as in te rm ed ia te p u rc h a se s by o ther b u s in esse s to a r r iv e at th e ir operating su rp lu s . Upon conso lidating the production accounts of the in su ran ce com panies w ith those of o the r p ro d u c e rs , the p rem iu m s le s s c la im s t r a n s f e r r e d betw een them would then be o ffse t, like o th e r in te rm ed ia te p u rc h a se s and s a le s . H ow ever, the tre a tm e n t


of those item s in the accounts of other producers is not uniform , as th,e provisions of the income tax legislation vary with the type of insurance. P rem ium s a re always deductible, but claim s a re included in taxable income in some cases (loss of profits insurance, loss of stock insurance, and a few other types) and excluded in o thers (e.g . c laim s for the loss of fixed a sse ts) . As suggested above, prem ium s le ss claim s should be trea ted as in term ediate expenditure of all businesses. This im plies that prem ium s should be deducted to a rriv e at the g ross operating surp lus of the other p roducers, and claim s should be added. The income tax legislation ensures that th is is done in the case of loss of p rofits and loss of stock insurance, as the c laim s a re included in net income; the trea tm en t of insurance com panies and other producers is th e re fo re consistent in th is case.In the case of insurance of fixed a sse ts , the claim s paid by the insurance com panies s till have to be accom m odated as receip ts som ewhere in the accounts of the other p roducers. A special adjustm ent of the tax data is therefo re needed to obtain a consistent trea tm en t, but as these c laim s m erely re im b u rse an amount by which fixed capital a sse ts a re depleted they a re added to depreciation (and thus to g ross income) ra th e r than to net incom e.

As the preceding paragraphs suggest, a significant p a rt of the A ustralian social accounts has an income tax basis . This does not mean, of course, that the income figures a re taxable incom es, o r that there is no attem pt to allow for understatem ent or non-coverage in the income tax data. It means firs tly , that som e of the im portant figures a re derived from income tax s ta tis tic s (supplemented, in some instances, by other data), and secondly, that other item s re la ted to them are defined in such a way that they will be consistent with income tax concepts. For exam ple, company income and the income of unincorporated businesses other than fa rm s a re both derived from taxation s ta tis tic s . Farm incom e, though not estim ated from tax data, is in certa in re sp ec ts defined s im ila rly to the o ther unincorporated business income figures (e. g. farm depreciation is estim ated on a basis consisten t with tax legislation). The depreciation and stocks figures also re flec t th e ir tax origin - they a re , for the m ost p a rt, those used in deriving taxable incom e, and they re flec t any pecu liarities of the legislation and any am endm ents which a re made to it. F or exam ple, buildings a re not depreciable unless they a re farm buildings, o r a re an in tegral p a rt of m anufacturing plant, o r a re


buildings in which scientific re sea rc h re la ted to the taxpayer's business is c a rr ie d on. The depreciation estim ates re flec t th is ,^ and also any changes in the ra te s allowed by varia tions in the legislation. These pecu liarities of the depreciation estim ates a re also reflected in the net, but not the g ro ss , national product figures. In the case of stocks figu res, adherence to the tax basis involves including certa in types of work in p ro g ress on con tracts which might not be thought of as stocks in le ss specialised investigations. Work in p ro g ress on buildings is included in stocks, except in so fa r as it is already covered by p ro g ress paym ents and included in the capital expenditure of the purchaser. A s im ila r point apparently applies to le ss tangible item s, such as expenditure by an excavating con tracto r. However, the stocks figures specifically depart from the income tax basis by excluding land, sh ares , debentures, and other secu rities held by businesses which trad e in those a sse ts , because an increase in the holding of them does not rep resen t a final use of production or im ports.

8 However, the depreciation estimates include property insurance claim s on buildings, as shown in the preceding paragraph.

4 Estimation and Reliabilityof Social Accounting Statistics — Coverage and Accuracy

In Chapter 3 the m atching of concepts with one another was considered. In th is chapter questions of accuracy a re examined. They are considered under th ree general headings: the coverage of the basic data, the re liab ility of the basic data, and the re liab ility of the estim ates of the social accounts derived from the basic data.

Basic s ta tistica l data - coverageSocial accounting data a re intended to provide com prehensive estim ates of the c la sses of transac tions lis ted in the accounts, showing th e ir to tal value over the en tire economy. The principal collections of basic s ta tis tica l data which a re available annually, o r at m ore frequent in te rva ls , often do not have the com prehensive coverage requ ired .When they a re used as the b asis of estim ates of social accounting item s it is necessa ry to find ways to estim ate the m issing tran sac tions.

Even in the case of data collected solely for s ta tis tica l purposes, there may be incom plete coverage because it has frequently been found necessa ry to exclude sm all item s from the collections. For exam ple, for the purpose of the A ustralian factory census a factory is defined as an establishm ent in which four or m ore persons a re employed or where power (other than manual) is used in any m anufacturing p ro cess . The figures therefo re exclude p a rticu la rs of some sm all m anufacturing establishm ents - the ’non -s ta tis tica l fa c to rie s ’. The A ustralian p rim ary production s ta tis tic s a re derived from a census of ru ra l holdings, for which purpose a 'ru ra l holding' is defined as a piece of land of one acre o r m ore in extent, used for the production of ag ricu ltu ra l products or for the ra is in g of livestock and the production of livestock products. Again, some production on sm alle r holdings is not covered.

In the case of data collected p rim arily for adm inistra tive purposes, but subsequently c lassified and to talled to provide s ta tis tic s , the problem s of coverage can be g re a te r . This is because the m issing

44

Estim ation - Coverage and Accuracy 45

transac tions can be substantial, because the non-cove rage can a rise in a varie ty of ways, and because its magnitude may change suddenly as a re su lt of am endm ents to the legislation or the adm inistrative a rrangem ents governing the collection of the data. The following exam ples illu s tra te these points:(i) F igu res derived from taxation data (whether income tax or other form s of tax , such as payroll tax) may exclude cases which fall below the exemption lim it. F u rth erm o re , the exemption lim its can be amended and thus the coverage of the data can change suddenly. For exam ple, the exemption lim it for payroll tax has been ra ised on a few occasions, and w hereas the exemption applied to payrolls of up to$2, 080 p er y ear when the tax was introduced, it now (1967) extends to payro lls of up to $20,800 p er year.(ii) The legislation also g ran ts to tal exemptions to certa in types of organisation , irresp ec tiv e of th e ir size . The Commonwealth governm ent is exempt from payroll tax, and so also a re relig ious and charitab le o rganisations and m ost hosp ita ls. Section 23 of the Income Tax and Social Services Contribution A ssessm ent Act exem pts many types of organisation from income tax.(iii) The collection and assessm en t of income tax re tu rn s take tim e, and when additional tim e spent on appeals and litigation is added it may be sev era l y ears before the outcome is known for all taxpayers.As m ost of the a ssessm en ts a re com pleted in a sh o rte r tim e, it is not worthwhile holding up the tabulations until all a ssessm en ts a re available. In the case of com panies the p rac tice is to tabulate all assessm en ts com pleted up to eighteen months a fte r the end of the y ear in which the incom es w ere earned. 1 The tabulations a re therefo re incom plete, and

1 Some confusion is occasionally caused by the term inology regarding the year to which the incom e tax data relate . Three different years are distinguished:(i) The 'incom e year1 is the year in w hich the incom e under consideration was earned.(ii) The 'assessm ent year' is the year in which assessment of the returns com m ences, and is the year follow ing the incom e year.( iii) The 'financia l year' or 'year of tax' is the year during w hich tax on the incom e is payable. Com panies pay tax on a g iven year's incom e during the follow ing year, but because of the p ay-as-you-earn and provisional tax arrangements tax is payable by individuals during the year in w hich the incom e is earned. The 'year of tax' therefore coincides with the 'assessment year' for com panies and w ith the 'incom e year' for individuals. In the case of provisional tax, however, the position is com plicated by the fact that the tax is paid in two steps; tax on an estim ated incom e is paid during the incom e year, and tax on the balance of actual incom e is paid (or refunded) during the follow ing year. The preceding year's incom e is usually taken as the estim ated incom e for the purpose o f the first paym ent, excep t where the self-assessm ent provisions of the leg isla tion are applied . C onsequently, although provisional tax is payable in the year in w hich the incom e is earned, the estim ation arrangements have the e ffec t of relating actual payments more c lo se ly to the preceding year's in com e.


th e ir coverage is not the sam e from y ear to year. However, the to tal income involved in the m issing assessm en ts is thought to be re la tive ly sm all and not to change substantially from year to y ear, unless the assessm en t of som e la rg e com panies is subject to extended litigation.In the case of individuals the p rac tice is to p rep a re two se ts of tabulations, the f ir s t se t (known as the 'm ain ' tabulations) covering assessm en ts up to fifteen months afte r the end of the income y ea r , and the second set (known as the ’supplem entary’ tabulations) covering the additional a ssessm en ts up to four y ea rs a fte r the end of the income year. The supplem entary tabulations include significant amounts of incom e, and the proportion of the total tabulations covered by them has often varied considerably from y ear to year (with equivalent varia tions in the proportion covered by the main tabulations).(iv) Evasion of tax by failing to subm it re tu rn s may lead to incom plete coverage, both of incom es and of num bers of taxpayers, while evasion by understating incom es or by overstating expenses may lead to incom plete coverage of incom es. 2 The C om m issioner of Taxation publishes in his Annual R eport p a rticu la rs of cases detected. The figures published th e re a re not easy to use in conjunction with the o ther income tax tabulations, because if the evasion is detected and dealt with before the ordinary tabulations for the y ear concerned a re closed off the income is included in them , w hereas if it is detected after they a re closed off it is not covered by them .(v) Income tax data re la ting to non-taxable a ssessm en ts of individuals a re not p repared each y e a r , although som e details have been tabulated for y ears adjacent to Commonwealth census y e a rs . As som e persons whose incom es a re not taxable a re not requ ired to subm it re tu rn s , a tabulation of the non-taxable a ssessm en ts would not cover a ll non- taxable incom es. N evertheless, the lack of such a tabulation leavesa gap in the data.

F or social accounting purposes, and also for many other purposes such as p reparation of s ta tis tic s of employment and of wages and sa la r ie s , it is n ecessa ry to fill in som e of the gaps in the basic collections. If we can obtain m ore com plete data for a p a rticu la r item during one y ea r , it may be possible to estim ate the m issing components in the other y ears by starting from the benchm ark figure 2

One form of evasion of incom e tax w ould not a ffect the estim ates of incom e item s in the socia l accounts, nam ely, the overstatem ent of concessional deductions such as m ed ica l expenses, e tc . Although this would lead to the understatem ent of taxable incom e, it would not introduce any error into 'actual incom e', and the latter is the basis of the estim ates of incom es in the socia l accounts.

Estim ation - Coverage and A ccuracy 47

and basing estim ates of the y e a r- to -y e a r movements on closely re la ted se r ie s which a re available each y ear. The m ost com prehensive benchm ark for a num ber of item s is the Commonwealth census. Some of the figures from the census which a re p articu la rly im portant in the estim ation of social accounting aggregates a re those re la ting to num bers of em ployees, num bers of em ployers and self-em ployed p ersons, and num bers and^rents of dwellings. In addition to the Commonwealth census th e re a re , of course, many other s ta tis tica l sources which a re available occasionally but not every y ea r, and which may serve as benchm arks for estim ates. Exam ples a re censuses of re ta il estab lishm ents, business surveys on special topics (e .g . in te re s t, ren t and royalties) which have been conducted occasionally, and item s contained in the income tax s ta tis tic s but not tabulated every y ear.

If we have annual data covering p a rt of an item to be estim ated , and benchm ark data covering the whole of it (or at leas t a g re a te r p a rt of it than is covered by the annual data) at some p a rticu la r tim e, a com parison of the two se ts of data can yield an estim ate of the m issing component (or p a rt of it). In general, however, it is not sufficient m erely to com pare the to ta ls from each se t of data, without any adjustm ent, and take the difference. F or exam ple, by com paring the employment figures from the census with those from the payroll tax tabulations we would hope to obtain an estim ate of the num ber of em ployees outside the scope of the payroll tax data. However, a person who has a p a rt-tim e job with a second em ployer in addition to his principal job may be counted twice in the payroll tax data but only once in the census. The duplication would have to be rem oved before the difference between census and payroll tax figures could be accepted as an estim ate of the num ber of em ployees outside the scope of the payroll tax data. Such differences of concept m ust be identified and allowed for before any conclusions about coverage can be draw n. Other adjustm ents to the two se ts of employment figures may also be requ ired before they a re com pared. F or exam ple, census employment includes crew s of foreign ships w hereas the payroll tax data do not, and in o rd er to estim ate the num ber of A ustralian em ployees outside the scope of the payroll tax data allowance m ust be made for th is. Another illu stra tion is provided by the trea tm en t of persons tem porarily absent from work - the census emploj^ment figures include th em , w hereas some of them a re excluded from the payroll


tax figures. 3 If the data a re used as the b asis of wage and sa la ry estim ates , the com parison of the two sources needs to yield an estim ate of the num ber of em ployees receiv ing earnings which a re not covered by the payroll tax d a ta . Many of the tem porary absentees who a re not covered by the payroll tax employment figures may not receive any earnings during th e ir absence, and an adjustm ent to the com parison of the two se ts of employment figures is requ ired in o rder to avoid estim ating an income for them .

It may not always be possib le to obtain a benchm ark from a single s ta tis tica l collection. F or exam ple, the census, the income tax s ta tis tic s and the surveys of in te re s t, ren t, and royalties conducted by the Bureau of Census and S tatistics all contain some inform ation on ren ts . It may be n ecessa ry to use the th ree of them in conjunction in o rder to obtain a benchm ark for certa in types of ren ta l paym ents.

A fter a com parison of the annual and the benchm ark data has yielded an estim ate of the m issing component for one year or point of tim e, it may be desirab le to b reak it up into a num ber of p a rts to sim plify the estim ation of corresponding figures for other y e a rs . For exam ple, the num ber of em ployees outside the scope of the payroll tax data could be broken into separa te categories which could be covered by special collections (e .g . of Commonwealth governm ent employees) or which could be re la ted to o ther basic s ta tis tica l collections (e .g . total census employment in p rim ary production and m anufacturing, whether covered by the payroll tax data o r not, might be re la ted to the employment figures obtained from the p rim ary production and the factory cen su ses). That would then leave a sm alle r hard core of unrecorded employment to be estim ated by le ss d irec t methods in the y ears between the cen su se s .

Although th e re may not be any benchm ark data d irec tly available for an item we wish to estim ate , it may be possible to derive it indirectly via a re la ted s e r ie s . Thus the payroll tax data contain wage and sa la ry figu res, while the Commonwealth census does not. But both se ts of data contain employment figu res, and an estim ate of the unrecorded wages (i. e. the amounts not recorded in the payroll tax data) can be based on the estim ate of unrecorded employment. When3 The census em p lo y m en t figures inc lude 'persons who are no t ou t of a job b u t are only tem p o ra rily absen t from th e ir jobs through illness, a cc id en t, annual holidays, lo n g -serv ice leav e , e t c . T h e e m p lo y m en t figures shown on the m on th ly p ay ro ll ta x returns are the 'n um ber of em ployees on pay ro ll a t conclud ing date of la s t p e rio d ' of the re tu rn , a sce rta in ed by co u n t from pay sheets - i t appears th a t th ey m ig h t inc lude som e, b u t n o t a ll, of the persons tem p o ra rily absent, depending on the precise a rrangem ents w hich apply during tem porary absence of p a rticu la r em p loyees.


estim ates a re p rep ared in this ind irec t m anner, it is n ecessa ry to allow for the possib ility that a p a rticu la r set of data may not have the sam e coverage of all item s derived from it. For exam ple, the percentage of wages and sa la rie s covered by payroll tax data would differ from the percentage of employment covered if the average wage of the unrecorded em ployees differed from that of recorded em ployees.

Basic s ta tis tic a l data - re liab ilityE r ro r s may en ter into s ta tis tic a l data in a num ber of ways. The m ost obvious way is through inaccurate answ ers to the questions asked. An answ er may be wrong because the question is not c lea r and is m isunderstood, because the inform ant does not know the c o rre c t answ er, o r because he does know it but p re fe rs to e r r in p a rticu la r d irec tions (e .g . it is na tu ra l to suspect som e understatem ent of incom es in the income tax data). Questions which ask the inform ant for a descrip tion ra th e r than a figure (e .g . questions about ’industry ’ o r ’occupation’) may easily produce answ ers which a re vague and a re th e re fo re difficult to c lassify accurately .

In som e cases the definition of the figures requested from inform ants may only be a second-best approxim ation to the definition we would have p re fe rre d to use. This may be n ecessa ry because it is unlikely that the figu res could be supplied in any other form , o r because s ta tis tic s obtained as a by-product from re tu rn s supplied for adm in istra tive purposes may be affected by special a rrangem ents for reporting figures by p a rticu la r inform ants. One re sp ec t in which we som etim es have to accept the second-best alternative is in the choice between figures on a cash or an accrua l b asis . P a rticu la rs of governm ent rece ip ts and expenditure a re , for the m ost p a rt, recorded on a cash b asis . Wage and sa la ry figures taken from payroll tax re tu rn s a re also on a cash basis ; consequently if the la s t day of the y ear happens to be a pay day for a very la rg e proportion of em ployees the wage and sa la ry figure will r is e in that year for a reason of no special economic consequence (e .g . in 1948/49 and 1959/60 there w ere tw enty-seven fortnightly pays by the Commonwealth governm ent instead of the usual tw enty-six). A s im ila r re su lt occurs in y ears when th e re is an ex tra payment of pensions o r o ther cash benefits by the Commonwealth governm ent. Child endowment paym ents, if lodged d irec tly in payees’ bank accounts, a re made at twelve-weekly in tervals and may th e re fo re r is e by a q u arte r in y ears when five paymentsoccur.


Another re sp ec t in which we a re som etim es obliged to accept the second-best definition concerns the choice of balance date on which the figures a re based. F or exam ple, com panies may obtain perm ission to base th e ir income tax re tu rn s on accounting y e a rs ending on dates other than 30 June. If they balance, say, at the end of D ecem ber, th e ir income tax re tu rn for a p a rticu la r income y e a r will show th e ir income for the year ended in the previous D ecem ber. The trend shown by the se r ie s may not depart much from that of the d esired se r ie s in m ost y e a rs , but in y ears when incom es change rapidly the difference can be of som e consequence. Companies operating in A ustralia and balancing in D ecem ber might have shown b e tte r re su lts in th e ir 1960/61 re tu rn s (based on calendar year 1960) than they actually experienced between July 1960 and June 1961 because economic conditions w ere m ore depressed in the f i r s t half of 1961 than in the f ir s t half of 1960. They might then have reported poorer re su lts in th e ir 1961/62 re tu rn s (based on calendar y ear 1961) than they actually experienced between July 1961 and June 1962 because economic conditions w ere b e tte r in the f ir s t half of 1962 than in the f ir s t half of 1961.4

P rocessing e r ro r s can occur in a varie ty of w ays, and a num ber of m echanical checks to detect them a re a norm al p a rt of the p rocessing routine. It is advisable for people using the data to apply some checks of th e ir own and to be on th e ir guard for changes of definition o r coverage. It is difficult to g enera lise about the nature of such checks. Some of them might m erely involve investigating the causes of substantial changes in the figu res, so as to check the p lausibility of the changes shown. One obvious check is the exam ination of m ovem ents in categories such as ’industry not s ta ted ’; substantial changes in such a c lassification certain ly indicate that changes in o ther industries a re suspect.

S tatistics may be collected by m eans of sam ples ra th e r than com plete censuses. The coverage of the sam ple estim ates is , of cou rse , the sam e as that of the fram ew ork o r the ’population’ from which the sam ple was selec ted , but the figures derived a re n ecessa rily estim ates which contain sam ple e r ro r s . By using la rg e r sam ples and m ore efficient sam ple designs we can reduce the e r ro r s

4 As a result of a recent change of procedure, the Australian estimates of company income from 1960/61 onwards now incorporate an adjustment to put them on a June year basis.See Australian National Accounts - National Income and Expenditure, 1948-49 to 1964-65, p. 13.


but not elim inate them . An assessm en t of the probable size of the e r ro r s (but not of th e ir direction) can be based on sam pling theory.In som e c ase s , com parisons with o ther data may provide an a ssessm en t of both the size and direction of the e r ro r s . Some idea of when they a re likely to be g rea te s t might also be obtained if we know the general sam pling p rocedure, for example a fte r the com position of the sam ple is changed (perhaps as a re su lt of a periodical overhaul to keep it rep resen ta tiv e of a constantly changing 'population’) the size of the movement from the previous level of the figures may be m ore suspect than usual.

