changes in real national income

CHANGES IN REAL NATIONAL INCOME

The latest National Income White Paper (Cmd. 7649), which covers theyears 1938 and 1946-8, provides a basis for comparing the present economicstate of the nation with the pre-war pattern, before it was distorted by large-scale armament production. By showing a series of three post-war years, itaiso enables one to trace the progress of post-war recovery, and the returnof the national product to peace-time uses.

This paper continues the series of commentaries on the National Incomewhich have appeared annually in the BULLETIN, and the methods of analysisused are mainly the same as in the previous years.'

i. THE SIZE AND DESTINATION OF THE NATIONAL PRODUCT

For the purposes of comparing the National Products of 1938, 1946and 1947, with 1948, the outlay on consumption, investment, defence andadministration, and exports for each of these three years was deflatedseparately, because the price indices available refer mainly to productsgrouped according to use. Imports at 1948 prices were deducted (afterbeing roughly allocated to the different types of spending) in order to reachthe value of home-produced goods and services. The procedure adopted isdescribed in detail in the Appendix, and the validity of the following analysisof the current economic situation depends on the assumptions listed there.

The size and destination of the National Productz of the United Kingdomat fixed 1948 national cost prices, i.e. what production would have cost if thefactors of production had throughout cost what they did on average in 1948,was estimated as shown in Table 1.3

TABLE IGross National Product by destination at 1948 national cost prices

For division of total Government spending between Military and Administration, seeAppendix.

'E.g., BULLETIN. Vol. 10, pp. 309 el seq. Minor details of method and definition are notrepeated in this paper. For the convenience of those with the booklet, 'Changes in the Costof Living and the Distribution of Income since 1938,' the reference there is pp. 55 et seq.

2' National' here refers to what is made by United Kingdom citizens, not to what ismade in the United Kingdom, since the income from British property overseas, but not theincome on foreign property here, is included.

'These estimates are found by deducting actual imports from outlay. They refer(ignoring the time-lag between the arrival and use of imports) therefore to the currentdestination of previous production, not the intended destination of current output.

1938(L'000 million)1946 1947 1948

Personal consumption in the U.K. ... 4.55 5.21 5.24 5.25Gross capital investment ... ... 1.68 1.43 2.03 2.14Government consumption ... 0.95 2.04 1.69 1.55Exports (a) Goods ... ... ... 1.04 0.87 0.98 1.17

(b) Services ... ... 0.62 0.26 0.24 0.39

Gross National Product 8.84 9.81 10.18 10.50

164 THE BULLETIN

On the basis of Table I, output would appear to have been ii per centhigher in 1946 than in 1938, with successive rises of 4 per cent from 1946to 1947 and 3 per cent from 1947 to 1948. To this one must add two custom-ary cautions. First the effect of a movement of labour from an industry witha low value of output per head to one with a higher per cap ita output involvesan apparent increase in output, and secondly there was a decline in qualityof output from 1938 to 1946, which means that the rise in national productbetween these years is exaggerated, but a slight improvement since 1946,implying a rather higher rate of recovery than shown above.

As will be seen by comparing the table of consumption at fixed prices,given in the Appendix, with the above table, though consumption was muchthe same as pre-war in real terms, the production of consumers' goods andservices for the home market was substantially higher than pre-war. Thisshows the extent to which the United Kingdom has succeeded in 'doingwithout' imported goods, the increase in home production offsetting thefall in real imports. It is interesting to note that a much higher proportionof U.K. output is destined for the home market than before the war, despitethe export drive, when we take increased Government spending and invest-ment into account. This might indicate, so far as demand for our outputis concerned, a slight reduction in vulnerability to an external depression,as well as possibly a better balance of occupations, though these are doubtlessoffset by some loss of real income.

The quantity indices of merchandise exports implied in Table I conflictwith the Board of Trade estimates in that they show that it was not until1948 that the pre-war leyel of exports was passed, for reasons discussed fullyin the Appendix. Briefly the explanation depends on the use, in this paper, ofa modified Paasche-type quantity index, implying current-year price-weight-ing, instead of the official Laspeyre-type quantity index, implying 1938 price-weighting.' Because the official quantity index weights the exports in whichour recovery has been quickest (such as machinery) by their relatively highpre-war prices, it shows the recovery of exports somewhat more favourablythan a technically equally correct comparison would indicate, using current-price weighting. Owing to the manner in which the import content ofmerchandise exports is estimated in this paper no allowance is made for aprobable decrease in the import content since 1938. For this reason, ourfigure for home-produced export value in subsequent years may be too low.