R eliability of social accounting estim ates Social accounting estim ates a re based on a la rg e num ber of s ta tis tic a l s e r ie s , some of which becom e available prom ptly and reg u la rly , o thers m ore slowly and at le ss frequent in te rva ls . The f i r s t e stim ates of many of the item s in the accounts a re based on a lim ited amount of inform ation which is available prom ptly, and as additional data come to hand the estim ates a re rev ised to take them into account. Such rev isions n ecessa rily continue until the la s t of the reg u la r collections and occasional benchm arks which affect a p a rticu la r y e a r 's estim ates has become available. If the concepts and the methods of calculation w ere held fixed the estim ates might then se ttle down to th e ir final form . That would not im ply, of cou rse , that the figures w ere perfectly accu ra te . F u rth er rev isions could th e re fo re come la te r s till, as the re su lts of additional re sea rc h into concepts, data, and estim ating p rocedures w ere taken into account.

The accuracy of the estim ates v a rie s from item to item , and because of th is it is frequently suggested that an indication of the accuracy of each item should be given when official estim ates a re published. However, it is difficult to find an objective b asis for a ssess in g th e ir accuracy . T here is no objective b asis for deriving num erical m easures to be used in the sam e way as standard e r ro r s of sam ple estim ates . One could average the past rev isions to various item s in the accounts, but although one could derive som e useful im pressions from such figures the following qualifications would have to be allowed for:(i) The averages would m erely indicate the amount of revision between the e a r lie s t estim ates and the final e s tim a te s . They would not indicate the re liab ility of the final figures which a re calculated


when the last of the benchm ark data has become available. The final figures a re still only estim ates, and the s ta tis tica l d iscrepancy does not vanish when all of the benchm arks have been incorporated in the estim ates.(ii) The availability of new s ta tis tica l co llections, and re sea rch into existing data and methods of estim ation, may im prove the accuracy of the estim ates. To this extent an average of past rev isions would exaggerate the inaccuracy of the la te s t methods of estim ation.(iii) In some c ircum stances the methods of estim ating p articu la r item s can dim inish in accurac}' as a re su lt of re la tive ly rapid in c reases in components the estim ates of which a re re la tively weak. Such developments can be brought about by changes in economic s tru c tu re , changes in business p rac tice , and changes in leg islation , as the following exam ples show:(a) the rapid increase of h ire -p u rch ase and general finance business

in A ustralia in the post-w ar period has involved a la rg e in crease in certa in types of in te re s t payment which a re m ore difficult to estim ate p rec ise ly from the available data than a re the m ore slowly increasing components of in te rest;

(b) a growing p rac tice of leasing business p rem ises o r equipment from spec ia lis t property-ow ning o r leasing com panies ra th e r than owning it has led to a rapid increase in a component of the ren t estim ates for which annual data a re scarce ;

(c) legislation which in c reases the exemption lim it for various types of taxation leads to an increase in the unrecorded component of item s estim ated from the corresponding taxation s ta tis tic s - thus a r is e in the exemption lim it for payroll tax adds to the unrecorded component of the wage and sa la ry estim ates.

As a re su lt of changes of the types noted in (iii), the w eaker components of an item can becom e a la rg e r proportion of its total. Consequently an average of a num ber of past rev isions could underestim ate the e r ro r s in the la te s t estim ates.

When allowance is made for these qualifications, how ever, some useful im pressions can be obtained from a study of past rev isions. Official publications in many countries give a broad indication, based on such im pressions, of the re liab ility of p re lim inary estim ates of social accounting item s, for example estim ates based on inadequate data may be enclosed in b rack e ts , o r a code of le tte rs (A, B, C, e tc . ) may be used to indicate different degrees of re liab ility .


In many applications of social accounting data the y e a r-to -y e a r changes a re of m ore im portance than the levels of the item s. It is th e re fo re im portant to inquire how the rev isions to the y e a r-to -y e a r changes com pare with the rev isions to the levels of the figures. If the rev is io n s to the levels of successive y e a rs ' figures w ere independent, the average rev ision to the y e a r-to -y e a r changes would exceed the average rev ision to the levels. 5 However, the rev isions to successive y e a rs ' levels a re not, in general, independent. Quite often the nature of the am endm ent im plies that the estim ates for a num ber of consecutive y ears have to be rev ised in the one direction, and in these c ircum stances the rev isions to the y e a r- to -y e a r changes a re le s s than the rev isions to the levels. For exam ple, when some benchm ark data which a re not collected annually (e .g . the census) becom e available, estim ates for all subsequent y ears and also for all y ea rs between that and the preceding benchm ark may be rev ised in the one direction to bring them into line with the new data. Also, if some of the annual data become available only afte r a considerable tim e lag (e .g . income tax s ta tis tic s) and if estim ates for succeeding y ears a re based on lim ited inform ation about y e a r-to -y e a r changes since the la s t available tabulations, the rece ip t of a la te r se t of annual tabulations may lead to rev isions to the y ear which they cover and also to rev isions in the sam e direction to succeeding y e a rs . Other kinds of rev ision may, of course , have different consequences. The re la tiv e im portance of the various kinds of rev ision v a rie s from item to item , depending on the data and procedures used to estim ate them . Some exam ples from the A ustralian estim ates a re given:(i) Net national product. For each y ear from 1943/44 to 1962/63 the range between the highest and lowest estim ate has been calculated to m easure the extent of the rev isions to the levels of the figures. Over the tw enty-year period the ranges averaged £81 m illion. A sim ila r calculation applied to the y e a r-to -y e a r changes in the estim ates leads to an average range of rev ision to the changes of £66 m illion. The y e a r- to -y e a r changes a re somewhat m ore accurate than the levels.(ii) S im ilar calculations derived from the estim ates of another th ree im portant item s yield the following re su lts :

5If X i and X2 v ary in d ep en d en tly w ith standard d ev ia tio n S, th en (X 2 -X ]) varies w ith

standard d ev ia tio n s /T " S


ItemAverage range between

highest and lowest:level change

£m £mP ersonal consumption * 65 47

Wages, sa la r ie s , and supplem ents 76 26

Company income * 31 29

* The averages for personal consumption and company income a re based on figures up to 1959/60 only, as too few com parable figures a re available for la te r y ea rs because of changes in concept.

The re su lts for personal consumption, like those for net national product, indicate that the changes a re significantly m ore accurate than the levels. The difference is much m ore m arked in the case of wages, sa la r ie s , and supplem ents. This might be expected from our knowledge of the nature of the estim ates , because a substantial p a rt of the payroll tax and other annual data used in the final estim ate is available when the figure for a p a rticu la r y ear is f i r s t published. Revisions following the rece ip t of fu rth er annual data a re therefore re la tive ly m inor by com parison with rev isions following the receip t of the m ore infrequent benchm ark data such as census figu res, and, as stated above, these benchm arks lead to g rea te r rev isions to the levels than to the y e a r- to -y e a r changes.. The estim ates of company income do not depend on any infrequent benchm arks, but a re v irtually finalised when the annual company tax tabulations a re com pleted. As there is a tim e lag of two y ea rs in the completion of the tabulations, there a re rev isions to the f ir s t two estim ates of company incom e, but, as the figures above show, the average rev isions to the levels a re p rac tica lly the sam e as the average rev isions to the y e a r-to -y e a r changes.

In h is discussion of the accuracy of national income s ta tis tic s O skar M orgenstern (1963: 266-9) devotes som e space to a consideration of the accuracy of changes as d istinct from levels, and he reaches some very gloomy conclusions. However, an exam ination of h is argum ent shows that h is method of m easuring the e r ro r s in the changes greatly exaggerates the e r ro r s which a re actually p resen t in the data. In the


following graph the different estim ates of U. S. national income for 1948 and 1949 a re shown. 6 F igures reported in the one national income publication a re joined by fine lines, so that the different e stim ates of the change between 1948 and 1949 can be read from the g raph .

$ billion

The changes reported vary from -$7* 2 billion to -$4- 7 billion, a range of $2-5 billion. M orgenstern 's m easu res imply that the actual change between these two y ears could be anything from -$10- 0 billion (corresponding to a movement from A to D) to -$()• 1 billion (corresponding to a movement from C to B), a range of $9-9 billion. The la tte r m easure only rep resen ts the range of uncertainty on the assum ption that rev isions to successive y e a rs ' estim ates a re independent, and that one is free to believe any of the figures for 1948 in conjunction with any of those for 1949. However, such an assum ption is untenable, for the reasons given in the previous paragraph . If some additional data with im plications for both the 1948 and the 1949 estim ates come to hand, it is not legitim ate to derive a y e a r-to -y e a r change by com paring the rev ised figure for one year with the unrevised figure for the o ther y ear. Yet that is p rec ise ly what is done to a rr iv e at M orgenstern 's m easure of uncertain ty , and it greatly exaggerates the e r ro r s in the data. In the two y ea rs considered above, the exaggeration is fourfold. The following table se ts out the com parison for the y ea rs considered by M orgenstern , and it shows that the 1948 to 1949 com parison is not exceptional.

The figures are taken from Table 23, Morgenstern (1963:249-50).


Years

Range from lowest to highest annual change shown by:

actual data M orgenstern 's m easu re*

$ billion $ billion1947 to 1948 3-4 10-01948 to 1949 2- 5 9-91949 to 1950 5- 5 11-61950 to 1951 1- 6 9*81951 to 1952 1- 5 6-21952 to 1953 4- 2 8-31953 to 1954 1-9 9-11954 to 1955 5- 8 11-41955 to 1956 2- 2 16-31956 to 1957 1-7 17-31957 to 1958 4- 3 15-81958 to 1959 •4 8-01959 to 1960 - 1-1

* Range between low er and upper points graphed for each y ear in Fig. 9, M orgenstern, p. 267.

The objection noted in the la s t paragraph also applies to the conclusions which M orgenstern (1963:268-9) has drawn from his Fig. 10. In Fig. 10 the quarterly national income se r ie s is graphed, and a band extending from 10 per cent below to 10 per cent above each figure is also graphed to indicate 'the zone of uncertain ty surrounding the d a ta '. M orgenstern notes that a s e r ie s which is very different from the published one could be graphed within that band of uncertain ty , and concludes that the quarte r-to - q u arte r changes a re not significant. However, the zone of uncertain ty indicates the extent of possib le e r ro r s in each level of the s e r ie s , and M orgenstern derives his conclusions about e r ro r s in the q u a rte r- to -q u a rte r changes and about the a lternative path the graph could take within the zone of uncertainty on the assum ption that the e r ro r s in successive q u a rte rs ' estim ates a re independent. Without that assum ption, one 's ability to draw se r ie s with a lternative paths within the zone of uncertain ty would be somewhat re s tr ic te d . It has been argued above that such an assum ption is untenable. In p a rtic u la r , it could be expected that a


rev ision to a p a rticu la r y e a r ’s figure would commonly lead to rev isions in the one direction to the quarterly figures which make up the annual to tal.

An exam ination of past rev isions to the estim ates can give an indication of the tim e needed for the estim ates to approach th e ir final form , subject to the qualifications noted on pp. 51-2 and subject to the possib ility of fu rther rev isions following re sea rc h into methods of estim ation. It has been noted that rev isions to the y e a r-to -y e a r changes in net national product in the A ustralian estim ates for the twenty y e a rs ending in 1962/63 extended over an average range of £66 m illion. If the f ir s t published estim ates for each year a re excluded the average range is reduced to £36 m illion, and if the f ir s t two estim ates for each y ear a re excluded the average range is reduced to £26 m illion. The additional data which come to hand during the y ea r afte r the f ir s t publication lead to a substantial im provem ent in accuracy . The extent of the im provem ent up to any stage v a rie s from item to item . For exam ple, the estim ates of compan}^ income are v irtually finalised after two y e a rs , which is the tim e lag in p reparation of the annual company tax s ta tis tic s , w hereas many other s e r ie s cannot be finalised until a la te r stage, pending rece ip t of benchm ark data such as the census.

There rem ains the question of the accuracy of the final estim ates, as calculated when the la s t of the benchm arks affecting a pa rticu la r year has been taken into account. It is difficult to find objective bases for such an assessm en t. Some details which a re relevant may be ascerta ined ; for example people who p rep are the estim ates may derive from the w orksheets the proportion of each item which is based on annual data and the proportion based in interpolations between and pro jections of benchm arks. That is one of the facts relevant to an assessm en t of accuracy , but a com plete a ssessm en t would also have to consider the accuracy of the annual data for each item and the accuracy of the benchm arks and the methods of interpolation and pro jection . The early p a rt of th is chapter has dealt with some aspects of these questions to a lim ited extent. Although broad judgments might be made, they would n ecessa rily be somewhat subjective.

For som e of the item s it may be possib le to p rep are two o r m ore estim ates from independent sources of data. In such cases the a lte rnative estim ates provide a check on one another. For example both farm income and property income received by persons could be


calculated from income tax data. The official estim ates of these two item s in the A ustralian accounts a re actually derived from other sou rces, but m ovem ents in the figures can be com pared with those based on income tax data.

C ertain item s in the accounts a re derived as balancing item s, and could not be expected to be as accurate as the d irec tly estim ated item s on which they depend. The final balancing item in the accounts, the s ta tis tica l d iscrepancy, is the net effect of all of the e r ro rs and inconsistencies in the estim ates . Although it re flec ts the inaccuracies in the complete set of accounts, it does not te ll us anything specific about the re liab ility of any p a rt of the accounts. The s ta tis tica l d iscrepancy consists partly of inconsistencies in the concepts in various p a rts of the accounts. For exam ple, as some item s a re estim ated on a cash b asis and some on an accrual basis it would be possib le for each of them to be estim ated accurately on those bases and yet give r is e to a d iscrepancy, if a p a rticu la r transaction were recorded on a cash b asis in the re c e iv e r 's account and on an accrual b asis in the p ay er’s account.

5 Quarterly Estimates

Q uarterly estim ates of national income and expenditure and supporting details a re compiled and published in a num ber of countries, including A ustra lia . The A ustralian estim ates a re published about seven or eight weeks afte r the end of each q u arte r and serve to provide a m ore up-to -date p ic tu re of economic activity than is shown by the annual e stim ates . They a re widely used in d iscussions of cu rren t economic trends and provide a basis for projections of activity.

The concepts and methods used in the quarterly accounts a re broadly s im ila r to 'those used in the annual estim ates and much of the d iscussion in previous chap ters about the meaning and re liab ility of national income estim ates is re levan t also to the in terpre ta tion of the quarterly figures. T here a re , how ever, some im portant d ifferences in types of data used, p a rticu la rly in the much g re a te r use of sam ple surveys to provide estim ates , and th e re a re also additional problem s in the in te rp re ta tion of changes from one qu arte r to the next as a re su lt of differences in the tim ing of item s and the influence of seasonal varia tions. This chapter deals mainly with the effect of these fac to rs on the meaning of the quarterly estim ates; as in previous chapters no attem pt is made to describe in detail the sources and methods used in compiling estim ates fo r each item .

The form and purpose of the quarterly estim ates The q uarte rly estim ates a re set out partly in the form of accounts and partly in the form of tab les, but both a re re la ted to the fram ew ork of the annual accounts. However, because of difficulties in estim ating item s of income and outlay of trading and financial en te rp rises by q u a rte rs , no accounts a re shown for these sec to rs in the quarterly e s tim ates . In addition, the capital account shows le ss detail of the undistributed income of com panies.

The main purpose of the quarterly estim ates is to provide a m ore up-to -date sum m ary of economic activity than is given by the la te s t

59


annual accounts. They provide, as it w ere , a sum m ary of individual ind icators which is designed to help assessm en t of the undertying economic situation. They also fill in gaps in available indicators in o rd er to show the to tal demands for goods and se rv ice s , the incom es originating from cu rren t production, and a division of expenditure and income into the main components.

The use of the estim ates may be com pared to that of an index of industria l production. A good deal of detail of the production of individual com m odities is available but for the purpose of gauging changes in the overall level of production the indicators need to be aggregated and weighted by th e ir im portance and estim ates a re requ ired of the production of item s not shown in individual s e r ie s . An index of industria l production is thus a sum m ary of the available s ta tis tic s of production with an allowance for the likely effect for production of o ther goods. In the sam e way, the quarterly estim ates bring together details of income and expenditure given by the available economic ind ica to rs, weight these by th e ir re la tive im portance and allow for item s not covered by these ind ica to rs.

While the main use of the estim ates is in cu rren t economic analysis and forecasting of economic activ ity , estim ates for past q u arte rs a re also of use in supplem enting the annual estim ates , particu la rly for the purpose of identifying turning points in economic activity. Annual estim ates tend to smooth out fluctuations in economic activity during the y ear and provide only a very rough m easure of the tim ing of changes in levels of demand and incom e. Thus, fo r exam ple, a fall in national income from one y ear to the next may originate in a decline in activity in the la tte r p a rt of the f ir s t year or in the early p a rt of the second y ea r, o r it could be the re su lt of a very sharp fall in the la tte r p a rt of the second year. The tim ing of changes, as well as th e ir magnitude, is m asked in the annual s e r ie s .

It should be noted, however, that q uarte rly estim ates a re not p rim arily compiled as h is to rica l s e r ie s and the re liab ility of changes in past figures is not much g re a te r than that of the cu rren t estim ates. L ittle inform ation is available afte r one qu arte r to improve the accuracy of the figures and such rev isions as a re made a rise from the need to fit the quarte rly se r ie s into annual benchm ark to tals and annual concepts. In addition, of co u rse , som e rev isions will be made when additional re tu rn s a re received to quarte rly surveys. There a re , however, few new q uarte rly benchm ark s e r ie s available to rep lace the f ir s t estim ates , as is the case with the subsequent estim ates of annual

Q uarterly E stim ates 61

national income figures.A fu rth er use of the quarterly estim ates is in up-dating annual

figu res. F o r exam ple, ju st before an annual figure is f i r s t published, qu arte rly estim ates will be available for the f ir s t th ree q u a rte rs of the y ear. In a ssess in g the long-term ra te s of growth it may be useful to bring the annual figures up to date and th is can be done approxim ately by the use of the estim ates for the f ir s t th ree q u a rte rs of the cu rren t y e a r .1

F o r the a ssessm en t of cu rren t economic trends it is not necessa ry tha t the quarte rly accounts should follow the form of the annual e stim ates o r that the supporting tables should be in the sam e amount of detail. The main use of the quarte rly accounts appears to have been in te rm s of the changes shown by to tal national product and the m ain aggregates. As explained in a la te r section of th is chapter, d iscrepanc ies in the b asis of tim ing of transactions also make it difficult to re la te item s and v irtually im possible to in te rp re t the m eaning of balancing item s of savings. In addition, a good deal of the detail of the annual estim ates is requ ired for long-term com parisons of the use of re so u rce s to m eet various needs, but is not requ ired in the a ssessm en t of cu rren t levels of economic activity . This includes, fo r exam ple, the use of public authority expenditure for such purposes a s law, o rd e r, public safety, and education. On the other hand, other detail may be pa rticu la rly useful to show by q u a rte rs , even though it is not included in the annual e stim ates . This may be the case , for exam ple, with detail of investm ent in stocks by industry where the usefu lness of the figures for cu rren t analysis m ore than offsets the com parative unreliability of the estim ates.

T here is also a m ore general point involved. The definition of national product used in the annual accounts is at le as t partly based on the use of the figures for com parisons of rea l output and income over tim e. For th is purpose, as explained in the following chapter, ce rta in imputed values a re included for non-m arketed output,

The preparation of the quarterly estimates did, as well, lead to a major improvement in the array and reliability of short-term economic indicators. Until the time of publication of the quarterly accounts, virtually the only comprehensive income and expenditure data available by quarters were imports and exports, wages and salaries, and retail sales (the retail sales figures were, however, subject to a considerable lag). The preparation of the quarterly estimates led to new quarterly surveys of expenditure by private businesses on equipment, buildings, and stocks; revenue, expenditure, and capital outlay of public enterprises; profits of companies, as well as leading to an improvement in the timing of retail sales surveys and a good deal of new analysis resulting in new series of expenditure and income of public authorities, farms, personal consumption expenditure, etc.


principally the ren t on ow ner-occupied dwellings. These im putations a re not n ecessarily appropria te in the use of the accounts for cu rren t analysis. There is also the possib ility that a different arrangem ent and subdivision of item s may be m ore useful for this purpose. The main reasons for the adoption of the form of the annual accounts in presenting the quarte rly estim ates w ere the p rac tica l ones that the concepts used in the annual estim ates w ere probably fa irly well understood by u se rs and adoption of a different fram ew ork could lead to confusion, and that it is s im p le r in compiling the estim ates to use the sam e concepts fo r the annual as well as for the quarterly data.