An estimate was also made of the output per head, at fixed prices, of theworking population, including H.M. Forces. The old series for employedpersons was revised upwards in the same proportion as the new series (basedon the new National Insurance data) exceeded the old in mid_1948.2 The

1 For general discussion of export targets the official Paasche-type price index hasadvantages, since it providc a T.aspeyre-type volume index, which permits a constantvolume target.

A special adjustment was necessary for domestic servants. Previously uninsureddomestic servants were deducted from the total employed figure (new series) at July 1948,and the remainder was used as the factor for adjusting upward the old series total employ.ment figures. The number of domestic servants was assumed to vary proportionately

CHANGES IN REAL NATIONAL INCOME ¡65

qualifications above about labour force changes and quality changes mustbe borne in mind when reading the results :3-

2. THE USE OF THE NATIONAL PRODUCTTable II shows the use of resources in real terms, and from it can be

obtained, the following comparisons :-

The reason for the apparent fall in real depreciation is the inadequacy of post-wardepreciation allowances, on Government capital in particular.

Nine-tenths of ' allowances in kind for H.M. Forces' at 1948 national cost prices wasadded to the total for consumption of food in each year.

t The valuation of total consumption goods and services in terms of 1948 national costprices tends e.g. to over-wieght food, and under-weight other consumption articles, notablydrink and tobacco, as compared with the alternative method of revaluing all commoditiesat 1948 market prices. Theoretically it is preferable to make welfare comparisons in marketprices. But the valuation of food at national cost prices may well be at present a bettermeasure of its value to the consumer than would be given by a valuation at a fixed marketprice.

These figures provide an indication of the extent to which the individualon average has failed to return to the ¡938 standard. The average movementis, of course, the resultant of all the individual movements, many slightlyupward and some slightly downward (and allowance should be made for thehigher proportion of young children). It is interesting to note that the fall inwith the total of domestic service wages in 1946 and 1947. The number of previouslyinsured domestic servants (mainly working in hotels, etc.) at July 1948 was assumed tohave remained constant since 1946. The final step was to add back the estimated numberof (previously) uninsured domestic servants. Following an estimate made by T. Barna. L.and C.E.S. Bulletin II, 1947, this number was taken as 1.3 million,

'Much of the apparent rise in' productivity ' since 1946 may be accounted for by a shiftfrom the Forces (at relatively low wages) to civilian employment.

Total population (thousands). Mid-year ......Consumption of food at 1948 national cost prices*

(DI) .........1938

47,494

2484

194649,185

2,486

194749,539

2,563

194850,033

2,578Non-food consumption at 1948 national cost prices 3,906 3737 3,920 3,920Consumption of all goods and services at 1948 national

cost prices ............... 6,390 6,222 6,483 6,498Consumption of food per capita at 1948 national costpricest ..................... ¿52.3 ¿50.5 ¿51.7 ¿51.5Non-food consumption per capita at 1948 national

cost pricest ......,, ......... ¿82.2 ¿76.0 ¿79.2 ¿78.4Consumption of all goods and services per capita at

1948 national cost pricest ... ......... ¿134.5 ¿126.5 ¿130.9 ¿129.9

TABLE II. Gross National Outlay at 1948 national cosi price1938 1946 1947

(L'OOO million)1948

Private consumption 6.39 6.22 6.48 6.50Net capital formation 0.76 0.71 1.39 1.51Government spending (a) Military 0.50 1.62 0.98 0.74

(b) Other 0.73 1.08 1.17 1.12

Net National Outlay 8.38 9.63 10.02 9.87Maintenance of capital* 1.07 0.84 0.81 0.81

Gross National Outlay 9.45 10.47 10.S3 10.68

1938 1946 1947 1948Gross National Product (L'OOO million) 8.84 9.81 10.18 10.50Employed working population (million) at mid-year 21.20 22.19 22.80 22.77Output per head ................ £417 ¿442 ¿446 ¿461

i66 THE BULLETIN

non-food is relatively greater than the fall in food consumption (because of thefall in real consumption of domestic durables, clothing and motoring). Thepreceding section shows that the decline in consumption occurs despite a rise inhome production for consumption, and is in fact due to the fall in real imports.