Timing d iscrepanciesOne of the main difficulties in in terp re ting the changes shown by the quarte rly figures is caused by the different points of tim e at which transac tions a re m easured . Some transac tions a re m easured a t the tim e of the cash rece ip ts and paym ents, some when goods change hands, and o thers on a p roper accrua l b a sis , that is at the tim e when obligations and righ ts over ownership a re settled . It would be possible in principle to use any of these methods of record ing transac tions and there a re some purposes for which the flow of cash2 or goods may be appropria te . But fo r the main purpose of the quarterly estim ates, which is to analyse the c ircum stances affecting the demand and supply of goods and se rv ice s , there is little doubt that the appropriate point of tim e at which transactions should be recorded is at the date of receivab les and payables. In fact, however, only a few transactions a re m easured on th is b a sis , the m ost im portant being those connected with business income. This leads to two problem s. F irs tly , estim ates which a re not on an accrual b asis may not accurately show the demands and supplies of goods and se rv ice s . Secondly, the inconsistencies of tim ing make it difficult to re la te tran sac tio n s , that is to com pare the movement in different item s and to divide a total into component item s which have the sam e meaning. T here is also the difficulty that estim ates derived as a balance between severa l item s a re affected by the way these item s a re m easured .

The inconsistencies in tim ing would not m atte r very much if there w ere a fa irly constant difference between the flows of cash or goods and the receivab les and payables in each q u arte r. In this case the d ifferences in tim ing would not affect the com parison of item s between 2

This m ethod was adop ted , for ex am p le , in a se t of so c ia l accounts designed to show the flow of funds in the econom y, co m p iled by M .A . C opeland (1952).


the sam e q u a rte rs of d ifferent y ears o r e stim ates co rrec ted for seasonal influences. In p rac tice , how ever, the difference between tran sac tio n s m easured on different bases is likely to vary in different periods. This is shown up, for exam ple, in big swings in the balance of paym ents item of d iscrepancy, caused mainly by inconsistencies in the tim ing of paym ents for im ports and receip ts from exports of goods and se rv ices and other balance of paym ents item s. The difference between a cash and an accrua l record ing of transactions will vary with, am ongst o ther things, conditions of cred it; in tim es of c red it re s tra in t outstanding liab ilities tend to r is e re la tive to the value of transactions. The d ifference between the flow of goods and an accrual recording w ill depend largely on fac to rs affecting the supply of goods. A dock s trik e in A ustra lia will lead to a g re a te r difference between the im port of goods and the incurring of the obligation for payment. Since these d ifferences a re partly associated with fluctuations in economic ac tiv itie s , they a re an im portant lim itation on the utility of the accounts.

The method of record ing transactions may be sum m arised briefly as follows: the principal item s which a re on a cash basis a re m ost of the capital and cu rren t item s of public au thorities , m ost of the capital expenditure and the su rp luses of some public trad ing e n te rp rise s , wages and s a la r ie s , and ren t and in te re s t (other than dwelling rent); the chief item s m easured at the tim e of the flow of goods and serv ices a re im ports and exports and the g ross output of p rim ary production; o ther item s a re m ore or le ss on an accrua l basis .

The difference between the flows of cash o r goods and changes in receivab les and payables v a rie s for individual item s. Exports of goods, for exam ple, a re likely to be m ore closely re la ted to the change in ow nership than im ports . The m ajor d iscrepancy between cash flows and an accrua l record ing of transac tions is in item s of public authority rece ip ts and paym ents. The cash payments of personal income tax by provisional tax p ayers, for exam ple, a re m ainly concentrated in the la s t quarte r of each y ear, but each of the q uarte rly figures for a p a rticu la r y ear will re la te largely to taxes payable out of the income earned in the previous y ear. Public authority cash expenditure tends to be concentrated in the la s t quarte r of each y ear owing to the need to se ttle outstanding obligations before the end of the fiscal year. The cash paym ents of wages and sa la rie s vary slightly between q u a rte rs from paym ents due, largely owing to the differing num ber of pay periods and the ir re g u la r payment of annual


bonuses.The effect of changes in economic conditions on the difference

between the flows of goods o r cash and changes in receivables and payables also v a rie s between item s. Fluctuations in the level of economic activity have little effect on the difference between cash and accrual paym ents of wages and s a la r ie s , but budgetary considerations and the need by public au thorities to acce lera te or re ta rd the flow of cash in the private sec to r, depending on w hether or not economic conditions a re generally deflationary o r inflationary, may influence the tim ing of public authority cash paym ents. A part from the effect of a dock s trik e , mentioned above, a num ber of other fac to rs could affect the tim ing of im ports of goods. Anticipated changes in im port re s tr ic tio n s or ta riff regu lations, for exam ple, have led in recen t y ears in A ustralia to abnorm al placem ents of o rd e rs for im ports, and changes in the origin of im ports may a lte r the period of tim e between the purchase of im ports and the a rr iv a l of the goods.

Balancing item s derived as the sum or difference of severa l estim ates a re the savings of sec to rs , the s ta tis tic a l d iscrepancy, farm income and farm product.

The savings of public au tho rities , or the net deficit on cu rren t account, is largely on the b asis of cash transac tions. The meaning of these figures is th e re fo re c le a r , although they may need careful in terpre ta tion in making com parisons between the figures and other estim ates in the social accounts.

P ersonal savings, how ever, a re obtained as a balance between item s of receip ts and paym ents which a re based on a m ixture of different methods of m easurem ent. Wages and sa la r ie s , cash social serv ice benefits, in te re s t and dividends, and personal rem ittances to and from overseas a re on a cash basis . Supplements to wages and s a la r ie s , the income of unincorporated business (other than farm s), dwelling ren t, and v irtually a ll of personal consumption expenditure a re recorded as receivab les and payables, while farm income and product a re partly on an accural basis (costs) and partly on the basis of flows of goods (farm output). 3 Changes in personal saving from one q u arte r to the next will therefo re re flec t differences between some Gross v a lu e of p roduction is defined as 'th e e s tim a te d v a lu e of produce d e livered for sale

during the quarter to g e th e r w ith the e s tim a te d v a lu e of changes in unde livered stocks o ther th an w o o l1 (Q uarterly E stim ates of N a tio n a l Incom e and E xpend itu re , C om m onw ealth Bureau of Census and S ta tis tics B ulle tin No. 26, D ecem b er quarter, 1966, p . 41). In form ation about d e liv e rie s is a v a ila b le for som e item s , as fo r w hea t and wool w hich are reco rded a t the tim e the products are d e liv e red to w h ea t silos or w oolbuying brokers. For som e item s p roduction is a llo c a te d on th e basis of harvesting periods.


item s m easured as receivab les and payables and some item s of cash rece ip ts and expenditure.

B usiness saving is included in ’other sav ings’, the main components of which a re undistributed income accruing to re s id en ts , retained investm ent income of life assu rance funds, and the increase in dividend and income tax provisions. While the f ir s t item is on an accrual b a s is , the inclusion of dividend and income tax provisions means that the tax and dividend paym ents by businesses a re on a cash b asis (this amount includes, as w ell, the increase in tax re se rv e s of persons) and the figure of other savings is therefo re a m ixture of tran sac tio n s m easured in d ifferent ways. 4

The s ta tis tic a l d iscrepancy, because it is the balance between item s of national product and expenditure, is obviously subject to a very la rge extent to fac to rs of tim ing. Changes in the discrepancy between one q uarte r and the next a re due partly to tim ing d ifferences and partly to e r ro r s of estim ation of item s on the b asis on which they purport to be recorded . The fo rm er elem ent is undoubtedly the main cause of varia tions in the s ta tis tica l discrepancy from one qu arte r to the next.

Probably the m ost difficult item s to m easure consistently a re farm income and product. As has been stated , these a re a balance between farm output, m easured at the tim e the produce is delivered, and co sts , m easured when the expenditure is incurred . This m eans that costs a re not m atched against production, and that some of the costs in a qu arte r p roperly re la te to production in a subsequent q u arte r. Some item s of co sts , such as harvesting and m arketing expenditure, a re closely re la ted to output, but a wide range, including seed and fe r t i l is e r , occur in different periods.

There a re several ways in which costs could conceivably be m atched with production and which have been used in som e overseas estim ates. One approach would be to impute values for growing crops and increasing num bers of livestock. This could be done e ither by d irec t valuation o r by fa irly a rb itra ry allocation of the estim ated annual values of production between q u a rte rs . The la tte r procedure involves making a fo recast of production for the cu rren t year and leads to the im putation of a profit on production before it is earned. An alternative approach would be to d istribu te costs to the periods when the

In effect, the increase in provisions for tax and dividend payments is written back into undistributed income of businesses; and this item of business saving is therefore on a cash basis.


production takes p lace, with unallocated costs shown as a w ork-in p ro g ress stock. E ither method would lead undoubtedly to s ta tis tica l problem s, although they would reduce the p resen t very large fluctuations in farm income and product between successive q u a rte rs .

It should be noticed that these types of tim ing difference occur also in some item s in the annual national income estim ates. But they a re much m ore im portant in the case of the quarterly estim ates, for two main reasons. F irs tly , the difference between the flow of cash or goods and an accrual record ing does not depend on the length of the period over which item s a re m easured and accordingly it is re la tively m ore im portant in re la tion to the sm alle r quarterly to ta ls . Secondly, for some item s the difference tends to cancel out over the year. For public authority expenditure, for exam ple, purchases tend to be above cash paym ents in the early p a rt of the y ear, but this is made up for by the re v e rse situation in the la s t qu arte r of the year. Sim ilarly, income tax paym ents by provisional taxpayers run behind accrua ls in the f ir s t th ree q u a rte rs of the y ear but a re ahead of accrua ls in the la s t quarte r.

The question a r is e s , in view of the d ifficulties in in terp re ting quarterly changes as a re su lt of tim ing d iscrepanc ies, whether o r not it is possible to adjust the basic data to put them m ore on a consistent accrua l b asis . One possib ility in the case of farm income and product has been discussed above. In estim ates fo r some overseas countries, including the United States, B rita in , and Canada, an adjustm ent is made to public authority transac tions to convert them from a cash to an accrual b asis . In A ustra lia very little work has been done on this question, and the only adjustm ents made to elim inate tim ing d iscrepancies a re for severa l item s in the balance of paym ents, stocks, and company income. The change in the value of stocks includes some stocks (e. g. wool and sugar) owned by non-residen ts and held in A ustra lia . This m eans that stocks include goods owned by non-residen ts which a re not included in s ta tis tic s of exports until they a re shipped and the change serv es to im prove the consistency of stocks and exports. An adjustm ent is also made to figures of public authority expenditure for purchases of la rge item s of defence equipment to im prove the consistency of th is item with the im ports. The public authority expenditure, for exam ple, shows p ro g ress payments made for w arships bought from o v erseas, while the recorded trade figures include im ports of w arships when they a re handed over to the


A ustralian governm ent. The public authority expenditure is now adjusted to include de liveries of overseas equipment.

E stim ates of the operating surp lus of com panies for early years also included a tim ing e r r o r which has now been elim inated in figures for m ore recen t y ea rs . Annual figures of company income derived from taxation re tu rn s re p re se n t a m ixture of different balancing dates. Until the institution of a q uarte rly survey of company p ro fits in 1961, quarterly figures of profit w ere obtained simply by distributing the annual total to q u a rte rs using various ind icato rs. But because of the m ixture of balance dates the annual figures rep re sen t only p a rt of company income in a p a rticu la r y ear and include som e of the income earned in the previous and succeeding y ea rs . Now, using the re su lts of the survey, annual figures of company income a re adjusted to show only the profit earned in the y ear. Q uarterly figures for recen t y ears now also show only the profit earned in the q uarte r.

Seasonal adjustm entA num ber of the item s in the quarterly estim ates a re affected by seasonal fac to rs of production or demand. Thus farm income and product vary according to the effect of the seasons on values of production, personal consumption expenditure is la rg e r in the D ecem ber q u a rte rs as a re su lt of p re -C h ris tm as trad ing , and capital expenditure on buildings is la rg e r in d r ie r periods of the year.Changes in the figures from one qu arte r to another a re therefo re likely to re flec t not only underlying trends in production or demand but also the effect in the q u a rte rs of reg u la r seasonal varia tions. In o rd er to obtain a s e r ie s which shows underlying trends it is n ecessa ry to elim inate the influence of seasonal fac to rs .

One way of doing th is , which is used by the Commonwealth S tatistician , is to re la te figures for each qu arte r to those for the sam e q u arte r of the previous year. In th is approach a s e r ie s of annual percentage changes is derived , leading to a m ore uniform sequence than if the percentage changes in successive q u arte rs had been taken. This method assum es, however, that the figures of the previous year show a norm al trend and a re unaffected by e ither cyclical changes or e rra tic varia tions. If, for exam ple, a s e r ie s was showing abnorm al in c reases o r declines twelve months e a r l ie r , the sequence of annual percentage changes would tend to re flec t th is by showing abnorm al declines o r in c rease s . As w ell, the influence of a p a rticu la r e rra tic


event twelve months e a r l ie r , such as a s trik e (reducing output) or an increase in ra te s of ind irec t taxes (leading to higher values of expenditure) would also be reflected in the annual percentage changes.

A second approach to derive seasonally co rrec ted figures is to divide estim ates for each qu arte r by fac to rs designed to elim inate norm al seasonal change. Since the essence of seasonal varia tion is that it is a regu larly re c u rrin g change, the fac to rs can be derived by inspection of past changes. 5 This method has been used by the S tatistician to provide seasonally adjusted estim ates for the chief item s of national income and expenditure from the Septem ber 1967 issue of Q uarterly E stim ates of National Income and Expenditure.The approach used is based on a method developed by the U. S. Bureau of the Census and applied by the S tatistician to seasonally adjust a num ber of o ther economic ind ica to rs. The main fea tu res of the approach a re se t out in Seasonally Adjusted In d ica to rs , 1967, published by the Commonwealth Bureau of Census and S tatistics in July 1967.

It essen tially involves smoothing past quarterly figures by a five- te rm moving average, averaging the ra tio s of the actual figures to the smoothed se r ie s in each equivalent q u a rte r, and using these ra tio s to adjust each figure. This is described by the Statistician as the m ultiplicative varian t of the U.S. Bureau of the Census method. For severa l item s, how ever, th is approach could not be used or is thought by the Statistician to produce m isleading re su lts , and a lternative approaches a re used. The main item s w here different m ethods a re used a re farm income and product, changes in stocks, and the s ta tis tica l d iscrepancy.

F arm income and product a re derived as balances between farm output and farm co sts . Item s of production and costs have different seasonal patterns and the im portance of each se r ie s v a rie s m arkedly in different y ears . Hence it is desirab le to seasonally ad just the individual item s separa te ly and to derive farm income and product as the balance of these item s; if the net figure only w ere adjusted the seasonal fac to rs would re flec t not only regu larly re c u rrin g seasonal pa tte rn s but also the changing com position of the production and costs. This problem runs through a lot of the item s of national income and expenditure, and the S tatistician has used g re a te r detail than is

^ 'S easona lly ad justed d a ta are w hat re m a in a fte r rem o v a l of reg u la rly re c u rre n t ebbs and flows in econom ic a c tiv ity due to th e w ea th er, crop-g row ing cyc les , ho lidays, vaca tions, reg u la r industry m odel c h a n g e -o v e r periods, and the l ik e ' (U .S . P residen t's C o m m ittee 1962 : 65 ) .


published in o rder to derive the seasonal adjustm ent fac to rs . But fa rm income and product a re the chief exam ples of a s e r ie s where the component item s exhibit quite d ifferent seasonal varia tions.

The seasonal adjustm ent of farm income and product is fu rther com plicated by the fact that the seasonal pattern of individual se r ie s is unstable. The g rea t im portance of seasonal fac to rs in affecting the d istribution of production between q u arte rs m eans that even a sm all change in seasonal conditions could lead to a quite noticeable d ifference in the distribution of production. As a consequence, seasonal adjustm ent using the ra tio -to -m oving-average method would lead to considerable fluctuations in these se r ie s between one quarter and the next. In o rd er to avoid th is re su lt the Statistician has adopted the approach of d istributing m ost item s of production and some item s of costs in a fa irly a rb itra ry m anner designed to elim inate as far as possib le fluctuations in farm income and product.

The methods used a re set out by the S tatistician as follows:G ross value of production of wool. The seasonally adjusted se r ie s has been obtained by multiplying a smoothed quantity se r ie s by a seasonally adjusted p rice s e r ie s . The smoothed q u a n ta s e r ie s was obtained from a moving average of the estim ated production in two half y ea rs , ending December and June. The figures for September and Decem ber q u a rte rs a re the sam e, nam ely one-quarter of the estim ated production in the y ear ended Decem ber. Those for M arch and June q u arte rs a re one-quarter of the estim ated production in the y ear ended June. The p rice s e r ie s was seasonally adjusted (m ultiplicatively) in o rder to elim inate the seasonal effect of quality variation in quarterly sa les of wool.G ross value of production of grain crops and sugar cane. The estim ated annual value for each crop has been d istributed equally among four q u a rte rs commencing with that q u arte r in which production com m ences each y ear in the orig inal s e r ie s .

Special adjustm ent has also been used for m arketing costs of wheat, the annual to tal being spread over four q u a rte rs , in line with the production figures. A s im ila r approach was not practicab le for the o ther com m odities, but would have made little difference.This method, although reducing the magnitude of the fluctuations in

farm product, does have a num ber of im plications for the in terp re ta tion of the estim ates.


F irs tly , changes in the annual levels of production of different item s tend to be reflected in the seasonally adjusted se r ie s in the change between the la s t and f ir s t periods of successive periods of production. Thus, for exam ple, the change in annual figures of wheat production appears in the D ecem ber q u a rte r, and for sugar in the September q uarte r. This discontinuity in the estim ates is in p rac tice likely to be somewhat offset by differences in the production seasons for different i te m s .

Secondly, the apportionm ent of the annual figures fa irly evenly between qu arte rs leads to a somewhat different concept of farm product from that underlying the method of presenting the unadjusted se r ie s . As has been pointed out, in the unadjusted se r ie s farm income and product a re m easured as the difference between output of farm products and costs incurred each q uarte r. A lower level of production in one qu arte r due, for exam ple, to the effects of a drought, is reflected in the values of farm income and product in that quarte r. The seasonally adjusted s e r ie s , however, would not show a s im ila r fall in the s e r ie s in that q u a rte r. The seasonally adjusted s e r ie s , obtained by the spreading of farm production fairly evenly over all q u a rte rs of each y e a r , a re in effect a form of accrual recording. The meaning of th is d ifference in in terp re ta tion on the estim ates can be very roughly shown by the following tab le , which com pares the changes in the seasonally adjusted figures of farm product during 1965/66 with those obtained by a sim ple com parison of the figures in com parable q u a rte rs of 1964/65 and 1965/66.

Farm product, 1965/66

Seasonally adjusted Changes over 12 monthsJune 1964/65 to Sept. 1965/66 -17 1964/65 to 1965/66 Sept. -611965/66 Sept, to Dec. -28 Dec. -32

Dec. to M arch +2 M arch -126M arch to June +3 June -13

The method of com paring d ifferences over tim e in the change in item s between com parable q u a rte rs of successive y ea rs is , for reasons mentioned, an im perfect one of allowing for seasonal changes, and it is quite likely that som e of the difference in the pattern of farm product in 1965/66 shown by the figures would have no economic significance to fa rm e rs . But the drought of that year did occur mainly in the m iddle of the y ear and it did affect mainly wheat, which


is harvested in the m iddle of the year. On an in terpre ta tion of farm product as used in the unadjusted se r ie s it would seem that there w as, in fact, a sharp fall in production in the middle two q u a rte rs of the y ear, 1965/66. The apparent stability in farm product (and income) shown in the seasonally adjusted se r ie s seem s to involve a difference in definitions which m ay, in some re sp ec ts , be le ss satisfac to ry than those used in the unadjusted s e r ie s .

The Statistician has made com parable adjustm ents to the change in farm stocks as to fa rm product. This s im ila rity of trea tm en t is im portant in view of the fact that the seasonally adjusted item s a re set out in the form of a balancing account of national product and expenditure. The seasonally adjusted figures of the changes in farm stocks a re derived by adding the difference between the seasonally adjusted and unadjusted value of farm output to the unadjusted value of the change in farm stocks and seasonally adjusting the rev ised stocks s e r ie s . In the case of wool, seasonally adjusted changes in the value of stocks a re derived by deducting seasonally adjusted w ithdrawals out of stock from seasonally adjusted values of production. These m ethods of adjusting changes in farm stocks lead to a consistent trea tm en t of this item with o ther seasonally adjusted se r ie s of national income and expenditure but the in terp re ta tion of the figures is not s tra ig h tfo rw ard .

A different trea tm en t from the standard approach in deriving seasonally adjusted figu res is also used for item s of the change in the value of non-farm stocks and the s ta tis tica l d iscrepancy. Because of the negative figures in non-farm stocks the m ultiplicative method cannot be applied and the S tatistician has used the additive ra th e r than 1 the m ultiplicative version of the U. S. Bureau of the Census method, which involves calculating the seasonal adjustm ent from the actual changes in stocks ra th e r than the ra tio of the actual changes to the moving average. An a lternative method would have been to calculate to ta l values of stocks held each q u a rte r, adjust these figures by the m ultip licative method, and then derive the seasonally adjusted se r ie s of changes in stocks as the difference between the adjusted to ta ls at the end of successive q u a rte rs .

The item of s ta tis tic a l d iscrepancy which in the unadjusted se r ie s is a balance between item s of income and expenditure making up national product is also trea ted as a balancing item in the seasonally adjusted e stim ates .

72 N ational Incom e E s tim a te s

R eliab ility of q u a rte r ly e s tim a te sThe usefu lness of the q u a rte r ly e s tim a te s for the in te rp re ta tio n of c u r re n t even ts depends on the accu racy of the fig u res and how quickly they a re availab le a f te r the end of each q u a rte r . T hese two conditions conflic t and le s s re lia b le f ig u re s could be published e a r l ie r . An ideal approach to solv ing th is conflic t would be to d e te rm in e how the f ig u re s a re used and the acc u racy needed fo r th ese d iffe ren t p u rp o ses . In p ra c tic e , how ever, the fig u res m eet a wide range of d iffe ren t u ses and it is not p o ssib le to su m m a rise even the chief u ses of the q u a rte r ly accoun ts , o r to provide ob jective m e a su re s of re lia b ility .

When the e s tim a te s w ere f i r s t p rep a red it was p o ssib le to s tr ik e only a rough balance betw een re lia b ility and p ro m p tn ess . E s tim a te s of the m ain item s - such as w ages and s a la r ie s , im p o rts and ex p o rts , and som e public au th o rity tra n sa c tio n s - w ere ava ilab le w ithin about fou r w eeks of the end of each q u a r te r . To obtain in form ation about o th e r item s new su rv ey s w ere needed and these w ere designed to obtain the re q u ire d in fo rm ation w ithin five w eeks. O rig ina lly , fo r exam ple, q u a rte r ly su rv ey s of p riv a te investm ent expenditu re on bu ild ings, equipm ent, and changes in n o n -farm stocks w ere lim ited to la rg e b u s in e s se s , and expend itu re by o the r b u s in e sse s w as assu m ed to v a ry in p ro p o rtio n to th is expend itu re . The adoption of a five w eeks tim etab le a lso affected v a rio u s in d ire c t m ethods of estim atio n which could be used .

It is d ifficu lt to be su re how re lia b le the q u a rte r ly e s tim a te s a re and, as with the ca se of the annual f ig u res , it is not p o ssib le to e x p re ss m a rg in s of e r r o r in a sim ple fashion, such a s sam pling e r r o r s . F o r the re a so n s given above it is a lso not p o ssib le to draw any conclusions about the re lia b ility of the fig u res from re v is io n s m ade. A sse ssm e n t of acc u racy can only be m ade by co n sid e rin g the so u rc e s and m ethods used fo r each item . The following g en e ra l account of so u rc e s of e r r o r m ay, how ever, give som e ind ication of the re lia b ility of the f ig u re s as w ell as illu s tra tin g the d ifficu lty of providing a s im p le answ er to the question of how re lia b le the q u a rte r ly e s tim a te s a re .

In the f i r s t p lace it m ay be noted tha t for a num ber of im p o rtan t item s in the accoun ts q u a rte r ly e s tim a te s a re b ased v ir tu a lly on the sam e so u rc e s of in fo rm ation a s the annual f ig u re s , o r from so u rc e s which prov ide v ir tu a lly a com plete enum eration . T hese include im p o rts and ex p o rts of goods, w ages and s a la r ie s , a la rg e p a r t of the


public authority tran sac tio n s , some item s of personal consumption expenditure, private investm ent expenditure on dwellings and o ther new buildings, and investm ent in farm stocks.

As explained previously , however, even though the sources may provide estim ates which a re re liab le , they a re not always on the co rre c t b asis of tim ing. E r ro rs in concept due to tim ing d iscrepancies affect p a rticu la rly item s of public authority rece ip ts and expenditure and various derived e s tim ates , such as savings.

For o ther item s the main sources of e r ro r a re due to th ree facto rs: the use of sam ple su rveys, differences in concepts, and indirect methods of estim ation .

Sample su rv ey s . E r ro rs due to the use of sam ple surveys affect p articu la rly expenditure by p rivate businesses on equipment, building and stocks, and company income. To som e extent it would be possible to calculate standard e r ro r s for these figu res, although the population from which the sam ples a re drawn covers only business firm s subm itting payroll tax re tu rn s (in the case of the expenditure surveys) and a fu rth er adjustm ent is needed to estim ate the rem aining (about 25 per cent) expenditure.

Q uarterly sam ple surveys a re the basis of e stim ates of private business income and fixed investm ent expenditure on stocks and capital expenditure (other capital equipment as well as other new buildings).

These surveys vary in num bers and coverage, although in a ll cases the re tu rn s account for m ore than 50 per cent of the estim ated total figure. The survey of company profit covers m ore than 500 of the la rg e r company groups, which account for som e 60 p e r cent of total company income. The surveys both of stocks and of capital expenditure a re c ircu lated to about 3,300 and 4,200 businesses respectively , subm itting payroll tax re tu rn s . P re lim in ary figures a re usually based on about 70 p er cent of re tu rn s and final estim ates a re made when la te r re tu rn s a re received .

D ifferences in concep ts . In a num ber of c ases the basic figures differ in concept from that ideally requ ired for the quarte rly estim ates , and additions or adjustm ents a re made to im prove th e ir usefulness for this purpose. This may reduce the accuracy of the basic figures. E stim ates of wages and sa la rie s a re available, based on payroll tax re tu rn s (and other inform ation), which a re reasonably re liab le . For the purpose of the quarterly e s tim ate s , how ever, an addition is made


to the figures for supplem ents (com prising largely em ployers' contributions to pensions and superannuation funds and d irec t payments of pensions), which a re estim ated by a rb itra ry methods. The resu lting figures a re c lo se r to what the estim ates purport to m easure , that is the to tal rem uneration of wages and sa la r ie s , but the s ta tistica l accuracy of the basic wages and sa la rie s figures is g rea te r than that of the combined s e r ie s .

Indirect m ethods of estim ation . Where no d irec t inform ation is ivailable it is n ecessa ry to estim ate item s by the use of re la ted , or ind irect, data. In the case of early estim ates made of the profit of com panies an attem pt was made to construct production accounts leading to a derived figure of profit based from indicators of output and costs . Again, as has been mentioned, som e item s of farm costs a re based on known o r assum ed pattern of production, such as harvesting dates for crops.

The main item s which a re indirectly estim ated , however, a re the income of unincorporated businesses o ther than fa rm s, ren t and in te re s t paid by trad ing e n te rp rise s , and depreciation.

N on-farm income is divided, in p reparing the estim ates, into broad industry groups, the annual figures of which (from taxation tabulations) a re interpolated and projected by q u arte rs using production and other indicators appropria te to each industry. Rent and in te re st paid is the sum of a num ber of separa te s e r ie s which are estim ated by the use of ind icato rs, and depreciation is in terpolated and projected on trend .

6 National Product as a Measure of Total Output

Most of the development in national income methods in the la s t two decades has concerned the social accounting form s of p resenting these estim ates . As explained in Chapter 1, this is a reflection of the in te re s t of econom ists in cu rren t economic analysis involving the in te rre la tio n of various p a rts of the economy and of the usefulness of the accounts in providing the inform ation requ ired for th is purpose.At the sam e tim e, how ever, th e re has been a continuing in te re s t in the m ore trad itional purposes of national income estim ating , that is of providing m easu res of the aggregate output and income of countries needed to com pare the levels of economic activity and living standards between countries and over tim e. Quite recently the in te re s t in aggregate estim ates has increased as a re su lt of the development in quantitative methods of economic h isto ry and the concern of econom ists with problem s of the economic growth ra te of countries. A good deal of work has been done, and is continuing, in the compilation of longte rm se r ie s of the rea l national product of countries. F or A ustra lia , estim ates of national product, investm ent expenditure, and the balance of paym ents from 1860 to 1938/39 have been compiled by N.G. Butlin (1962).

These s e r ie s , used in in tertem poral and international com parisons, a re based on concepts proposed by the Statistical Office of the United Nations. Although these w ere drawn up as p a rt of the definitional fram ew ork of social accounts, the concepts a re relevant also to the use of estim ates of national product as a m easure of the aggregate output and income of co u n trie s .1 In fact, there is not a g rea t deal of

There is no necessary reason why the social accounting tables should include an entry for national product. The main object is to measure economic transactions of types of goods and services and particularly those which lead to a demand for employment. This would strictly confine the coverage of the accounts to market transactions. However, since the definition of national product as a measure of total output or income of countries is based largely on market transactions, there is not a great deal of difference between this definition and the sum of individual items shown in the accounts, and there are certain advantages in maintaining thic consistency.

75


difference between the p resen t concepts and those used in p re -w ar h is to rica l se rie s ; they a re s till based on the c rite rio n se t out by A. C. Pigou in 1928, that national product (or income) should include the values of production of goods and se rv ices that ’can be brought d irectly or indirectly into re la tion with the m easuring rod of m oney’ as in te rp re ted narrow ly by Pigou (1932:34) as covering 'everything that people buy with money income, together with the se rv ices that a man obtains from a house owned and inhabited by h im se lf '.

The use of the standard definition in com piling the estim ates does ensure a broad m easure of com parability in the figures for different coun tries, thus facilitating com parisons between these estim ates . However, the definition is based on institu tional c h a rac te ris tic s of econom ies and th e re s till rem ains the problem of allowing for the effect on the figures of any variation in the coverage of these institu tions. T here a re differences in the scope of the m arket economy between countries and over tim e, which could mean that a differing proportion of economic activity is included. As w ell, the use of standard definitions has tended to lim it the experim ents with a lternative m easu res made in p re -w ar y e a rs . For exam ple, Swedish estim ates published in 1936 covering the period 1860 to 1930 included in addition to the values of production sold for money, e stim ates of the unpaid dom estic work of housewives and the se rv ices of household goods and m otor c a rs . One of the fea tu res of the work in national income estim ation in recen t decades has been the lack of any development in methods of allowing for the effect of d ifferent institutional c h a rac te ris tic s of econom ies over tim e or between countries. There have, however, been substantial im provem ents in one aspect of the s e r ie s , that is in the methods of allowing for differences in levels of p rices . Although th e re a re s till many unresolved problem s in th is a re a , th e re is a fa ir m easure of agreem ent about the appropriate methods of deflation in com parisons both over tim e and between countries.

This chapter and the following two deal chiefly with problem s of definition and deflation which a r is e in using national product as a m easure of the aggregate output and income of countries. This chapter d iscusses questions of concept and the methods of valuing the goods and serv ices in cu rren t money p rices; the following two chap ters deal with the p rocedures in adjusting money values for d ifferences in levels of p rices in com parisons over tim e and between countries.

M easures of Total Output 77

Concepts of national productA detailed discussion of the definitions of national product is provided in the United Nations document, A System of National Accounts and Supporting T ab les . The definitions and methods set out in this document a re generally followed by m ost W estern countries; th e re a re some differences in the trea tm en t of p a rticu la r item s, largely as a re su lt of differences in the type of basic data available, but these do not lead to any substantial difference in the total figures.

National product com prises the total value of goods and serv ices cu rren tly produced and available for consumption, investm ent, government use or net export. It does not include the addition to wealth as a re su lt of new d iscoveries of na tu ra l re so u rce s , or the increase in natural a s se ts , such as fo re s t tim ber o r livestock, which does not re su lt from productive activity . 2 it may (and invariably will) differ from capacity o r potential output, and generally will m easure changes in the productiveness of an economy only to the extent that th is is reflec ted in goods and serv ices produced.

There a re severa l definitions of national product. Three of the m ost common v a rian ts , which differ by the trea tm en t of overseas tran sac tions, a re :(i) G ross dom estic product. The m arket value of the g ross product of estab lishm ents located within a country, including exports and excluding im ports.(ii) G ross national product. The m arket value of the g ross product of estab lishm ents owned by residen ts . This is equivalent to g ross dom estic product plus net income from abroad.(iii) G ross national product, defined as dom estic expenditure (on consumption and for capital formation) plus net foreign investm ent.At cu rren t p ric e s , th is is equivalent to (ii), but will differ from (ii) at constant p rices if th e re is a change in the te rm s of trade .

The p a rticu la r form ula used will depend partly on s ta tis tica l considerations, partly on the nature of the problem and probably

2A System of N ational Accounts and Supporting Tables (U .N . 1964b) recom m ends that

expenditure on forest c learance, land reclam ation and im provem ent, e t c . , and on the developm ent of plantations, orchards, vineyards, forests, e t c . , be included but that increases in natural resources due to growth (as w ith forests and standing crops) be excluded . Practice w ith regard to natural increase in livestock varies; för exam ple, this item is included in the British o ffic ia l estim ates of national incom e and in the Australian long-run series of national product com piled by Professor N .G . Butlin, but om itted from Australian o ff ic ia l estim ates from 1938 /39 . The treatm ent of this and other item s in o ff ic ia l estim ates of various countries is set out in deta il in N ational A ccounting Practices in Sixty Countries (U .N. 1964a).


partly also sim ply on the p reference of the u se r . It is usual to favour(i) over (ii) o r (iii) because of the s ta tis tica l d ifficulties involved in revaluing to constant p rices the net income from overseas. Form ula(ii) may be s im p ler to m easu re than (iii) but has the disadvantage fo r som e purposes of analysis that it ignores the effect of changes in te rm s of trad e . F or exam ple, a fall in im port p rices followed by an increase in the consumption of im ports would not affect the estim ate of national product (at constant p rices). These effects may be quite im portant if the purpose of the analysis is re la ted to a w elfare approach, since they do lead to changes in quantities of goods and serv ices available for consumption and investm ent. On the other hand, (ii) may be m ore appropriate for purposes of production or productivity com parison, w here it is desirab le to elim inate the effects of changes in external p rices in the m easurem ent of local production. In some c ircum stances, a lso , (iii) may be appropriate for th is purpose - fo r exam ple, if in the long run the changes in the te rm s of trad e re flec t s tru c tu ra l changes in an economy leading to g re a te r ’productiveness ' of the foreign trade sec to r, and it is d esired to take th is into account.

In addition, if a deduction is made for depreciation, the concepts a re described as ’n e t’. They may also be expressed at e ither m arket or factor p ric e s . Thus national income is equivalent to net national product a t fac to r p ric e s .

A ustralian official term inology is different from the above accepted international usage. Following a suggestion by Mr H. P. Brown, 'product' re fe rs to geographic concepts, while 'incom e' is used to denote residence 'N ational' has no p articu la r significance except perhaps to denote an aggregate. Hence 'g ro ss dom estic product' as defined above is described in the A ustralian estim ates as 'g ro ss national p roduct'. T here is no A ustralian equivalent to 'g ro ss national p roduct' but it could be described as 'g ro ss national income at m arket p r ic e s '.

SelectionNational product is confined largely to those goods and serv ices which pass through the m arket exchange, although som e allowance is made for a few specific non-m arket activ ities. The United Nations standard system of accounts includes the comment that 'in a m onetary economy all goods and se rv ices a re included which a re exchanged for m oney'.


As w ell,in the case of p rim ary p roducers. . .a ll p rim ary production whether exchanged o r not and all other goods and serv ices produced and exchanged a re included in production. In the case of other producers . . . the total of the ir p rim ary production is included as for p rim ary p roducers. In addition there is included the total of th e ir other production which is exchanged together with the unexchanged p art of th e ir production in th e ir own trad e . (U.N. 1964b:5)This m eans that in principle all p rim ary production is included,

together with a p a rt of the rem aining production. It is obvious that such a definition excludes a good deal of activity which could possibly be described as econom ic. The c lass ic definition of econom ics as the study of human behaviour in disposing of sca rce m eans which have alternative u ses, to satisfy ends of varying im portance (Robbins 1935:15-16) would bring into the coverage of production a whole range of non-m arket activ ities. But attem pts to provide a concept of national product which takes these activ ities into account have invariably foundered on the difficulty of distinguishing between that activity which is undertaken for its own sake and that which involves consciously the use of sca rce re so u rce s to provide goods and se rv ice s . Some activ ities of households may properly be c lassed as le isu re , while o ther ac tiv ities may re flec t the use of re so u rces which could be available for other purposes. The m otives of households a re so entangled that it is im possible in p rac tice to separa te c learly these two types of activity without having reco u rse to some fairly a rb itra ry c r i te r ia , such as to include in national product only those transac tions which rep re sen t cash outlays.

The ru le to include all production which is akin to the output produced by the m ajor activity of m em bers of the household does, how ever, have some justification in a p rim arily exchange economy.It could be assum ed that people a re m ost efficient in th e ir norm al occupation and that o ther work has som e, and probably a large elem ent of. non-econom ic justification. Thus, for exam ple, a builder may construct his own house because it is a m ore efficient use of h is tim e to do it h im self than to employ another builder or buy a house, but if he uses h is spare tim e to m aintain h is c a r it could be assum ed that th is activity is not undertaken as the m ost efficient m eans of getting his ca r fixed.

N evertheless, it does appear that some spare-tim e household


activity which is not re la ted to the main occupation does have an economic m otivation. This is reflected in the fact that an increasing proportion of goods and serv ices produced by unpaid household activity tends to be purchased through the m arket as rea l national product per head r is e s over tim e. These include, for exam ple, h a ir-cu ttin g , the p reparation and serving of m eals, laundry and dry cleaning and am usem ent se rv ices of various kinds. This has led to the belief that the adoption of the definition re su lts in an understatem ent of the national product of le ss developed econom ies and an upward bias in the ra te of growth of national product over tim e.

In addition, the definition is not fully applied in p rac tice and a good deal of activity which is s im ila r to the main occupation of the household is not included in the m easurem ent of national product. No amount is included, for exam ple, for the unpaid se rv ices of housewives and few attem pts have been made in h is to rica l s e r ie s to m easure the household production of goods and serv ices in p re -in d u stria l econom ies which are la te r produced in fac to ries , such as weaving and knitting, and the m anufacture of household u ten sils . There have been substantial changes in the proportion of housewives who work for w ages, not only over long periods of tim e but also during re la tive ly short periods, such as in w artim e. As housewives en ter the m arket, an increasing proportion of national product com prises goods and se rv ices previously perform ed in the home. The om ission of the la tte r type of production could lead to a fu rther overstatem ent in the growth ra te of national product, although at the tim e when this is likely to be m ost im portant, that is during the early stages of industria lisation of an economy, rea l national product is likely to be ris in g at such a fast ra te that the re la tive e r ro r in neglecting th is activity is not likely to be significant.

F inally, even w here an attem pt is made to m easure non-m arket activ ities, the estim ates a re likely to have a large m argin of e r ro r . This applies pa rticu la rly to the m easurem ent of subsistence ag ricu ltu re in le ss developed econom ies which accounts for as much as o r m ore than 80 p er cent of the national product of these countries. D ifficulties a r is e in m easuring th is production as a re su lt of the frequent lack of census o r o ther s ta tis tica l reg is tra tio n of this production, d ifferences in the quality of products consumed at home and supplied to the m arket, and the lack of any readily available p rice s to value th is output.

A fu rther om ission from the value of national product is the se rv ices

M easu res of T otal Output 81

of a s s e ts owned by p e rso n s and governm en ts . E xpenditu re on th ese a s s e ts is included in national p ro d u c t a t the tim e they a re acqu ired but th e ir s e rv ic e s m ay extend ov er a long perio d of tim e and m ay be g re a te r than the in itia l outlay . T his m eans not only th a t the tim ing of the incom e is likely to be d is to r te d , but tha t any su rp lu s of incom e ov er th e ir co s t p r ic e is om itted .