The increase in ' productivity' has not in fact managed to cover higherexports, higher Government spending and higher investment b' a sufficientmargin to maintain per capita consumption. 'Net' capital formation asdefined in the National Income White Papers, after falling in 1946 to 93 percent of the pre-war level, has since risen to 198 per cent. However, a glanceat the figures for the ' maintenance of capital', again using the NationalIncome White Paper definition, shows that the increase in pre-war realnet investment is not quite so great. This is mainly because of the arbitrarynature of' Government depreciation '(see note on this item in the Appendix).A more significant picture may be gained by taking the two series combined:i.e. gross capital formation. This shows a fall in 1946, as compared with pre-war, to a level of 84 per cent, with a subsequent rise in 1947 to z i r per centand in 1948 to 127 per cent. Viewed against the rise in the working popula-tion, the per capita investment recovery would not be quite as great, but stilltestifies to the success of the country in tackling the immediate post-warproblems of making good var losses and war-time depletion and obsolescence,and starting the long job of raising industrial efficiency.

All these estimates are still in some degree subject to the qualificationabout quality changes downward from 1938 to 1946, and upward thencefor-ward. (In the case of consumption, this factor and rationing must both betaken into account when consideraing' consumer satisfaction.')

Real Government spending on administration would appear to haveremained fairly constant at about double the pre-war level, while militaryspending, after being over treble in 1946, has been reduced to a figure ofabout 50 per cent above 1938. Of the L88o millions at 1948 prices madeavailable by demobilisation since 1946, only £280 millions have gone towardsincreasing consumption, while the balance has gone entirely into increasingthe country's capital resources overseas or at home. It was in fact primarilythe check to real consumption which made possible such a large reductionlast year in Britain's external deficit a: is shown in Table III.

Table III shows that the U.K. deficit on Balance of Payments currentaccount was in 1948 only a quarter of what it would have been in 1938, had1948 prices operated then.' (The increase of o million at current prices

1 The' deficit on Balance of Payments current account is subject to a variety of statis.tical interpretations. The figures in the latest National Income White Paper (Cmd. 7649),are taken directly from the Balance of Payments White Paper (Cmd. 7648), and, followingthe definitions used there, represent actual payments. Thus the £45 million received inthe second half of 1948 under the Indian Settlement are included, while the ¿125 million.representing the net increase in short-term credits granted by the United Kingdom, plusexports of capital equipment to British oil-companies abroa!, are excluded. Since this latterfigure represents actual exports, there would be good reason to include it in the Balance ofPayment, in which case there would appear to have been an overall surplus of £5 millionin 1948. Ii, on the other hand, the Indian Settlement £45 million are excluded, as a capitalitem, there would be a deficit of £40 million, as against the Balance of Payments WhitePaper deftcit of £120 million.

CHANGES IN REAL NATIONAL INCOME 167

The fact that at 1948 prices the net loss of foreign assets appears smaller than it was atcurrent prices depends on the f.o.b. price indices with which imports and exports wredeflated. These price indices, as is explained in the Appendix, contain a vide margin of error.

was entirely due to the deterioration in the terms of trade). The deteriorationin the balance of payments between 1938 and 1947 was analysed in real terms1in the article on the 1947 National Income. This series has been continuedin the table below, where the comparison is made between 1938 and 3948.

The causes of the External Deficit in 1948 as conared with 1938( millions)

Deficit in 1938 ............ ... 70Effect of change in the terms of trade (including invisibles) ... ±480Effect of changes in the national outlay compared with 1938 at 1948 prices:

More private consumption ... ± 110More gross investment + 380More military spending ... . - + 240More expenditure on administration + 500

+ 1,230Efiect of increased national production compared with 1938 at 1948 prices:

More production for the home market 1,760More exports of goods ... 130Less exports of services ... ... ... + 230

1,660430

Deficit in 1948 ... 120

This shows that' real' changes have nearly offset the effect of the adversechange in the terms of trade. It would appear, from the tables given above,that the normal growth in the National Product during 1949 alone would besufficient to achieve for the U.K. an overall balance of payments on currentaccount, providing that there is a less than proportionate increase in thenational outlay.