D uplicationN ational product c o m p rise s the value of goods and se rv ic e s c u rre n tly produced and availab le for the final p u rp o ses of consum ption , investm en t, and ne t ex p o rts . Output used in fu r th e r p roduction is excluded since th is is duplicated in c u r re n t p roduction . The duplicated output co m p rise s th re e m ain types of p ro d u c ts . F ir s t ly , th e re a re b u sin ess co s ts deducted in a rr iv in g a t accounting fig u res of p ro fit. Secondly, th e re a re a num ber of item s w hich, w hile not a p a rt of the accounting co s t of goods so ld , m ay in fact fa c ilita te fu r th e r production o r not p ro p erly be a p a r t of final output used fo r consum ption, in vestm en t, o r net ex p o rts . T h ird ly , th e re is the co s t of a s s e ts used up in c u rre n t p roduction , o r dep rec ia tio n .

The allow ance fo r b u siness c o s ts of production lead s to no sp ec ia l p rob lem s since the m ain so u rc e s of in form ation on b u s in ess p ro fits a re accounting re c o rd s which do prov ide d e ta ils of th ese expenses.It has been m entioned e a r l ie r th a t in som e in s ta n c e s , w here taxation s ta t is t ic s a re used a s a b a s is fo r es tim atin g com pany p ro f its , som e ad justm en t may be needed to th e se data to allow fo r om itted or im p ro p erly included item s , but th e se ad ju stm en ts a re usually of m ino r im portance and do not lead to any p a r tic u la r p ro b lem s. They con ce rn , in p a r tic u la r , ad justing for the d ifference betw een actual and a sse ssa b le incom e. D ifficu lties a r is e , how ever, in defining and m easu rin g the o th e r two types of duplication . T hese have led to a com m on adoption in national accounting w ork of lim iting the deductions to the actual reco rd ed o ffse ts to b u s in ess p ro fits only and of ignoring le s s c e rta in deductions. In som e u ses of the r e s u lts and in com parison betw een p a r tic u la r p erio d s o r econom ies th is could d is to r t the m eaning of the fig u res .

The difficulty about the second type of duplication is th a t the am ounts depend on the p u rpose fo r w hich national p roduct e s tim a te s a re being used and on an a s se s sm e n t of the u sefu ln ess of individual goods and s e rv ic e s . Let us take f ir s tly those p roducts w hich, w hile not a p a r t


of norm al business costs of production, may not rep resen t a final use of goods and serv ices .

The expenditure by public au thorities and consum ers is sim ply the total value of goods and serv ices purchased. Some of these products may not n ecessa rily add to rea l incom es. Item s such as the cost of travelling to work, types of governm ent regulatory or adm inistra tive functions necessa ry to m aintain peace and o rd e r, and special clothing requ ired for a p a rticu la r type of job could m ore properly be regarded as a cost of living, o r earning incom e, than as contributing to rea l incom e. S im ilarly , some of the costs charged by businesses against sa les may provide satisfac tions to em ployees and thus add to th e ir re a l income. These include not only m edical se rv ice s , clothing, and other am enities provided by businesses for th e ir em ployees, but also various 'fringe b en efits ', such as lavish expense accounts, and personal telephone calls on business phones. Up to the p resen t tim e, however, there has been no agreem ent as to the way in which the item s which a re tru ly final output can be distinguished from the in term ediate costs .

P a r t of the trouble lie s in deciding on the final goal of economic activity. If the em phasis is on the benefits to consum ers, then the problem is one of lim iting the item s of personal consumption expenditure to elim inate those which a re p rim arily costs of earning incom e, such as travelling to work, and of including in the public authority expenditure only the item s which have a counterpart in the residual consumption expenditure. For p rac tica l purposes, th is approach com es down to making adequate allowance in com parison between two econom ies for the effect of institutional o r geographic d ifferences on the utility of item s of personal consumption expenditure.

Other end goals may, of cou rse , be p re fe rred . Thus, for exam ple, Eckstein (1961:20) drew a distinction between m ilita ry expenditure in the W estern and in the ’Soviet type’ econom ies. In the la tte r case m ilita ry production and expansion of industria l capacity for m ilitary production a re accorded a cen tral place in the planning p ro cess . In an ex trem e statem ent of the case , one could say that the cen tral task of a Soviet-type economy is to allocate re so u rces in such a way as to m axim ise the ra te of growth in m ilita ry production. In these te rm s , the appropriate definition of final product might be m ilitary consumption and capital form ation, while household consumption could be considered an in term ediate product.


He com m ents la te r (p. 21) thatit would seem that in m easuring the com parative perform ance of d ifferent types of econom ies, much can be said for using th ree a lte rnative concepts of final product, each d irected tow ards a different aspect of com parison. These could be designated as the w elfare, the power, and the com prehensive definitions respectively: the f ir s t re fe rrin g to household consumption and capital form ation that may contribute to it, the second focusing on governm ent expenditure and capital form ation associated with it, and the th ird encom passing both.F or the purposes of th is study, the th ird concept is m ost relevant since our p rim ary in te re s t is in the s tru c tu re of China's Mainland economy, in the prevailing pattern of re so u rce allocation, and in the magnitude and in te rre la tionsh ips of the broad financial flows.If, on the o ther hgnd, it is assum ed that it is not possible to

consider the end goals of economic activity o ther than in te rm s of the types of output produced, the problem then is sim ply one of making proper allowance for the costs of producing goods and serv ices .

However, th is ra is e s the second difficulty that some of final output as conventionally m easured may m ore properly be a p a rt of the cost of producing business incom e. This output would include, for exam ple, some expenditure on ro ad s , expenditure on the regulatory activ ities of public au thorities for m aintenance of law and o rd e r, negotiation of in ternational trad e ag reem ents, and so on. If not undertaken by the public au th o ritie s , th is expenditure would be incurred by busm ess firm s and charged as a cost to the value of sa les . But there is no c lea r way of distinguishing between th is expenditure, which fac ilita tes business production, and that which is available for final use. T here seem s little doubt, how ever, that some item s of national product a re p roperly a cost of production and that this expenditure is re la tive ly m ore im portant the m ore developed the economy. As a re su lt the conventional m easure of national product is likely to lead to som e overstatem ent of the rea l product of countries with high incom es per head and to an upward b ias in the ra te of growth over tim e of rea l product.

In d iscussions of the duplication in national product a ris in g from these products there appears to be a genuine difference of opinion as to the amounts involved and the way th is affects the use of national product figures for different purposes and in com parisons between different econom ies. One conclusion which has em erged from this


discussion is the need for a detailed classification of national product by function to show separa te ly , for exam ple, the goods and se rv ices which could rep re sen t costs of production and 'n ecessa ry ev ils ' in government and personal consumption expenditure. Thus, in terpreta tion of the meaning of figures of national product w ill vary according to the purpose of the com parison and the significance of the output used for d ifferent purposes.

The th ird type of deduction to be considered is the depreciation of capital a sse ts as a re su lt of th e ir use in cu rren t production. Since capital a sse ts a re p a rt of final output (as investm ent expenditure) when produced, allowance is needed for th e ir depreciation in producing other output in o rd e r to avoid double-counting. To the extent that p a rt of investm ent expenditure is requ ired sim ply to rep lace a sse ts used up in cu rren t production, including the full expenditure in national product would oversta te the level of economic output. The depreciation charge is not an identifiable value of output o r cost and is imputed from the value of capital a sse ts and the estim ated loss in value due to production in each y ear. It is an attem pt to estim ate what would be the value of output needed in each y ear to rep lace the depreciation of capital.

Because of the d ifficulties in defining what is meant by capital used in cu rren t production and in m easuring the amount, national product is often used in the g ross sense as an approxim ation to net national product. The official A ustralian estim ates of national product at constant p ric e s , for exam ple, a re shown only on a g ro ss b asis and a re used to serve purposes w here a net concept would in principle be m ore appropria te . It has also been argued that the true value of depreciation is ju st as likely to differ m ore from any s ta tis tica l estim ate made than from zero , and that it is th e re fo re m ore re liab le to adopt a value for depreciation of zero . D epreciation appears to be a fa irly constant proportion of national product and the use of the g ross concept is not likely to lead to la rge e r ro r in com parisons of national product.

The depreciation estim ates should show the value of capital used up at cu rren t p rice s . It is to be distinguished from financial provisions for depreciation made in a rriv in g at business profit and from the change in total capital stock from one y ear to the next. The financial provision is a way of w riting off past capital expenditure against income in o rd er to recoup the orig inal expenditure on the a sse ts .


A ssets a re usually w ritten off at th e ir orig inal cost p rice , instead of at cu rren t replacem ent p ric e s , and the allocation of depreciation charges is usually made in a fa irly a rb itra ry fashion, generally by a method which does not lead to any big d isto rtions in p ro fits. Financial provisions a re often also affected by taxation requ irem ents which may have little relationship to economic considerations. D epreciation is an elem ent of the change in capital stock, but in addition capital stock will a lte r as a re su lt of new investm ent and capital lo sses . The la tte r item is not deducted in the m easurem ent of national product on the grounds that it is not a cost incurred in productive activ ities.

Item s of norm al re p a ir and m aintenance a re usually excluded from investm ent and hence also from depreciation allow ances. Thus depreciation is the using up of a sse ts a fte r allowance has been made to m aintain them in a reasonable state of efficiency. In national income estim ates of Scandinavian countries, however, all re p a irs a re capitalised and then w ritten off as depreciation, leading to a m ore g ross (or ’g ro s s -g ro s s ’) concept of national product and investm ent expenditure. Abnormal re p a irs which a lte r the nature of the capital a sse t a re usually cap italised but the distinction between norm al and abnorm al re p a irs and m aintenance is based on accounting p rac tice , which leads to some uncertainty about what re p a irs and maintenance a re in fact charged against the cost of sa les . The national income account is com pelled to re ly on the available figures of business profit, and p rac tice in dealing with re p a irs and m aintenance may vary between different businesses.

The main elem ents of depreciation a re w ear and te a r , the decline in value owing to fo reseen obsolescence both as a re su lt of the introduction of new and m ore efficient m achines and changes in demand, and accidental damage (U.N. 1964b:32). All of these elem ents contribute to the decline in the value of a sse ts but it is not c lea r how fa r each could be attribu ted to loss of productiveness due to the use of the a sse t in cu rren t production. S trictly speaking, only w ear and te a r could be d irec tly attribu tab le to the use of the a sse t in production and part of th is could also a r is e even if a sse ts w ere not used. By including all of these elem ents in depreciation, th e re fo re , a somewhat w ider concept is obtained than would be s tric tly relevant to depreciation as an elem ent of duplication of cu rren t output. The depreciation allowance in national income accounting m ore properly rep re sen ts the amount of cu rren t output needed to m aintain the stock of a sse ts , irresp ec tiv e of the causes leading to decline in values. It


has been argued that w ear and te a r is likely to be a m inor p a rt of the depreciation charge, and to th is extent the usual allowances contain only a sm all elem ent of decline in value as a re su lt of cu rren t production. 3

D epreciation is th e re fo re la rgely the re su lt of foreseen changes in conditions of supply and demand, together with accidental dam age.The point a r is e s , however, that the changes in conditions of supply and demand could affect values of o ther a sse ts and that th is p a r t of depreciation could in fact be attribu ted to im proved efficiency of new a sse ts (which contribute to obsolescence of existing asse ts) or increased demand for o ther products. Thus the effect of including obsolescence as an elem ent of depreciation is to w rite off the fall in the value of a sse ts of business o r industry which a r is e s from increased values of a sse ts in o ther businesses or industries . To a la rg e extent, th e re fo re , the depreciation estim ates do not m easure a net decline in the productiveness of a sse ts . It may also be queried whether it is c o rre c t to make a deduction from national product for the im proved productiveness of new equipment; on the conventional m easure depreciation will be la rg e r the fa s te r the ra te of technical im provem ent in investm ent goods.

The conventional m easure of depreciation involves estim ating the life of the a sse t, deducting the value for sc rap at the end of its life, and w riting off the rem aining value using som e standard method of apportioning annual charges. This may be on the s tra ig h t-lin e method (in which case the sam e amount is w ritten off each year) or the method of reducing balance (in which case the sam e percentage of the value at the beginning of each y ear is w ritten off). An amount is then added in each y ear for accidental damage as it o ccu rs . 4

The valuation of national productThe goods and serv ices com prising national product a re weighted by p rices as the m ost sa tisfac to ry available m easure of the economic significance of different item s. These may be e ither the m arket p rices or the imputed 'fac to r co st' p ric e s , that is , m arket p rices3 Sir Robert Shone (1957) has commented that 'I do not really think it right to think of depreciation occurring because efficiency falls. The efficiency of a plant may well remain substantially constant throughout its life, or indeed increase if managers find better ways of operating it. 1

For a discussion of the effect of using different methods of calculating depreciation, see U.S. Department of Commerce (1963) and Redfern (1955).


excluding net ind irect taxes. As f ir s t proposed by Hicks (1940), the choice between these a lternative methods of valuing output is determ ined by the purpose for which the estim ates a re to be used. M arket p rice s m easure the m arginal utility of goods and serv ices used for final purposes of consumption, investm ent, and net exports, while factor cost shows the m arginal productivity of fac to rs used.The fo rm er method of valuation is appropria te for com parisons of national product used for different purposes, including com parison of levels of economic w elfare, while the la tte r method of valuation is appropriate for studies of levels of production, or the productivity of fac to rs used.

However, p rices have only a vague so rt of relevance fo r these purposes. For exam ple, m arket p rices m easure the utility derived from only the la s t unit of p a rticu la r goods and se rv ices acquired and thus leave out the ’co nsum ers1 su rp lu s’ o r additional utility derived from other purchases. This m eans that com parisons of the total values of expenditure on each product provide only a rough m easure of the re la tiv e utility obtained. As w ell, the use of p rices to com pare u tilities of goods and serv ices assum es that p u rch ase rs adapt th e ir expenditure to equate the satisfactions derived from the goods and serv ices (which involves perfect knowledge of the p rices of different p roducts), that wants a re constant between individuals and at different periods of tim e, and that income is fa irly evenly d istributed . ^

The la s t qualification is probably the m ost im portant in p rac tice .It m eans that p rice s can only be in te rp re ted as re la ting to a p a rticu la r income d istribution , and a substantial change in income distribution will a lte r com pletely the significance of the p rice s . In th is case , com parison using a set of p rices will need to be confined to a p a rticu la r group the rea l income of which is approxim ately unchanged. At the sam e tim e, the relevance of any set of p rice s as weights w here income is d istribu ted unequally may be doubted. It m eans, for exam ple, that the rich a re given g re a te r weight sim ply because they a re rich .

S im ilar difficulties apply in the in terp re ta tion of factor cost as a m easure of the m arginal productivity of re so u rce s used in production, a s a re su lt of the lack of perfect com petition between business firm s and in the supply of fac to rs of production. But in addition there is

There is an extensive literature on this subject. A useful summary of the significance of market and factor prices is given in Ohlsson (1953).


some doubt as to the extent to which, even if in p rac tice factor costs did m easure the m arginal productivity of fac to rs used, it is appropriate to deduct the full amount of ind irect taxes in m easuring national product at factor cost.

It has been argued that the distinction between ind irect taxes as a cost to businesses and other taxes as tra n s fe r paym ents is by no m eans c lea r-cu t. This distinction is based on the assum ption that ind irect taxes a re shifted forw ard and a re thus properly a cost of goods sold while o ther taxes a re an allocation out of p rofits or personal incom e.In fact, however, some types of ind irec t taxes may m ore properly be regarded as a tra n s fe r paym ent by businesses or p ersons, including, for exam ple, the paym ent by persons of various types of licences and fees usually included in indirect taxes while income taxes paid by businesses may in some c ircum stances be passed on. The problem is that it is alm ost im possible to determ ine in p rac tice how far different types of business taxes a re in fact passed on. But it is c lea r that while all of personal income tax and ind irect taxes paid by persons a re tra n s fe r paym ents and not a cost of business production, the g rea t bulk of business paym ents of ind irec t taxes is a cost of production.The position is le ss certa in with reg a rd to business paym ents of income taxes, but even here the weight of theo re tical arid s ta tis tica l evidence is that changes in ra te s of tax affect company profits a fte r taxes m ore significantly than before tax p rofits (National Bureau of Economic R esearch 1958:52).

There is also som e doubt as to w hether the factor cost concept does rea lly show the value of output in te rm s of the m arginal productivity of re so u rce s used. From the point of view of the individual business the costs which a re re levant to business decisions a re the payments made d irectly for fac to rs used, plus the total cost of m a te ria ls . The value of m a te ria ls used is made up of the cost of fac to rs used in producing the m a te ria ls and also the ind irec t taxes levied at previous stages of production. Thus it has been argued that expenditure on final output at factor cost should exclude only those ind irec t taxes levied a fte r the final stages of production; other indirect taxes have the sam e relevance in producing final output as the accum ulated sum of paym ents to fac to rs of production at in term ediate stages of production. Since these account for the large bulk of indirect taxes it has been fu rther argued that a m ore accura te m easure of national product at facto r cost is in fact obtained by including instead of


excluding all of ind irect taxes (Nicholson 1955).Because of these difficulties in both defining and m easuring national

product at fac to r cost there a re some grounds for accepting national product at m arke t p rices as the m ore useful m easure for production and productivity com parisons. In p rac tice there is not a large difference between the changes in the two aggregates and the choice between these aggregates has probably m ore theore tical than p rac tica l significance.

As well as the difficulty of in terp re ting the meaning of national product valued at m arket p rices o r factor cost, there a re p rac tica l difficulties in estim ating national product in both valuations. In the case of the m arke t p rice valuation, these concern mainly the value of the change in stocks and depreciation and the valuation of non-m arketed production and government expenditure; in the case of the facto r cost valuation th e re is the additional problem of estim ating the net ind irect taxes on individual item s of final expenditure.

In cu rren t p rices fo r m ost item s of national product the basic sources used show the quantities of goods or se rv ices com prising expenditure or output valued at an average p rice in the period. For the two item s of investm ent on stocks and depreciation, however, the basic data a re not in th is form and com plicated methods of adjustm ent a re needed to obtain the equivalent values.

The main source of information of investm ent in stocks is balance sheet value of stocks held by businesses. The difference between successive balance sheet figures shows the change in the value of stocks during the year. This includes, however, not only the change in the quantity of stocks held, valued at the p rices at which they a re acquired (the value of the change in stocks) but also the change in stocks as a re su lt of any variation in the p rices at which opening and closing stocks a re valued (stock appreciation). Even if the physical level of stocks was unchanged during the y ear, any varia tions in p rices would affect the values shown in balance sheets and thus lead to a value of stock change. In o rd e r to obtain a figure of the in c rease in stocks which corresponds to that of o ther item s of expenditure it is n ecessa ry to elim inate this elem ent of stock appreciation from the change in the book value of stocks. The p rocedures of doing th is a re described in the next chapter.

E stim ates of depreciation shown in business reco rd s a re sim ila rly not in the form requ ired for national income estim ates . As has been


pointed out, business provisions for depreciation a re usually calculated by w riting off the o rig inal cost at which a sse ts a re acquired , ra th e r than a cost m easured at cu rren t p rice s .

The valuation of some non-m arketed production may be based on the actual p rices of equivalent production sold through the m arket.This is the case , for exam ple, w here the non-m arketed production accounts for only a sm all proportion of total production and it could be assum ed m arket p rices would be unaltered o r only slightly changed if a ll of the output w ere sold on the m arket. The consumption of farm produce by p rim ary p roducers in a predom inantly exchange economy is likely to be only a sm all p a rt of to tal value of farm production and hence th is is usually valued by re fe ren ce to the p rice of that production which is sold. W here the non-m arketed production accounts for a la rg e proportion of total output, however, m arket p rices may be an im perfect guide to the re la tive values of goods and se rv ices . It may then be n ecessa ry to derive p rice s from actual o r imputed costs of production, o r from the p rices of equivalent goods im ported, o r from those of the sam e products in another country. The la tte r procedure is quite often used but it involves the assum ption that the conditions of supply and demand in one country a re equally applicable in the other country. Actual c ircum stances may in fact be quite different, leading to an a rtif ic ia l po rtray a l of economic activity .