But it must be remembered that the rise in the National Income of rathermore than 3 per cent per annum since 1946 has been assisted both by demobil-isation (especially in 1947) and by the easing of key shortages (especially in1948), though hampered in 1947 by the fuel crisis. The assistance providedby demobilisation in expanding our industrial labour force has howeverfinished and we must look to further redistribution of labour, and the effect6f increased labour efficiency from improved capital equipment, to maintain

1 Buu..arns, Vol. 10, p. 312. (Booklet, p. 58).

1938 1946 1947 1948('000 milloin)

Gross national outlay 9.45 10.47 30.80 10.68Less gross national product - 9.81 --10.18 ---10.50Less net indirect tax oil exports --0.06 -0.04 ---0.05 --0.06

Net loss of overseas assets 0.55 0.62 0.60* 0.12

Imports, including invisibles 2.83 2.18 2.29 2.22Exports, including invisibles and net indirect tax 2.28 1.56 1.60 2.10

Net loss of overseas assets 0.55 0.62 0.60* 0.12

TABLE III National produrt, nalional on/lan' and lion import surplus nl i948 pries

x68 THE BULLETIN

this rate of growth. It must be stressed that this growth is contingenton the maintenance of a high level of employment, and thus on a continuedhigh level f imports. The Chancellor of the Exchequer has warned thenation! that the combined cost of the National Health Scheme, NationalInsurance, and the education services will be in the region of £763 millions,and the Economic Survey estimate that Government expenditure willprobably be £126 millions higher in 19492 may be on the low side. Itis true that a slight fall in investment is forecast in the Economic Survey,but the amount involved is small compared to the national income.3

This would indicate that unless (i) there is a radical change in the Govern-ment's expenditure (i.e. a sharp reduction in the Social Services or militaryspending), or (ii) more vigorous controls are applied to new capital investment,or (iii) the terms of trade move :.,harply in our favour, then the increasedresources needed for achieving the overall balance of payments must stillbe provided by checking the rise in national consumption.

It may in any event happen that cuts in dollar imports will lead toreduced employment and output'. This would, of course greatly increase thedifficulty of allocating our resources. The most tempting but the mostdisastrous solution (as in the 1947 crisis) would be to cut capital investment.But the problem of spreading the cuts in real expenditure over the remainingforms of outlay (Government expenditure and private consumption) wouldinvolve great political strains for the country.

For example devaluation will at once raise the acute question of how muchwage-earners should be sheltered, whether for welfare or other reasons, by in-creasing subsidies and family allowances (any such aid to real wages tendingof course to maintain imports). There will also be the further question of whereto find the resources for the consequent necessary greater increase in thevolume of exports.5 If there is alternatively or additionally an import cut,there may be less room for choice as to where it should fall, but the consequentreduction in real outlay will not be the easier to bear for that. The problem ofadjusting the national economy to the new, post-war, equilibrium level ofnational output, at best slightly rising, must pose an unpleasant series ofchoices.

DUDLEY SEERS

P. F. D. WALLIS.1 Budget Speech (1949).S Cf. the Economic Survey for 1949, C,nd. 7647, esp. Table 20. It must be borne in

mind, when considering the effect of increased expenditure by the Government on theNational Health Scheme, that a part of this represents a transfer from private to Govern.ment account, and therefore no increase in national outlay. The Survey estimate is at end1948 prices.

Despite previóus errors of surveys in forecasting a fall in investment, there reallymay be a fall this year, because of the reduction in stockbuilding.

'Even those who argue that some general unemployment will lead to higher outputcould hardly hold that areas of acute unemployment in an otherwise fully employedeconomy will help output.

'The extent to which the terms of trade turn against us. and the need therefore forincreased volume, depend on the amount of simultaneous devaluation of sterling area andcontinental countries.


APPENDIXCORRECTION FOR PRICE CHANGES

(i) ConsumptionThe method used to estimate consumption at fixed national cost prices,

is the same as in previous years, being derived from Professor Champer-nowne's paper on the 1945 National Income.' Briefly, it involves the recon-struction of the table of the National Cost of Consumers' Goods and Services(Table 22 in the current National Income White Paper), at fixed 1948 nationalcost prices, in such a way that each of the twenty items yields a quantity rela-tive equivalent to that which is implied by the corresponding item in Tablezi: (Consumption at fixed 1938 market prices).2

TABLE IVConsumers' Goods and Services revalued at 1948 National Cost

From Table IV, and Table 22 of Cmd. 7649, we can calculate the followingcurrent-weighted index of national cost prices of consumers' goods andservices :-

'BULLETIN, Vol. 8, No. 5.'The validity of this assumption also d'pends on the heterogeneity of commodity

groups. A quantity relative for a group calculated from the White Paper implicitly weightsquantities of separate commodities within the group according to their 1938 market prices,whereas we would strictly want here weighting according to 1948 national cost prices. Theerror depends in fact on the correlation between quantity relatives for particular com-modities and the differences in the relative prices of commodities in 1938 and 1948. Where,for example, increased relative prices are associated with high quantity increases andewe versa, as has probably happened inside the food group, the table will understate thevalue of consumers' goods at fixed national cost. Unallocated taxes (at 1948 level) wereassumed a function of volume.

1938 1946 1947 19481. Food...... 2458 2,365 2,503 2,5392. Alcoholic beverages 368 355 350 3413. Tobacco ... 134 179 157 1514. Rent 387 404 412 4215. Fuel and light 283 313 331 3476. Durable household goods 440 278 338 3467. Other household goods 81 64 69 728. Clothing 857 634 717 7829. Books, newspapers and magazines 77 108 120 127

10. Private motoring ............ 178 90 92 6311. Travel 205 292 292 30512. Communication services 35 51 51 5213. Entertainments 72 117 111 11814. Other services ... 685 638 677 55115. Other goods 308 266 294 29416. Income in kind of H.M.F 29 134 67 4317. Less foreign tourists' expenditure in the U.K. 79 15 22 35

Less unallocated net indirect taxes . 217 177 202 22618. Personal expenditure in the U.K. after adjust-

ment for indirect tax and subsidy ...... 6,301 6,096 6,357 6,40119. Personal expenditure abroad ... - 89 125 126 97

20. Total consumption 6,390 6,222 6,483 6,498

1938 1946 1947 1948

100 154 163 172

170 THE BULLETIN

(ii) Gross InvestmentAn investment cost index was constructed on the same lines as in the

paper on the 1947 National Income.' For plant and machinery the exportaverage value igidices (Board of Trade Journal) for machinery and electricalgoods were used, and roughly weighted according to their share in post-warexports.2 For vehicles, aircraft, and ships, the' vehicle' export average valueindex was taken, and for stockbuilding, the ' Industrial materials and manu-factures' wholesale price index. In the case of building, an index wasconstructed from information given in Table A of the Girdwood Committeereport (The Cost of House-Building) and the Economist, July ioth, 1948, p. 67.The market price index for' miscellaneous services', implied in the NationalIncome White Paper, was chosen as the most appropriate index for propertytransfer costs.

The separate index numbers for the different classes of investment werethen weighted (j) for 1938 by the distribution of gross capital formation asshown by Kaldor,3 (ii) for 1947 from information given in Table z of Cmd.7647. (The figures for stockbuilding were taken from Table 2 of Cmd. 7649,while ' Investment Costs' was roughly estimated. The 1947 weights forthe first three items in the index were held to apply to 1946.) The final indexnumbers were calculated as indicated in the table below :-

Investment cost index, 1938 and 1946-48'

BULLETIN, Vol. 10, No. 10.'Owing to the higher profit margins and higher quality standards of export goods, as

opposed to home-market goods, this use of the Board of Trade export average value indiceswill impart an upward bias to the investment cost index.

'Appendix C to Lord Beveridge's Full Employment in a Free Society (p. 360).4 slightly lower index for fixed capital is implied by the United Nations Economic

Survey of Europe in 1948 (Table 33), but no supporting details are given.'This is equivalent to assuming that ii 10 per cent less volume of investment were made

in any year than in 1948, the 1948 net indirect taxes attributable to this output would alsobe 10 per cent less.

1948 1948 1948Weight (1938= Weight (1946= Weight l947=for 1938 100) for 1946 100) for 7947 100)

Building (inri. Public Utilities) 490 259 770 121 770 107Plant and machinery ......120 232 420 134 420 114Vehicles, ships and aircraft 65 206 275 113 275 101Stockbuilding 25 234 80 131 376 117Investment costs (misc.) 60 153 80 108 100 103

1938 1946 1947 1948Gross investment at current market prices (Table 2,

770 1,285 2.040 2.352Gross investment at 1948 market prices ... ... 1,856 1,568 2.224 2,352Gross investment at 1948 national cost prices... ... 1,832 1.547 2,195 2,321

Index 241 122 109

These are market price indices (or their nearest equivalent), and they areused to deflate gross investment at market prices as estimated in the NationalIncome White Paper. In addition gross investment at fixed market priceswas assumed to give the same quantity relatives as gross investment at fixednational cost price.5 On these assumptions we have the following estimates:

TABLE V. Gross Domestic Capital Formation. ( million).


(iii) Government Current ExpenditureThe following is the division of Government expenditure implied by the

latest National Income White Paper :-

* was assumed throughout that no net indirect tax or subsidy tell on this item.