M arket p rices a re also of doubtful significance in valuing the cu rren t pu rchases by public au thorities (other than by business undertakings, in which case cu rren t purchases a re trea ted as a norm al cost of business and deducted from sa les revenue), since in effect the p rice of th is output to final consum ers is nil. This point has supported a good deal of the argum ent as to w hether public authority expenditure should be trea ted as final or in term ediate product. It is argued, for exam ple, that the absence of any relevant p rice valuation m eans that th is expenditure cannot be com pared with, o r re la ted to, o ther final expenditure. A way of overcom ing this difficulty has been suggested by Kuznets (1941), and was adopted by him in some early calculations of the national product of the United S ta tes , in which the expenditure of the public au thorities is tre a ted as in term ediate outlay financed by fines and taxes, with the difference between the revenue and expenditure of public au thorities , roughly equivalent to the budgetary su rp lus, being regarded as the final expenditure of public au thorities . Another suggestion has been made


that the governm ent could somehow be viewed as an ultim ate consum er, the satisfaction of whose needs can be equated with those of the population. The conventional p rac tice , however, is to tre a t the governm ent as a final pu rchaser of goods and serv ices justifying this on the grounds that the bulk of public authority expenditure does, in fact, rep re sen t final output and that no other method of valuation is possible except in te rm s of the costs of the goods and serv ices acquired.

The main problem in the m easurem ent of factor cost is that while m arket p rice s a re the values at which actual transactions a re recorded , fac to r costs a re an imputed price obtained by deducting one elem ent of cost, net ind irect taxes, from m arket p rice s . Because of the s ta tis tica l d ifficulties in d istributing the ind irec t taxes on in term ediate transac tions to categories of final expenditure few attem pts have been made to estim ate national product as the sum of item s of final expenditure at factor cost valuations. Instead, estim ates of national product at factor cost a re usually derived by deducting the total ind irec t taxes from the sum of final expenditure valued at m arket p rices o r, m ore d irec tly , by simply adding the paym ents made to fac to rs of production.

7 Deflation of National Product

P rev io u s ch a p te rs have d iscu ssed the p ro b lem s involved in m e asu rin g national p rod u c t in c u r re n t money p r ic e s . F o r many p u rp o ses , including the com pariso n of lev e ls of na tional p roduct over tim e and betw een c o u n tr ie s , e s tim a te s a re a lso needed of the value of n a tional p roduct a f te r allow ing fo r d iffe ren ces in p r ic e s . This leads to a co m p ariso n in re a l v a lu es, o r in te rm s of the quan tities of the goods and s e rv ic e s co m p ris in g national p roduct. T hese e s tim a te s a re often d e sc rib e d a s quantity indexes but since they involve the valuation of item s a t a co n s is te n t se t of p r ic e s of one b ase y e a r o r in one co u n try , and thus include both a p r ic e and quantity com ponent, they a re m o re a c c u ra te ly d e sc rib e d as quantum s e r ie s .

The c o rre c tio n of e s tim a te s in c u r re n t money values fo r d iffe re n ces in the leve l of p r ic e s is r e fe r re d to as the deflation of national p roduct. This c h a p te r dea ls with the question of deflation in in te rtem p o ra l co m p ariso n s; the following ch ap te r d is c u s se s the revaluation of money values of na tional p roduct of d iffe ren t co u n trie s to an equivalen t leve l of p r ic e s .

M ethods of deflationIt is u su a l to m ake a d is tinction betw een the m ethod of deflating national p roduct by su b trac tin g the quantum of im p o rts from the quantum of final output on the one hand, and by sum m ing the quantum of p roduct of in d u s tr ie s on the o the r hand. T hese a lte rn a tiv e ap p ro ach es sim ply follow two of the d iffe ren t m ethods by which na tional p roduct is e s tim a te d in c u r re n t p r ic e s , and hence the r e s u l ts should be the sam e , provided the data used a re co m parab le , and a p p ro p ria te techn iques of defla tion a re used . In p ra c tic e , s im ila r data a re not used and the r e s u lts a re d iffe ren t. The d ifference is often supposed to ind icate in som e way o r o the r the possib le e r r o r of the f ig u re s .

The re la tio n sh ip betw een the two m ethods m ay be ind icated as

92

D eflation of N ational P ro d u c t 93

follow s. N ational p roduct for the econom y is defined as the final expenditu re on goods and se rv ic e s p roduced , le s s im p o rts of goods and s e rv ic e s . It is a d ifference betw een the output of the econom y and the input ( im p o rts ). P ro d u c t of individual in d u s tr ie s is s im ila r ly defined a s output le s s input, but in the ca se of each in d u stry the output c o n s is ts of the final expenditu re of the econom y w hich is a ttr ib u tab le to the p roducts of the in d u stry plus sa le s to o th e r in d u s tr ie s , and the input includes im p o rts used by the in d u stry plus p u rc h a se s from o th e r in d u s tr ie s . Thus the production of each in d u stry c o m p rise s com ponents of the f ig u re s used in p re p a rin g the e s tim a te of na tional production fo r the econom y plus in te r - in d u s try tra n sa c tio n s . The quantum e s tim a te s of national p roduct should be the sam e , w hether d eriv ed by deducting from the quantum of final output the quantum of im p o rts o r by sum m ing the quantum of p roduct of in d u s tr ie s . If the deta il of final expenditu re and im p o rts used in the two m ethods is id en tica l, the m ethods used fo r deflation a re the sam e , and th e e s tim a te s of the in te r - in d u s try tra n sa c tio n s cancel out, th is le ad s to the sam e e s tim a te of re a l p roduct. Thus the d ifferen ce betw een e s tim a te s derived from th e se a lte rn a tiv e app ro ach es m ay be due to the u se of d iffe ren t e s tim a te s of final expenditu re o r to inconsistency in dealing with in te r - in d u s try tra n sa c tio n s .

One lim ita tio n of the m ethod of aggregation of industry p roduct is tha t the av a ilab le data of input and output a re genera lly incom plete .The m ethod of approach should en ta il deflation of the de ta il of the output and input of each in d u stry , the d ifference betw een the output and input re p re se n tin g the in d u stry p roduct. In p ra c tic e , lim ita tio n s of data m ake it n e c e s sa ry to use only one in d ica to r, usually of output but so m etim es of input, to re p re s e n t changes in industry p roduct, in which ca se the agg reg a te of quantum of industry p roducts w ill not to ta l to the quantum of national p roduct obtained by the deflation of expenditu re e s tim a te s . T his could lead a lso to e r r o r s in individual in d u stry e s tim a te s of quantum of p roduction . An exam ple of the m agnitude of e r r o r s which do a r is e in p ra c tic e from th is so u rce in h is to r ic a l s e r ie s is p rov ided by a co m p ariso n of the tre n d in p roduct of 'f a r m s ’ in the United S tates over a fo r ty - th re e -y e a r p e rio d from 1910 to 1953. D uring th is perio d , the quantum of output of 'f a rm s ' in c re a se d about 81 p e r cen t, the quantum of input by 324 p e r cent, and the quantum of p roduct by 39 p e r cen t (K endrick 1961:347).

The re la tio n sh ip betw een input and output s e r ie s se e m s , how ever,


to vary between industries and there is some evidence that the two s e r ie s a re likely to move closely together in the case of m anufacturing industry. As w ell, the deflation of inputs and outputs could in some cases produce strange re su lts , owing to changes in re la tive p rices and quantities. Negative rea l product could be obtained in ex trem e cases. For th is reason , and because of lim itations of data, it is generally preferab le to re ly on single indicators to rep re sen t changes in industry product except w here, as in the m easurem ent of farm product in the United States, there a re quite substantial d ifferences in the ra tio of m a te ria ls used to output.

A deflated s e r ie s shows the quantities of national product in each y ear, expressed in the p rices of a given base y ear. Ideally, each item of output is taken to com prise a quantity and p rice component, and the p rocess of deflation involves substituting the base y ear p rices for cu rren t p rice s . This can be done e ither d irec tly , by multiplying quantity data by the base y ear p ric e s , o r ind irectly , by dividing the value figures by a p rice index. Where properly constructed p rice se r ie s exist, it is usually the p rac tice to p re fe r the ind irec t approach of p rice deflation to the d irec t revaluation of quantity data.

There a re two main advantages in using p rice deflation com pared with d irec t revaluation. In the f ir s t p lace, the revaluation of components of output is norm ally based on p rice o r quantity indexes covering only a p a rt of expenditure or product; that is , a sam ple of p rices or quantities is used and it is assum ed that th is sam ple is rep resen ta tive of all item s in the p a rticu la r component of output. In p rac tice , there is usually le ss varia tion in the movement of p rices than of output of s im ila r products. In the second place, the specification of p rices is likely to be m ore detailed than that of quantities, with the re su lt that a p rice se r ie s is m ore likely to re la te to s im ila r item s than quantity data. F o r exam ple, in dealing with the revaluation of output of flour, a p rice s e r ie s used to deflate value of output may be specified as a grade of flour, thus providing an answ er in te rm s of quantity of the specific g rade, but a quantity se r ie s used in d irec t revaluation may com prise the total output irresp ec tiv e of grade, and the deflated se r ie s will accordingly not re flec t change in the grade of output. One difficulty in using p rice s e r ie s in deflation a r is e s , however, from the fact that norm ally the quantum se r ie s a re needed with a base y ea r p rice weighting, and th is is obtained in deflation only by the use of a cu rren tly weighted p rice index. These a re ra re ly com piled, with the re su lt that, in the case


of those com ponents of national output which a re defla ted , the w eighting of quan tities is in te rm s of c u r re n t p r ic e s .

A m ore su b stan tia l p roblem is th a t fo r a g re a t m any of the item s in national p roduct, the values cannot be divided betw een a p r ic e and quantity com ponent. In these c a se s it is n e c e s sa ry to im pute in som e way a quantity equivalen t to the value. T his is the position fo r much of the output of se rv ic e in d u s tr ie s and fo r cu s to m -b u ilt p ro d u c ts .

In the ca se of the cu s to m -b u ilt p ro d u c ts it is so m etim es p ossib le to im pute p r ic e s from those of s tan d a rd ise d p roducts of the sam e ind u stry . In som e in d u s tr ie s (for exam ple , shipbuilding and a i rc ra f t m anufactu re), how ever, a lm o st a ll of the output co m p rise s unique p roducts and in th is case the usual p ro ced u re is to com bine co st item s in o rd e r to re c o n s tru c t the p robab le p r ic e change of a p a r tic u la r m odel if it had continued to ex is t. An index of co s t is usually com piled by com bining ap p ro p ria te ly w eighted m a te r ia l c o s ts and earn in g s of the types of m a te r ia ls and labour used in p roduction . An ad justm en t m ay be m ade also fo r changing p ro fit m a rg in s .

A m ain defect of th is approach is the neg lect of p roductiv ity change. F o r the sam e reaso n the physical output cannot be iden tified and m e asu re d , n e ith e r can output p e r unit of input. The re s u lt of th is om ission is to lead to a downward b ia s in the quantum indexes.M ethods have been p roposed to overcom e th is d ifficu lty , but they all su ffer from som e lim ita tion o r o th e r. F o r exam ple, an a ttem p t m ay be m ade to use d ire c t m e a su re s of p hysica l output - such a s tonnage in the ca se of sh ips o r square fee t of space in the ca se of build ings. H ow ever, the value p e r unit m ay v a ry co n sid erab ly acco rd in g to the type of p roduct (coasta l o r p a sse n g e r sh ip , fac to ry o r office build ing, e t c . ), so tha t a change in the com position of output m ay cause a co n sid erab le change in unit value. In the offic ial e s tim a te s of rea l p roduct of the building industry in B rita in , to overcom e the lack of any allow ance for productiv ity change a p ro ced u re is used which involves ad justing labour input by a change in the ra tio of m a te r ia l to labour c o s ts . If th is ra tio fa lls , it is a ssu m ed th a t p roductiv ity has in c re a se d and the index of labour input is ad justed upw ards. This p ro ced u re igno res ra te s of re tu rn to cap ita l and involves som e s ta t is t ic a l im p rec is io n .

The deflation of expenditure on output of the se rv ic e in d u s tr ie s r a is e s p a r tic u la r ly d ifficu lt p ro b lem s. In the f i r s t p lace , fo r a la rg e p a r t of th is output it is d ifficu lt to env isage any re a l is t ic unit of


transaction . That is , it is not c lea r ju st what is being acquired. This is the case with many of the se rv ices of public au thorities which a re supplied without charge to the final consum er. In th is instance the usual p rac tice is to revalue the expenditure by the use of quantity or p rice se r ie s of inputs used. But even where there is a charge for the serv ice th e re a re d ifficulties in dividing the values of expenditure into a p rice and quantity component. This is basically a problem of identifying the a ttrib u tes of the serv ice provided. In the case of expenditure on goods the a ttribu tes a re la rge ly (but not entirely) composed of a tangible product, and quantity com parisons can be obtained by simply com paring the num bers of these products. (Where specifications change a difficulty is encountered in com paring the old with the new product, and the method of doing th is - of allowing for quality change - is d iscussed in a la te r section of this ch ap te r.)For item s of se rv ice s , however, the a ttrib u tes com prise d ifferent types of se rv ices which somehow need to be combined into a unit of ’quantity '.

In p rac tice , quantum se r ie s of expenditure on the output of se rv ice industries a re frequently based on a main attribu te of the se rv ice .F o r exam ple, the rea l expenditure on tran sp o rt se rv ices may m easure only the num ber of passen g ers c a rr ie d , on education the num ber of pupils enrolled, on h a ird re ssin g the num ber of h a ircu ts , and on funerals the num ber of deaths. It is obvious that changes in the c ircum stances under which these se rv ices a re provided could lead to an e r ro r in the quantum se r ie s . F inally , reco u rse may be made to some general m easure of p rice change, such as a p rice index of consumption goods, to revalue expenditure to constant p rices .

The use of these methods of m easuring the quantum of expenditure on serv ices is generally thought to lead to some understatem ent. Thus com parisons of the rea l expenditure on goods and se rv ices may be affected by the p rocedures of m easurem ent used. However, few attem pts have been made to calculate the magnitude of the e r ro r involved and such attem pts as have been made have been n ecessa rily based to a la rge extent on subjective judgment. 1

Investm ent in stocks and depreciationSome components of the investm ent in stocks at cu rren t p rices a re estim ated by m ultiplying the change in the quantities of goods in stock

lSee, fo r ex am p le , H aig (1966).

Deflation of National Product 97

during the year by an estim ated average p rice . This is the case , for exam ple, with a la rge part of the investm ent in farm stocks shown in the official A ustralian national income estim ates . These item s of stocks a re revalued to constant p rices by simply substituting base y ear p rices for the cu rren t p rices . But for the m ajor p a rt of investm ent in stocks the cu rren t value estim ates a re based on annual balance sheet values of stocks held. In estim ating the change in stocks at constant p rices from th is inform ation it is f ir s t necessa ry to revalue the book values at each balance date to show the quantities of stocks held at base y ear p rices; the estim ates of investm ent in stocks a re then obtained as the difference between successive balance sheet values at constant p rice s . While the method of making the revaluation of balance sheet figures is stra igh tfo rw ard , there a re im portant s ta tis tica l lim itations in carry ing th is out in p rac tice .

The revaluation of balance sheet values to constant p rices involves f irs tly , identifying the goods held in stock, and secondly, applying appropriate price indexes to the values of the goods. The identification of goods in stock is by no m eans c lea r-cu t. In the case of m anufacturing in d u strie s , for exam ple, goods held in stock com prise raw m a te ria ls , work in p ro g ress , and finished goods. While finished goods will be s im ila r to the output produced by each industry, stocks of raw m ate ria ls and work in p ro g ress will re flec t the goods purchased from o ther industries . For both m anufacturing and trading industries the flow of goods as sa les o r purchases will not n ecessa rily rep resen t the type of goods held in stock, owing to varia tions in the ra te s of stock tu rnover. The methods of p rice deflation a re s im ila r to those used to revalue o ther item s of final expenditure, although the available p rice s e r ie s a re not usually sufficiently detailed to enable a proper weighting to be made for the com position of the goods held in stock.

The m ajor problem is encountered, however, in determ ining the p rices at which goods a re valued. Balance sheet values a re usually at the lower level of cost o r m arket p rices . Where p rices a re falling, values will accordingly tend to be w ritten down to m arket p rice s , in which case values will be those a t the date of the balance sheet. But where valuation is at cost, p rices will depend partly on the method of charging goods against sa les and partly on the ra te of stock turnover.If, for exam ple, goods a re charged against sa les using the method of f ir s t- in f irs t-o u t, stocks of raw m a te ria ls will be valued at the p rices of the m ost recen t acquisitions. In th is case , raw m a te ria ls stock w ill be valued at p rices of purchases in the num ber of months p rio r to


the balance date given by the ra tio of annual purchases to the value of stocks held, and work in p ro g ress and finished goods will be valued at p rices during e a r lie r months. The slow er the ra te of stock tu rnover, the longer will be the period p r io r to balance date for which p rices will be re levant to the revaluation of the goods held in stock. Other methods of charging goods to stock will lead to a d ifferent method of valuing stocks and thus to the selection of different p rices needed for the revaluation.

The inform ation needed to c a rry out these steps is generally not available and much sim p ler p rocedures a re usually applied. In the revaluation of non-farm stocks in the official A ustralian estim ates of national product, for exam ple, p rice indexes which correspond only approxim ately to the types of goods in stock a re applied to the total balance sheet values of stocks held by m anufactu rers, tra d e rs , and other industries separa te ly , and the period of turnover is roughly estim ated from the values of total stocks held and annual output or sa les . There is alm ost no inform ation available about methods of charging goods to production, balance date revaluations, o r the com position of goods held in stock, and the wholesale and re ta il p rice indexes used a re not s tric tly appropria te for the purpose of revaluing the goods in stock.

As in the case of investm ent in stocks, estim ates of depreciation at constant p rices cannot be derived by sim ply applying a p rice index to figures of depreciation shown in business reco rd s . This is chiefly because business figures of depreciation rep re sen t the value of a sse ts w ritten off at h is to rica l cost and in any one y ear a sse ts will be valued at a num ber of different levels of p rices depending on the date of acquisition. It is n ecessa ry , th e re fo re , to build up a se r ie s of estim ates of capital stock valued at equivalent p rice s . This may be done e ither by accum ulating past investm ent outlays at constant p ric e s , allowing for past depreciation and capital changes, or by d irectly revaluing the stock of a sse ts to constant p rices . Both methods have been used in obtaining estim ates of depreciation at constant p rices in overseas calculations of national product a t constant p rice s .

A difficulty a r is e s over the in terp re ta tion of the values of capital stock at constant p rices and the meaning of the derived depreciation figures as a re su lt of deficiencies in the methods of adjusting investm ent o r capital stock to constant p rice s . S trictly speaking, the p rice se r ie s used to deflate the cu rren t values of investm ent expenditure or capital stock should take into account any change in the


p roductiveness of equipm ent a s a re s u lt of tech n ica l change. In p ra c tic e , how ever, it is d ifficu lt if not im possib le to allow for changes in the p rod u c tiv en ess of equipm ent o r even in the techn ica l m ethods of producing iden tica l equipm ent, and the p rice s e r ie s used for deflation a re g en era lly b ased on data of c o s ts of production . This m eans th a t the d eriv ed d ep rec ia tion f ig u res sim ply show the cap ita l used up. valued not a t the co s t of rep lac in g a s s e ts of equivalen t effic iency but a t the co s t of rep lac in g s im ila r a s s e ts , often without allow ing fo r any tech n ica l im provem en ts in th e ir m ethods of p roduction . This leads to an o v e rs ta tem e n t in the annual e s tim a te s of d ep rec ia tion ca lcu la ted from cap ita l stock values up to the date of the b a se y e a r used in the constan t p rice e s tim a te s , and, becau se fu tu re cap ita l stock fig u res w ill be re la tiv e ly undervalued , to an u n d ers ta tem en t of d ep rec ia tion ca lcu la ted from cap ita l stock a f te r the date of the b ase y e a r .

It h a s been m entioned p rev iously th a t th e re is som e doubt as to w hether obso lescence should p ro p e rly be re g a rd e d as an elem en t of d ep rec ia tion charged ag a in st c u r re n t output. To the ex ten t th a t th e re is a tech n ica l rea so n fo r thinking th a t dep rec ia tio n is o v e rs ta te d even on the conventional m e asu re m en t, th is could tend to support the contention th a t in p ra c tic e national p roduct m e asu re d befo re any deduction is m ade fo r dep rec ia tio n is , in fac t, a m o re usefu l m e a su re of net national p roduct.