To revalue these at 1948 prices, each type of expendituré was separatelydeflated. Purchases were assumed to be subject to the consumers' goodnational cost price index given at the end of section (i) of the Appendix.Owing to complete lack of information as to methods for constructing asuitable index for Government depreciation, the investment cost indexexplained in section (ii) was used. For wages and salaries, it was assumedthat annual productivity per Government employee remained constant.

For pay and allowances in kind to H.M. Forces at fixed 1948 nationalcost, we have :-

1938 1946 1947 1948Annual average number in 1-IM. Forces ('OOOs) .. 385 2032 1,292 867National cost at 1948 prices (SM) ... ... ... 109 577 367 246

For lack of information about the relative number of wage and salaryearners among administrative employees, and wage and salary indices, aconstant wage and salary stratification was assumed (a) for Central Govern-ment, and (b) for Local Authority employees. In the case of the CentralGovernment, Post Office, and National Insurance Administration personnelwere excluded; the latter being included among Local Authority employees,together with full-time teachers paid by the Local Authorities. The figuresfor non-Forces wages and salaries paid by the Central Covernment, impliedin Table 14 of Cmd. 7371, were assumed to be correct. An estimate was madefor the corresponding figure in 1948. The numbers receiving wages andsalaries from the Government each year were assumed to vary in the sameway as the numbers shown in the employment of central and local Govern-ment.

Hence we have :-Gen frai Government

1938 1946 1947 1948

Number employed ('OOOs) 144 444 435 425Total wages and salaries (EM) 60 257 257 260

Do. at fixed 1948 prices 88 272 266 260Local Government

Number employed ('OOOs) 1,054 1,296 1,378 1,468Total wages and salaries (EM) 190 313 353 410

Do. at fixed 1948 prices 294 362 385 410

Total Government wages and salaries (non-Forces) at1948 prices ............... 382 634 651 670

( million at national cost)1938 1946 1947 1948

Purchases of goods and services 301 1,226 963 833Making good depreciation' 90 100 105 110Wages and salaries 328 1,094 956 916

Total 719 2,420 2,024 1,859

172 THE BULLETIN

By these methods, Government current expenditure on goods andservices, at fixed 1948 national cost prices, was estimated as follows

'Government' depreciation 'is defined (see note on p. 52, Cmd. 7649) as ' Provision formaintenance of buildings, highways and bridges, plus annuities under the Housing (Tem-porary Accommodation) Act. 1944'. Depreciation in real terms has probably if anythingincreased. The indices which we have used to deflate this item are not likely to involvesuch a wide margin of error as to make the official estimates imply anything other thana sharp fall in real depreciation, which indicates the unsatisfactory nature of the officialestimates.

The method used to divide Government current expenditure follows thelines indicated in the previous article on the 1947 National Income.' Broadly,it involves the following three points: (j) the division of current expenditurebetween Military and Other in the i45 National Income White Paper,Cmd. 6784, for the year 1938; (ii) the inclusion of wages and salaries of the'Defence' section of the Supply Departments, withH.M. Forces' pay andallowances; and (iii) estimates of total military expenditure derived by inter-polation from the Financial Statements, for the years 1946-8.

This alternative classification of Government current expenditure, at1948 national Cost prices, is given in the table below.

(iv) Exports and Imports(a) Exports

The index needed for deflating merchandise export values is one withgiven year weights, showing the average price movement from the given yearto 1948. 1938 exports, for example, should be deflated by an index of the type

p48q38 using the customary notation. The Board of Trade Journalp38q35

provides a senes of estimates of values of home-produced exports at current1BULLETIN, vol. io. pp. 326 and 327.

( million)1938 1946 1947 1948

Wages and Salaries of H.M. Forces and Supply Depart-ments (military) ... ......... 123 631 407 280

Expenditure on goods and services for the ArmedForces .................. 377 988 569 462

Total military expenditure ... 500 1,619 976 142

Non-Forces wages and salaries 368 580 611 636Expenditure on non-military goods 138 382 448 371

Total non-military expenditure ... 506 962 1,059 1,007

Making good depreciation . ... 217 122 114 110

Total Government current expenditure ... 1,223 2,703 2,149 1,859

1938( million)

1946 1947 1948

Purchase of goods and services... 515 1,370 1,017 833Making good depreciation* 217 122 114 110Pay and allowances of H.M. Forces 109 577 367 246Wages and salaries (non-Forces) 382 634 651 670

Total current expenditure ... ... 1,223 2,703 2.149 1,859


prices, (p q38 and P48 q48), and also an average value relative, which may

be taken as: This average value relative is strictly an index calculatedP38

with 1948 weights for each section of the commodity group concerned, but touse this as a 1938-weighted relative for each group will not produce greaterror. An index number of the type required may then be estimated asfollows : p48Zp38q38-

q38

Zp38q38the numerator providing the figure for home-produced exports in each yearat fixed 1948 prices. To obtain the total index for deflating merchandiseexports, allowance had to be made for re-exports. Since this item is, in eachyear concerned, a very small proportion of the total, the index for deflatingre-exports was estimated directly from the Board of Trade figures for averagevalues of re-exports. The two indices were combined by weighting them inproportion to their values, at current prices, in each year. These estimates,however, would be based on the 'value as declared ' export series, given in theBoard of Trade Journal, whose totals for each year are not strictly comparablewith the corresponding figures appearing in the National Income WhitePaper, except in the case of 1938. In the event, it was considered that thedifference between these two series of export values, in 1946-8, due to differ-ences in definition, would not invalidate the use of the indices calculatedfrom the Board of Trade figures, for deflating the National Income WhitePaper estimates of merchandise exports. The results are tabulated below:Base year (= 100) Price index Merchandise exports at Merchandise exports at

for 1948 current prices 1948 prices(L million) (L million)

(b) ImportsIn the case of imports, the price relatives in the Board of Trade Journal

refer to c.i.f. prices, so that a price index for imports calculated on the linesabove would be an index of c.i.f. values. What is required for deflating thefigures of merchandise imports given in the National Income White Paperis a f.o.b. index. The method chosen was to caculate the c.i.f. index, andcorrect the numerator according to the assumption that:

Ep48q48(f.o.b.)L'p48q38(f.o.b.) = Zp48q38(c.i.f.) x rp48q48c.t. .)

Owing to the dispersion of errors, this was considered not to involve anygreat error as compared with the more technically correct formula

p4aq48(f.o.b.)Zp,q38(f.o.b.) =Z[ p48q38(c.i.f.) X

p48q45(c.i.f.)Jfor whose construction information was not available.!

'Since the figures for total imports were used, no additional step was required to allowfor re.exports. as In the case of the construction of the exports pace index.

1938 271 533 1,446194.6 134 849 1,1351947 118 1,083 1,2771948 100 1,512 1,512

174 THE BULLETIN

The Zpq, (f.o.b.) corresponding to the 1prqr (c.i.f.) had therefore tobe found for each of the four years concerned.

Two series of estimates for total f.o.b. import values were available: theone contained in the Balance of Payments White Paper, Cmd. 7648, and theother in the National Tncome White Paper, Cmd. 7649. Neither arecomparable with the 'value as declared' totals given in the Board of TradeJournal except, once more, in the case of 1938; the main difference beingthat' the increase in the value of goods shipped but not paid for' is excluded,for reason of definition, from the Balance of Payments White Paper f.o.b.estimates (from which the National Income White Paper figures are derived).But for want of better information, the Balance of Payments White Paperseries was taken, as being the more comparable of the two with the Board ofTrade figures. And by this means, both the numerator and the denominatorof the c.i.f. index were corrected, to give the required estimate of the f.o.b.indices for deflating the value of merchandise imports figures, given in theNational Income White Paper.

These indices should not be combined with those used for deflatingexports to form an estimate of the movements of the 'basic' terms of tradesince 1938. The possible error in the f.o.b.-c.i.f. margin for 1948, which isused in the calculation above, would invalidate any results so obtained.Movements in the ' basic' terms of trade, defined as net of the effect of thec.i.f. margin, and based on f.o.b. values throughout, are mainly of theoreticalinterest. It would show changes in the hypothetical exchange value of acertain bundle of U.K. manufactures, typical of this country's exports, interms of a certain bundle of foreign manufactures and commodities abroad,typical of our imports. What is of practical significance, is how much theU.K. has to pay, in terms of goods exported, for the goods which are landedfor consumption in this country. And for this, the relevant terms of tradeindices are those which are published in the Board of Trade Journal, beingcalculated from the simple relationship between the figures for the averagevalue of exports, f.o.b., and imports, c.i.f. It is true, though, that it would beof the greatest interest and significance to have more precise information asto the movements of the c.i.f. margin since pre-war. It would appear, forinstance, that our terms of trade have been very seriously affected by the factthat, owing to the shortage of coal for export, many ships have had to traveloutward in ballast, thus greatly increasing the c.i.f. margin. Further infor-mation on this subject would tell us to what extent an improvement in theterms of trade might be expected, from an increase in the export of coalalone. And it would also be of interest to compare the official terms of trade

Base year (= 100)Fob.

price index)ierchandise imports

at current pricesJlîerchandise imports

at 1948 tricesfor 1948 ( million) ( million)

1938 275 835 2,2971946 133 1,057 1,4581947 109 1,524 1,6611948 loo 1,730 1,730

CHANGES IN REAL NATIONAL INCOME ¡75

estimates, calculated from Paasche indices, with the Laspeyre approximateindices which would be yielded by the method adopted in this paper.