The base periodA fu r th e r point in revalua tion m ethods is the choice of the base y e a r .The change shown by a quantum s e r ie s w ill usually d iffer acco rd ing to the base y e a r used to value the quan tities of goods and s e rv ic e s , owing to the fact tha t re la tiv e p r ic e s change over tim e . In in te rte m p o ra l co m parison the e a r l ie r the base perio d the la rg e r is the change in the quantum of national p roduct; the item s of p roduct which in c re a se m ost tend to show below av erag e p ric e in c re a s e s , while those tha t in c re a se le s s tend to show above av e rag e p r ic e change, w ith the r e s u lt tha t the item s which show the la rg e s t in c re a se have a h ig h e r re la tiv e p ric e w eighting the e a r l ie r the base y e a r .

T his is shown in the official A u stra lian e s tim a te s of national p roduct which a re com piled using two a lte rn a tiv e base y e a rs - 1953/54 fo r a s e r ie s from 1948/49 to 1959/60 and 1959/60 fo r a s e r ie s com m encing a t 1953/54. In the s ix -y e a r overlap period the f ig u res b ased on the e a r l ie r y e a r in c re a se by 2 -1 p e r cen t, o r an annual ra te of 0 - 3 p e r

100 N ational Incom e E s tim a te s

cen t, f a s te r than those based on the la te r y e a r . T his d ifference is no t, how ever, a tru e re flec tio n of the effect of using d iffe ren t base p erio d s ; only m a jo r item s a re affected in the reb as in g and m uch of the individual deta il is com bined using p r ic e s of a s im ila r p e rio d in the two s e r ie s . It is likely tha t the tru e d iffe ren ce , if it could be ca lcu la ted , would be som ew hat la rg e r than tha t shown by th is com parison .

In p rin c ip le , th e re is no way of overcom ing the effect of using d ifferen t base y e a r s , e ith e r by com piling one s e r ie s (obtained by averag ing changes re su ltin g from the use of d iffe ren t base periods) o r by re fe re n c e to the n eeds of a p a r tic u la r p rob lem . It does not seem c o r re c t , as so m etim es p roposed , that

v ery often a re c e n t valuation b a se , which re f le c ts the technolog ical re la tio n s and b u y e rs ' p re fe re n c e s th a t obtain in the actual econom y, w ill seem m o re re le v an t than som e rem o te base which re f le c ts econom ic conditions tha t have long sin ce ceased to ex ist. (Ja sz i 1961:325)

R a th e r , the p a tte rn of p r ic e s of one y e a r used in w eighting quan tities w ill re la te only to the econom ic conditions in th a t y e a r and th e ir use in o ther p e rio d s im p lie s tha t b asic fa c to rs of supply and dem and - which affect re la tiv e p r ic e s - have rem ain ed unchanged. T here may be a good deal of econom ic s ign ificance in changes in re la tiv e p r ic e s betw een p e rio d s , which could affect the in te rp re ta tio n of the m eaning of s e r ie s b ased on d iffe ren t p e rio d s . Hov/ever, fo r p ra c tic a l p u rp o ses , the a lte rn a tiv e s e r ie s may be thought of as showing one so u rce of e r r o r (that due to the m ethods of su m m a ris in g the basic data into to ta l quantum s e r ie s ) which m ay o r m ay not lim it the u sefu ln ess of the r e s u lts fo r any p a r tic u la r p rob lem .

Q uality changeThe prob lem of quality change a r is e s w henever th e re is a change in specifica tion of goods included in a p r ic e index used fo r defla tion , o r in a quantity s e r ie s used in the d ire c t rev a lu a tio n . In o rd e r to have a continuous s e r ie s a m ethod has to be dev ised to allow fo r the change in spec ifica tio n . The p ro c e d u re s adopted affect the m agnitude of the re su ltin g quantum s e r ie s . While th e re is no ag reem en t about the way in which quality change should be allow ed fo r , th e re is fa ir ly gen era l ag reem en t th a t the p re se n t p ro c e d u re s do not n o rm ally m ake full allow ance; th a t is , th e re is an u n d ers ta tem en t in ex isting s e r ie s of national p roduct. The extent of the u n d ers ta tem e n t and its re la tiv e


im portance at different tim es and between different countries is ju st not known. It may be suggested that the existence of quality change will not invalidate com parison between periods of s im ila r economic conditions fo r one country o r between countries at approxim ately the sam e stage of economic developm ent, provided that there a re no obvious reasons why the allowance made for quality change in the p rice or quantum indexes should vary. But even in these c ircum stances there is cause for some reserva tion .

The nature of quality change may be a sm all im provem ent in a product or the introduction of a com pletely new product. Although the theoretical im plications a re s im ila r , the main difficulties in p rac tice in allowing for quality change a re due m ore to the gradual but w idespread m odifications to existing products than to the occasional introduction of a new product.

Whenever a change occurs in a product which is included in a p rice o r quantum se r ie s , it is necessary to devise a way of linking the p rice or quantity of the two products. In o rd er to do th is , one requ irem ent is detailed specification of the a ttribu tes of the products. This is norm ally eas ie r to obtain in the case of p rice data than quantity data, and it is mainly in the case of p rice s e r ie s that the question really a r is e s as to the allowance for quality change. In quantum se r ie s obtained by d irec t revaluation it is usual to ignore the effects of quality change.

It should be noted also that inadequate allowance for changes in the proportions in which existing products a re supplied may lead to o v e r- or understatem ent of im provem ent in the quality of goods and serv ices . But this is a different problem from that which a r is e s from the change in qualit}^ of an individual item ; it is a question, in the case of price indexes, of sampling and of the index num ber problem , and in the case of quantum se r ie s obtained by d irec t revaluation, of the detail of specification and the index num ber problem .

T here a re th ree ways in which item s which d iffer in specification may be re la ted . F irs tly , they may be com pared in te rm s of re la tive costs of production. Secondly, an attem pt may be made to allow for the effect of changes in specifications on the utility or efficiency of the product. Thirdly, they may be re la ted by th e ir re la tive p rices.

C o sts . Com parison in te rm s of re la tiv e costs is an attem pt to provide an objective basis for the m easurem ent of changes in rea l product. Any other method of com paring products involves in some


way or o ther a subjective a ssessm en t of the a ttribu tes which affect the usefulness of products. 2 D ifferences in costs can be m easured in te rm s of quantities of fac to rs of production used, thus avoiding the need for subjective evaluation. The p rac tica l effect of th is method of com paring products is to exclude from the m easurem ent of re a l product changes in quality which do not re su lt from a lte red methods of production.

This approach has been advocated by Milton G ilbert and adopted in com parisons of the rea l product of m em ber countries of the Organisation fo r European Economic Co-operation (OEEC). This method is often the p rac tica l re su lt of the usual methods of allowing for quality change, and G ilb e rt's argum ent provides a justification for these e s tim ates . N evertheless, for most purposes of com parison of rea l product it does seem desirab le to attem pt to make allowance, however im perfectly , for the change in the quality of goods and se rv ices . Over tim e, th is is an im portant aspect of economic p ro g ress and between countries it could lead to an im portant difference in the levels of rea l output and income.

Equivalent quality . An attem pt may be made to allow for changes in specifications of products as they affect the a ttribu tes of the goods and serv ices . This may be done e ither in a subjective fashion o r, as has been proposed recen tly , by use of m ore objective c r ite r ia . In the fo rm er case , rough weights a re attached to various selected specifications (such as durability of rubber ty re s , h o rse-pow er, and m echanical im provem ent of m otor vehicles), and changes in these a re allowed for according to the re la tive im portance of the weights. In the second case , valuation of selected specifications is made e ither by the tim e se r ie s analysis or by applying objective te s ts to products to see how w ell they m eet the purpose for which they a re used. Once the valuation has been made fo r each specification, new m odels can be d irec tly re la ted in te rm s of these given specifications. There a re , in p rac tice , th ree lim itations to th is approach. F irs tly , the method cannot be used to re la te an en tire ly new product to an existing one. Secondly, only a lim ited num ber of specifications can be handled in th is way and th e ir selection is based on subjective fac to rs . Thirdly,2

'I t is essen tia l to draw a d is tin c tio n be tw een w hat we have c a lle d eco n o m ic and noneconom ic d iffe ren ces in q u a lity . S ta tis tic a l ad justm ents can be m ade for th e fo rm er w hereas none c a n be m ade for th e la t te r since th ey are essen tia l n o n -q u a n tita tiv e in c h a ra c te r . We c a n define a n o n -eco n o m ic change in q u a lity as one w hich com es about through the g en e ra l im p ro v em en t of sc ien ce and the arts bu t w hich does n o t involve any increase in p roduction costs ' (N ational Bureau of E conom ic R esearch 1961:260).


the valuations derived in th is way will rep re sen t re la tive costs only, since consum ers' valuation will be reflec ted in quantity purchased ra th e r than price.

P r ice s com parison . If a change is made in the specification of a product without a corresponding p rice change, the new product is sim ply trea ted as equivalent to the old. If there is a p rice change, the assum ption is made that the difference in p rice does or does not mainly rep resen t a quality change. In the fo rm er case the new and old products a re equated in te rm s of the respective p rice s , in the la tte r case the new and old products a re trea ted as s im ila r and the p rice difference as a genuine p rice change.

If there is a period of overlap, when both the old and the new com m odities a re available, it is usual to tre a t the p rice difference as a m easure of quality change, since th e re is a presum ption that the valuations of the m arket do adequately re flec t quality change in the sense that p rices a re proportional to m arginal u tilities . If there is not a period of overlap, there is no p a rticu la r a p rio r i reason for choosing either method, but it may be noted that w here p rices are changing a bias is introduced into the index by e ith e r of the a lte rnatives. Thus, in tim es of ris in g p rice s , if the difference is trea ted as a quality change the p rice change will be b iased downwards, and if regarded as a p rice change, there will tend to be an upward bias in the index.

The assum ed understatem ent of quality change in the m easurem ent of national output is due to th ree main reasons. F irs tly , there is the w idespread use of the sim ple p rice re la tive method of incorporating a lte red products into p rice indexes. This is likely to lead to some overstatem ent in the p rice indexes used for deflation because it may be assum ed that the new product would not have been introduced unless th e re had been an im provem ent in product. Secondly, new products a re likely to be introduced into a p rice index at a re la tive ly late stage, and p a rt of the benefit of the early p rice fall is likely to be om itted. P r ic e s of new models tend to fall until they obtain m arket acceptance, and an upward bias may be introduced into the index unless they a re p riced at an early stage. The re v e rse b ias may ex ist in other c ircum stances w here, for exam ple, products a re introduced at a rtific ia lly low levels to obtain m arket acceptance, and a re then ra ised . Thirdly, if an attem pt is made to allow for quality im provem ent it is likely that the allowance will be made on the basis


of some only of the c h a ra c te r is tic s of the product.Offsetting these effects, there a re a lso reasons why quality change

can be overstated in p rice indexes, p a rticu la rly , for exam ple, in w artim e or where there a re special reaso n s for m aintaining fixed p rices. Thus, while it may be presum ed that in p rac tice there is inadequate allowance for quality change in preparing estim ates of national output, the amount of understatem ent is hard to determ ine and it will vary according to both the extent of quality change occurring and the methods of allowance in price and quality indexes.

8 Comparison of the NationalProduct and Income of Countries

The in ternational com parison of le v e ls of national p roduct and incom e lead s to much the sam e so r t of p rob lem s as a re encountered in com paring the re a l national product of one country in d iffe ren t y e a rs . The two m ain considera tions a re f ir s t ly , to com pile e s tim a te s of the m oney values of national product of c o u n trie s e x p re sse d in the p r ic e s of cu rre n c y units of each country, and secondly , to rev a lu e these e s tim a te s to an equivalent level of p r ic e s . The th e o re tic a l is su e s , involving the concepts of national p roduct and incom e and the techn iques used to com pare re la tiv e p r ic e le v e ls , a re s im ila r in in terna tional and in te rtem p o ra l co m p ariso n s.

T h e re a re few p rac tica l problem s in obtaining com parab le money va lues of national p roduct, since o ffic ia l e s tim a te s b ased on concepts and m ethods proposed by the S ta tis tica l Office of the United N ations a re now availab le fo r m ost W estern c o u n trie s , and th ese a re reaso n ab ly consisten t. Some m inor d iffe ren ces do ex ist but they can be read ily allowed fo r.

H ow ever, acute p ra c tic a l p rob lem s a re encoun tered in in te rn a tio n a l com p ariso n s in assem bling the s ta t is t ic a l e s tim a te s needed fo r the p r ic e revaluation , and these have so f a r la rg e ly lim ited such s tud ies to se v e ra l com parisons made by the OEEC of the re a l p roduct and incom e of m em ber cou n tries for se v e ra l rece n t y e a rs . 1 T here a re , as w ell, g re a te r d ifficu lties in in te rp re tin g the r e s u l t s , owing to v a ria tio n s in the econom ic s tru c tu re and in stitu tional conditions of the econom ies being com pared.

Instead of applying the detailed m ethods of p r ic e revalua tion now used in in te rtem p o ra l com parisons, an a lte rn a tiv e approach is often u sed to com pare the national product of d iffe ren t c o u n trie s , based on the revaluation of money figu res of na tional p roduct of co u n trie s by the offic ial exchange ra te s . This m ethod of com parison w as used by

* G ilb e rt and Kravis (1954); G ilbert and A ssociates (1958); Paige and B om bach (1959)- See also H aig (1967).

105


the OEEC in the early y ea rs after World War II and it is s till one of the approaches used by the S tatistical Office of the United Nations to com pare the rea l product of a num ber of countries in te rm s of U. S. do lla rs . 2

This method of exchange ra te conversion could, however, involve a la rge m argin of e r r o r , and studies made by the OEEC have shown that in com parisons between the United States and European countries the e r ro r could be as la rge as 50 per cent. The main lim itations of the method a re firs tly , that exchange ra te s a re s tric tly only re levan t to com pare p rices of goods and serv ices which en ter in ternational trad e , and secondly, even for these item s the actual p rice re la tionsh ips will differ from the exchange ra te as a re su lt of re s tr ic tio n s on im ports, the costs of transporting products between coun tries, and custom s duties and other charges on im ports. 3 The w idespread use in the post-w ar years of a rtif ic ia l exchange ra te s not determ ined by m arket forces and of d isequilibrium in the balance of paym ents on cu rren t account a re fu rther lim itations of th is method. The la tte r difficulty can be overcom e to som e extent by imputing m ore re a lis tic exchange ra te s , for exam ple, by bringing up to date ra te s applying in a norm al y ear using the m ovem ents in in ternal indexes of p rice changes. The United Nations Statistical Office uses th is technique to estim ate the rea l product of some underdeveloped countries where exchange ra te s and international transactions a re d is to rted by governm ent action or chronic balance of payments d isequilibrium . Using exchange ra te s based on a m ore norm al period overcom es these d ifficulties but it does not avoid the m ore fundamental lim itations of any ra te of exchange to rep resen t re la tive p rice s . It also involves a fu rth er source of s ta tis tica l e r ro r as a re su lt of deficiencies in available indexes of p rice change.

A lternative approachesAs in the case of in tertem poral com parisons, the revaluation of national product of countries to one equivalent p rice level could be made by deflating e ither figures of expenditure and im ports o r values of the product of in d ustries . These two approaches should give the

2 The estimates are published in the U.N. Statistical Office Yearbooks of National Accounts Statistics.

The limitations of the method of exchange rate conversion are described in more detail in, for example, Gilbert and Kravis (1954:14-17).

International Comparis on of National Product 107

sam e resu lt if they a re properly applied. Only one international com parison (made by the OEEC) using both methods is available and these show a slightly different answer.4 The chief reason for th is is the use of a single indicator to compare industry products in rea l te rm s instead of the deflation of the values of inputs and outputs of industries.

The use of the expenditure method by the OEEC resu lted in a rela tively higher level of rea l product for the United States, com pared with that for B rita in , than that obtained by the method of revaluation of industry product. It is not possible, how ever, to iso late the reasons which led to this difference, even though in the OEEC study, using the product approach, it was suggested that

there a re fac to rs in the methods used in the industry (product) study which seem likely to favour the relatively low er-incom e, lower productivity country, and factors in the expenditure study which may favour the United States both as the higher income country, and as the country with m ore com prehensive p rice and quantity data on the consumption side. (Paige and Bombach 1959:16)

It was concluded (p. 17) that 'the differences between the two studies do not seem . . .to be la rg e , considering the wide scope of the estim ates and th e ir experim ental c h a ra c te r '.5 The expenditure approach has been applied in two studies published in 1954 and 1958 which

compared real product and income of European countries and the United States in 1950 and 1955, and the product approach was used in a study published in 1959 of the real output and productivity of Britain and the United States in 1954 and 1957. The results of the latter study were extrapolated to 1950, thus enabling a comparison to be made of the results of the product method with the expenditure method, obtained from the earliest OEEC study, of the real product of Britain and the United States.5 The comparison of the two results is shown in the following table:

Indices of Gross National Product of Britain and the United States in 1950

Total and per head (Britain = 100)

Total Per headat British atU. S. at British at U.S.

prices prices prices prices

Industry method 535 452 178 151Expenditure method 613 478 204 159

Source: Paige and Bombach (1959:15).


The choice between the two approaches depends partly on the availability of data. In p rincip le, as pointed out, the product approach req u ire s not only details of final expenditure and im ports used in the expenditure method, but also data of in te r-in d u stry transactions.This leads to the need for a much g re a te r volume of inform ation. In p rac tice , however, the com parison of industry product in the OEEC study was made largely by using single indicators of goods produced. N evertheless, while expenditure details and p rices of item s of expenditure a re generally available annually, com prehensive production figures a re usually available only in occasional censuses of production, which lim its the use of the method to p a rticu la r y e a rs .For other y ears some details of production a re available but th e re a re many gaps in the figu res. In A ustra lia annual censuses of production a re conducted, but these show le ss detail of individual com m odities than the work sheets underlying the expenditure estim ates published in the official national income publication.

There a re also likely to be g re a te r d ifferences in the composition of production than of final expenditure, and th is makes it m ore difficult to com pare item s of production. A la rg e r num ber of item s of production than of expenditure a re not likely to be common in two countries; th is leads to la rg e r problem s in the imputation of p rices o r the g rea te r use of p rices of substitu te products. In p a rticu la r, expenditure patterns a re likely to be fa irly com parable in the case of countries at s im ila r levels of rea l income per head while the composition of production could d iffer substantially as the re su lt of different re so u rces and sk ills available. To some extent th is is offset by the fact that ind icato rs of output a re m ore likely to com prise standard types of products than item s of expenditure, thus leading to fewer d ifficulties in m atching specifications of item s.

The two re su lts also provide different break-dow ns of the total national product, both of which a re useful for different purposes of analysis , and im portant in in ternational com parisons. In the expenditure approach re su lts show the use of national product for various purposes. These data a re useful in studies of the use of output to m eet various political o r social objectives, such as defence o r health se rv ices , for adding to the productive capacity of industry , o r for providing various goods and se rv ices re la ted to living standards. Thus the expenditure approach provides a com parison of the differences in the end re su lts of economic p ro cesses of countries.

International Comparison of National P roduct 109

The product approach divides national product according to the industry of origin and th is information is useful in studies of the com parative level of production of industries; divided by the quantity of labour and other inputs used the re su lts provide a com parison of to ta l and labour productivity of industries.

Up to date severa l studies have been c a rrie d out in the use of the expenditure method and resu lts are available using th is approach for a num ber of countries and for several y e a rs . The only fu ll-sca le com parison using the method of comparison of industry products has been made by the OEEC for Britain and the United States.

In terpreta tion of international comparisons A m ajor problem in interpreting the resu lts of international com parisons is caused by the big variations in re la tive p rices in different coun tries, leading to large differences in com parisons based on the coun try 's pattern of p rices. This problem is s im ila r to that which a r is e s from the use of different base periods in the case of in te rtem pora l com parisons. But while in com parisons over tim e the d ifferent re su lts a re not too g reat to invalidate the use of the re su lts fo r m ost pu rposes, in international com parisons the differences have a much g re a te r effect on the meaning of the re su lts .

Thus in the previous chapter it was shown that the use of different base periods a t an interval of eleven years leads to a difference in A u s tra lia 's post-w ar growth ra te of 2 - 3 per cent. In international com parisons, the re su lts could be up to 50 p er cent different, or m ore , by using the p rices of different countries to weight expenditure, as shown by the following table.


Ind ices of G ross N ational P ro d u c t p e r head of Eight E uropean C oun tries

(U.S. A. = 100)

U .S . p r ic e w eightsE uropean p r ic e

w eightsExchange ra te s

Country 1950 at 1955 at 1950 a t 1955 a t 1950 a t 1955 at1950 1955 1950 1955 1950 1955

p r ic e s p r ic e s p r ic e s p r ic e s p ric e s p ric e s

D enm ark 61 56 49 46 37 37B rita in 62 64 49 51 37 42Norway 59 61 47 50 34 41Belgium 57 58 47 49 43 44F ra n c e 53 56 40 43 35 47N etherlands 52 53 39 42 27 31G erm any 44 58 32 44 26 35Italy 30 35 21 24 16 19

S o u rce : G ilb e rt and A sso c ia te s (1958:28).

The national p roduct p e r head of these co u n trie s is 25 to 50 p e r cent h ig h e r re la tiv e to tha t of the United S tates if national p roduct item s a re w eighted by United S tates p r ic e s r a th e r than th e ir own p r ic e s . The f i r s t of the OEEC stud ies included a d e ta iled com pariso n of the p ric e and quantity ra tio s fo r individual p ro d u c ts , and it w as found th a t the in v e rse re la tio n sh ip betw een p r ic e and quantity applied to a ll goods, consum ption, p riv a te investm en t, and governm ent p u rc h a se s .

With re la tiy e ly few exceptions the p roducts w ith high purchasing pow er equ ivalen ts have a low rank ing am ong the quantity ra tio s , while low -p riced p roducts have a high rank ing . The m edium purchasing pow er equivalen ts a re m ore sc a tte re d o v e r the range of quantity r a t io s , but even in th is ca se they tend to be concen tra ted in the m iddle th ird of the p roduct c la s s e s . In the low er th ird of the quantity ra tio s th e re a re a lm o st no p roduct c la s s e s w ith low re la tiv e p r ic e s , while in the upper th ird th e re a re a lm o st no p roduct c la s s e s w ith high re la tiv e p r ic e s . Some of the exceptions to the re la tio n sh ip between p r ic e and quantity ra tio s re f le c t m e re ly the national p re fe ren c e for c lo se su b s titu te s . (G ilbert and K rav is 1954:52)T h ere a re th re e im plications of the re s u lts shown by th is tab le . F ir s t ly , the re s u lts of using d iffe ren t p a tte rn s of p r ic e s b ring out

International C om parison of National Product 111

the fact of negative correlation between p rice s and quantities; item s which a re m ore expensive in one country a re re la tive ly le ss consumed and thus item s which a re re la tively le ss im portant in one country’s national product tend to have a h igher p rice weight. This leads to the position that countries a re re la tive ly b e tte r off where the pattern of p rices used to weight quantities of goods and serv ices is that of another country. This implication is s im ila r to that of using different base periods in intertem poral com parisons w here national product tends to show a fa s te r increase the e a r lie r the period used as the base year.

Secondly, it also shows that the g rea te r the difference in income per head the la rg e r is the variation between estim ates based on one or another coun try 's se^ of relative p rice s .

Thirdly, the e r ro r s in using the method of exchange ra te conversion a re also strik ingly brought out. Again, the method of exchange ra te conversion leads to la rg e r e r ro rs in com parisons between countries with g re a te r differences in income levels p e r head. One reason for th is seem s to be that exchange ra te s tend to be m ore closely re la ted to re la tive p rices of goods than serv ices and serv ices tend to be m ore highly p riced than goods in countries at h igher income levels. Since capital is re la tive ly m ore im portant the m ore developed the economy, higher income countries tend to have a higher cap ita l-labour ra tio and thus a lower p rice of capital re la tive to labour. This leads to a lower p rice of goods and serv ices which involve m ore capital intensive methods of production. The OEEC stud ies, for exam ple, showed p rices of durable consum er goods to be low er re la tive to the p rices of se rv ices in the United States.

This d ispersion of p rices leads to the question of how the re su lts can be in te rp re ted when m arkedly different answ ers a re obtained using p rices of d ifferent countries as weights. The OEEC studies have produced single re su lts by geom etrical averaging of re la tive p rices . But as suggested in the previous chapter th e re is little economic meaning in such a method; m ore properly the reasons for differences in re la tive p rice s a re likely to be an im portant facto r in assess in g the meaning of com parisons. Little work has, how ever, been done to isolate the causes of differences in re la tive p rices due to e ither factor of demand o r supply, and the OEEC studies sim ply comment that ’the im portance of the fac to rs affecting re la tive p rice s cannot be isolated in any system atic fash ion ', and add that bearing these fac to rs in mind


w ill ’help the re a d e r to understand m any of the d iffe re n c e s ’ in the co m p ariso n s of re a l p roduct of co u n trie s (G ilbert and K rav is 1954:7).

The second m ain p rob lem in in te rp re tin g the r e s u lts is due to the possib ility tha t d iffe ren ces in quan tities of goods and s e rv ic e s in national p roduct m ay be the re s u lt of v a r ia tio n s in ta s te s and needs.To the ex ten t tha t th is is the c a se , it is v ir tu a lly im p o ssib le to draw any conclusion about lev e ls of r e a l incom e from quan tities of goods and se rv ic e s consum ed; the populations have d ifferen t ta s te s and the sign ificance of p roducts is accord ing ly d iffe ren t. It has often been assum ed tha t d iffe ren ces in ta s te s and needs a re m o re im p o rtan t in in terna tional than in te rte m p o ra l co m p ariso n s and th is is an im p o rtan t lim ita tion in using th e se re s u lts . But re c e n t s tu d ies have shown tha t in p ra c tic e th ese d iffe ren ces a re not likely to be im p o rtan t.

The second study by the OEEC a ttem pted to explain how fa r d iffe ren ces in quan tities of goods and s e rv ic e s co m p ris in g p e rso n a l consum ption expenditu re could be explained by d iffe ren ces in level of incom e o r re la tiv e p r ic e s , leav ing a re s id u a l to be accounted fo r by o th e r fa c to rs , m ainty ta s te s and needs. M ultiple c o rre la tio n coeffic ien ts w ere obtained using a s data the quan tities consum ed and the p r ic e s and incom e le v e ls of the co u n trie s included in the study.The re su ltin g co effic ien ts w ere found to be high and not d is s im ila r to those found in dem and stud ies based on tim e s e r ie s in individual co u n trie s . O ther s tu d ies have a lso tended to the sam e conclusion - tha t in fact th e re is li t t le evidence to suggest th a t a t le a s t in re la tiv e ly developed econom ies th e re is likely to be a su b stan tia l d ifferen ce in ta s te s of the populations (B eckerm an 1966:9).

N ev e rth e le ss , th e re a re co m p ariso n s w here ta s te s and needs could obviously vary as a re s u lt of physical d iffe re n ces in the c lim a te o r o th e r geographic fa c to rs . A m o re se v e re w in te r, for exam ple, may lead to h igher expenditu re on fuel, clo th ing , and c e rta in types of food, and a g re a te r d isp e rs io n of the population m ay lead to la rg e r expend itu re on tra n sp o r t s e rv ic e s . In using in te rn a tio n a l co m p ariso n s to m e a su re re la tiv e re a l incom e, th e se item s m ay m ore p ro p e rly be tre a te d a s c o s ts of living than as com ponents of incom e, and ad justing fo r d iffe ren ces in lev e ls of expenditu re m ay im prove the e s tim a te s fo r th is p u rpose . It h a s , how ever, a lso been a rgued th a t fo r every6 It has been argued by N icholson (1955) th a t these d ifferences in re la tiv e p rices co m p le te ly in v a lid a te in te rn a tio n a l com parison of r e a l p roduct.' This is s im ila r to the p o in t m ade in C h ap te r 6 abou t the e ffe c t on n a tio n a l p roduct of inc lud ing item s of cost of liv ing and of using the results for com parisons of re a l incom e over tim e in one coun try .

International Com parison of National P roduct 113

adjustm ent made which serves to low er the re a l product of one country a corresponding need for adjustm ent could be found in the national product of another country. While estim ates of the rea l product of B ritain could, for exam ple, exclude the higher expenditure on fuel when used to compare levels of rea l income in B ritain and A ustra lia , there would be a case for excluding from the A ustralian figures expenditure such as that on a ir conditioning, to offset the w arm er clim ate.

For th is reason it has been suggested that adjustm ents for higher expenditure needed to offset disadvantages of living in one country could lead to an e r ro r in the com parison if it is not m atched by corresponding adjustm ents to expenditure in another country. Since these adjustm ents involve a good deal of subjective in terpreta tion it has been fu rther argued that they do not n ecessa rily im prove the estim ates for com parisons of rea l income (Beckerm an 1966:15).

The final problem in using international com parisons of re a l product a r is e s from the use of national product, com prising goods and serv ices which a re exchanged for money, as a m easu re of to tal economic activity . This problem is quite com parable to that d iscussed in Chapter 6, and while it exists as a general lim itation of the usefulness of the to ta ls , it is not likely to be a serious one in com paring econom ies having broadly s im ilar levels of rea l income per head and institu tions. In com parisons between countries with widely differing levels of income per head they may, how ever, be im portant. In this circum stance the wide dispersion in re la tive p rices leading to two substantially different com parisons is likely to be an equally o r m ore im portant lim itation of the resu lts .

Sources of informationIt has previously been stated that rela tive p rices of goods and serv ices a re likely to be widely d ispersed in different countries.This can be illu stra ted by the re su lts of a com parison made of rea l product, income, and relative p rices in A ustra lia and B ritain in 1958. Using quantities of item s consumed in B ritain to weight re la tive p ric e s , the overall p rice level of consumption goods (after allowing for the ra te of exchange between the two countries) was 8 per cent higher in A ustralia than in B ritain . But if expenditure is divided into twenty-eight main categories of goods and serv ices it is found that for th irteen of the categories A ustralian p rices differ by m ore than 20 per cent from


th is average. For some item s re la tive p rice s a re very different; p rices of hardw are in A ustra lia , for exam ple, a re some 70 per cent above those in B ritain and p rices of ch em ists ' goods a re nearly 50 per cent h igher, while p rices of c igare ttes and tobacco a re nearty 40 per cent lower in A ustra lia . In o rder to obtain a re liab le m easure of national product it is im portant that the products a re broken down into considerable detail before being weighted by the re la tiv e .p rices .

This involves the p re lim inary step of dividing national product up to show expenditure (or product) on individual goods and serv ices or groups of item s. Published estim ates of national product of countries show a good deal of th is information but not in the detail needed for the weighting of p rices of individual products. Thus it is necessa ry to supplem ent the published figures; th is can be done by using unpublished sources based on working sheets used in compiling official national income figures, but in many instances new calculations a re requ ired based on data of production, im ports , and exports, o r from surveys of expenditure of various costs including, for exam ple, household expenditure inquiries.

The next step involved is to assem ble the data of p rice or quantity needed to revalue the components of national product to equivalent p rice s . This is the main problem in international com parison. Not only do data of p rice or quantity need to cover the main item s of product, but in addition ca re is needed to allow for differences in specifications of the p rice or quantity data available.

In the OEEC com parisons the main sou rces of p rice and quantity data w ere the collections made by national s ta tis tica l offices and p rice s obtained d irec tly from re ta il s to re s and other businesses. F or both sources detailed specifications could be obtained. In the com parison of B ritish and A ustralian re a l product and p rice s m ost re liance was placed on p rice s collected by national s ta tis tic a l offices and on price catalogues of business firm s. B ecause of the lim ited reso u rces available for the la tte r study it was not possible to undertake the extensive field inquiries c a rrie d out by the OEEC, and th is procedure could lead to e r ro r in com paring p rices of item s, particu larly of investm ent goods, which a re not collected to any extent by national s ta tis tica l offices and which could vary considerably in specifications.

It has been mentioned that a problem is encountered in comparing quality of item s w here the available p rice data do not re la te to identical products. The methods of doing th is a re s im ila r to those

International C om parison of N ational P ro d u c t 115

used in in te rtem p o ra l com parisons in allowing fo r the effect of quality change. H ow ever, while the conceptual approach is the sam e , p ra c tic a l d ifficu lties a re likely to be m ore im p o rtan t as a re s u lt both of g re a te r d iffe ren ces in the quality of p roducts betw een co u n trie s than over tim e (at le a s t between periods which a re not too d is tan t), and to m ore co n sid erab le p rob lem s in co llecting p rice in fo rm ation . It is m uch e a s ie r to continue the collection of p ric e data from one period to the next than to obtain corresponding in form ation fo r d iffe ren t co u n trie s .As w ell, it is likely that a la rg e p ropo rtion of goods and se rv ic e s produced and consum ed in coun tries w ill be unique p ro d u c ts , th a t is , p roducts which a re not common to the d ifferen t co u n trie s . In the com parison betw een B rita in and A u s tra lia , fo r exam ple, it w as found th a t coal is a com m on item of household fuel in B rita in but it is of neglig ib le im portance in A ustra lia , and accord ing ly no equivalen t p rice com p ariso n s fo r th is product could be m ade in the two co u n trie s .

In handling unique products the OEEC stud ies deduce the re la tiv e p r ic e from tha t of a d ifferen t product req u irin g s im ila r c o s ts of p roduction , o r obtain com petent opinion from production sp e c ia lis ts about the equivalen t cost (G ilbert and K rav is 1954:86). An a lte rn a tiv e approach , which w as adopted in the com parison between B rita in and A u s tra lia , is sim ply to use the re la tiv e p r ic e s of item s m eeting s im ila r needs a s the p rice com parison . The fo rm e r m ethod follows from the gen era l approach developed by the OEEC of re la tin g p r ic e s of p roducts which d iffer in specification in te rm s of re la tiv e c o s ts of production (see C hapter 7). In the la tte r m ethod unique p roducts a re b a s ica lly those fo r which no sensib le com parison of quality can be m ade; if co s ts of production a re not accep ted a s providing the b a s is for p ric e co m p ariso n s th e re is no a lte rn a tiv e way of com paring p r ic e s except by re fe re n c e to p rice s of som e o the r p ro d u cts . Unique p roducts a re not of suffic ien t im portance as a p ropo rtion of national p roduct, how ever, fo r the method used in th e ir p r ic e o r quantity co m parison to lead to any significant e r r o r in the o v e ra ll r e s u lts .The tre a tm e n t adopted could to a no ticeab le ex ten t affect the co m parison of som e item s of product.

Further Reading

The publications noted below a re no m o re than a se lec tion from the availab le l i te r a tu r e , but they a re d ire c tly re la te d to the to p ics covered in th is book and prov ide som e add itional d iscu ssio n of them .

C hap ters 1 and 2Brow n (1949). The A u stra lian tre a tm e n t of financia l e n te rp r is e s is

explained in th is a r tic le .Com m onw ealth B ureau of C ensus and S ta tis tic s , A u stra lian N ational

A ccounts - N ational Incom e and Expenditure Downing (1966).K arm el (1963).N ational B ureau of Econom ic R e se a rc h (1958), p ap e r by J a s z i ,

pp. 15-127. T his p ap e r d isc u sse s a num ber of the m ore c o n tro v e rs ia l points of concept w hich a r is e in soc ia l accounting.

P igou (1946).Stone and Stone (1961).U. N. S ta tis tic a l O ffice (1964b).

C hap ters 3 and 4C o m m issioner of T axation , Com m onwealth of A u s tra lia , Annual

R e p o rts , and Supplem ents on Taxation S ta t is t ic s .Com m onwealth B ureau of C ensus and S ta tis tic s pub lica tions, e sp ec ia lly

the following:A u stra lian N ational A ccounts - N ational Incom e and E x p en d itu re . Com m onwealth T axation A s s e s s m e n ts .L abour R e p o r ts .M anufacturing In d u s try .Y ear Books of the Com m onw ealth of A u s tr a l ia .

Com m onw ealth of A u s tra lia , Incom e Tax and Social S erv ices C ontribution A sse ssm e n t A c t.

U. N. S ta tis tic a l Office (1955).C onsiderab le d e ta il on the co n cep ts , so u rc e s , and m ethods used in the

116

F u rth e r R eading 117

national incom e e s tim a te s of B rita in and the U .S .A . is availab le inthe following:U. K. C en tra l S ta tis tic a l Office (1956). N otes which help to b rin g th is

publication up to date a re published in the annual Blue Books on national incom e and expend itu re .

U. S. D epartm ent of C om m erce (1958). C om m ents on som e a sp ec ts of the accounts a lso ap p ea r from tim e to tim e in the re g u la r is su e s of the Survey of C u rren t B u sin ess .

Some of tne m o re im p o rtan t d iffe ren ces between the concepts used in the e s tim a te s of a num ber of co u n trie s a re se t out in U .N . S ta tis tic a l Office (1964a).

C hapter 5Com m onwealth B ureau of C ensus and S ta tis tic s , Q u arte rly E s tim a te s

of N ational Incom e and E xpenditu re .In terna tiona l A ssocia tion fo r R e se a rc h in Incom e and W ealth (1964).A sh o rt account of so u rc e s and m ethods used in the A u stra lian official

q u a rte r ly e s tim a te s is given in H aig (1961). Some changes have been m ade in m ethods of es tim a tio n se t out in th is p ap e r, p rin c ip a lly in the use of a new su rv ey of com pany p ro fits to e s tim a te com pany incom e.

C hap ters 6 and 7G ilbert (1961).J a s z i (1961).K uznets (1951, 1961).N ational B ureau of Econom ic R e se a rc h (1958, 1961).Studensky (1958). Includes a com prehensive account of the

developm ent of na tional incom e e s tim a te s s ince the seven teen th cen tu ry .

U .N . S ta tis tic a l Office (1964b).Von Hofsten (1952).

C hapter 8B eckerm an (1966).G ilbert and K rav is (1954).Haig (1967).P aige and Bom bach (1959).

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B utlin , N .G . (1962). A u stra lian D om estic P ro d u c t, Investm ent and F o re ign B orrow ing, 1861-1938 /39 , C am bridge.

C o m m issioner of T axation , Com m onwealth of A u s tra lia . Annual R ep o rts , and Supplem ents on Taxation S ta t is t ic s , C an b erra .

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Ch. 11.Kendrick, J . (1961). Productivity T rends in the United States

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and M oney, London.Kuznets, S. (1941). National Income and its Composition, 1919-1938

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M orgenstern , O. (1963). On the A ccuracy of Economic O bservations, P rinceton , Ch. 14.

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— (1966). F low -o f-funds, Supplem ent to S ta tis tic a l B u lle tin , Sydney.R obbins, L .C . (1935). An E ssay on the N atu re and S ignificance of

Econom ic S c ien ce , London.Shone, R . (1957). C om m ents on T . B arn a . 'T he rep la c e m e n t co s t of

fixed a s s e ts in B rit ish m anufactu ring in d u stry in 1955', Jo u rn a l of the R oyal S ta tis tic a l Society (Ser. A) 120 (P t I):39.

Stone, R . and C ro ft-M u rra y , G. (1959). Social A ccounting and Econom ic M odels. London, Ch. 2.

— and Stone, G. (1961). N ational Incom e and E x p en d itu re , London.Studensky, P . (1958). The Incom e of N a tio n s , New York.U. K. C en tra l S ta tis tic a l O ffice (1956). N ational Incom e S ta tis tic s:

S ources and M ethods, London.— N ational Incom e and E xpenditu re (annually).U. N. S ta tis tic a l O ffice (1955). M ethods of N ational Incom e

E stim ation (Studies in M ethods, S er. F , No. 8), New York.- - (1964a). N ational A ccounting P ra c tic e s in Sixty C oun tries (Studies

in M ethods, Ser. F , No. 11), New York.— (1964b). A System of N ational A ccounts and Supporting T ab les

(Studies in M ethods, S er. F , No. 2), New York.— . Y earbooks of N ational A ccounts S ta t is t ic s , New York (annually).U. S. D epartm en t of C om m erce (1958). U. S. Incom e and Output

(Supplem ent to the Survey of C u rre n t B u s in e s s ) , W ashington.- - (1 9 6 3 ) . Survey of C u rre n t B u sin ess 43(10):5-12.— . Survey of C u rre n t B u s in ess . W ashington (m onthly).U. S. P re s id e n t 's C om m ittee to A p p ra ise Em ploym ent and

U nem ploym ent S ta tis tic s (1962). M easuring Em ploym ent and U nem ploym ent, W ashington, p .6 5 .

B. D. Haig, at present a Senior Fellow in the Department of Economic History, Australian National University, was Director of the National Income and Expenditure Division of the Commonwealth Bureau of Census and Statistics. He is the author of several books and a number of articles on national income and related topics in journals of economics and economic history.

S. S. McBurney has lectured in economic statistics at Australian universities.He was on the staff of the Commonwealth Bureau of Census and Statistics for some years, working on national income estimates and other economic statistics. He is at present at the Commonwealth Treasury.

the interpretation of national income estimates...the interpretation of national income estimates...

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