From the Board of Trade Journal:

Own calculations from formula explained in exports section :-

This would appear to indicate that between ¡938 and 1946 there was amarked negative correlation between the increase in the proportion of goodsgoing into exports, and their price-increase since 1938; e.g. in ¡946 machineryhad a quantity index of ¡¡2, and an average value index of ¡75, while in thecase of cotton yarn and manufactures, the relatives were respectively 42 and301.

Since 1946, however, this correlation would appear to be positive, bearingtestimony, among other things, to the qualitative success of the export drive.

(c) Invisible ItemsIn order to deflate ' invisible' items, it was assumed that (j) shipping

costs were 300 per cent above ¡938 in ¡946 and ¡947, and 320 per cent above¡938 fl ¡948;' (ii) film costs were ioo per cent higher for the post-waryears; (iii) Government expenditure overseas was subject to a price rise equalto the f.o.b. imports index; (iv) tourist expenditure overseas was deflated bythe index implied by item 19 in Tables ai and 22 (Cmd. 7649); (y) foreigntourists' expenditure in the U.K. was subject to the factor cost index forconsumers' goods and services. (vi) For deflating payments of interest,profits and dividends, an index was constructed from information containedin the White Paper 'Statistical Material presented during the WashingtonNegotiations' (Cmd. 6707) and the latest Balance of Payments White Paper(Cmd. 7648). This attempted to show what the payments of interest anddividends would have been in ¡938, ¡946 and ¡947 had the rate of return ontotal capital investment been what it was in 1948. This is necessarily a veryrough calculation, for it neglects qualitative changes in the total of capitalinvestment, and is therefore subject to a wide margin of error.2 (vii) In thecase of 'other' exports, no satisfactory break-down has been given in theofficial publications to date. The latest Balance of Payments White Paper

See Economisi, Vol. CLI, p. 469, and Vol. CLIV. p. 32.'Dr. Derksen in a paper read to the Econometric Society at Cleveland, Ohio, on Dec.

28th, 1948. recommends that net property income from abroad should always be deflatedby an index of import prices'. His approach is. however, essentially from the welfareside, whereas our approach here is essentially a 'productivity' one, and the only methodopen is to assume that the real output of oversea assets is a function of the real capital used.

Paasche-type indices 1938 1946 1947 1948

Exports (including re-exports) ... loo 196 222 247Total imports (c.i.f.) ... ... 100 211 258 289Terms of Trade ... ... 100 93 86 85

Approximate Laspeyre-type indices 1938 1946 1947 1948

Exports (including re-exports) loo 202 230 271Total imports (cii.) 100 225 265 294Terms of Trade 100 90 87 92

¡76 THE BULLETIN

(Cmd. 7648) describes this category as' a miscellaneous collection of receiptsand payments. The principal constituents are the overseas transactions ofBritish oil companies, insurance, expenses on the upkeep of British enter-prises abroad, commissions, royalties and private remittances'. Accordingly,since none of the price indices previously enumerated in this Appendix wereheld to be applicable, the 1938 figure was arbitrarily deflated by an index ofzoo, and those for ¡946 and ¡947 were taken unaltered.

* * * * * * *

In order to allocate imports by end use a number of arbitrary assumptionswere made. It was assumed that one-half of imports in the Board of Tradecategories lic, lid, Ile, 111e and IlIh, and three-quarters of imports incategories hIc, hId, 111f, 111g, and Ills, end as investment goods in 1946-8,and can be revalued at 1948 prices by the appropriate price-relatives publishedin the Board of Trade Journal.' Since in 1938 a large proportion of thisclass of import may be assumed to have gone into rearmaments, the import-content of gross investment in that year was taken to be approximately 8per cent (as it appeared to be in ¡946). Re-exports were also deductedfrom the balance of visible imports (after taking out investment-good importsin the manner indicated above), and to the remainder, shipping paymentswere added. For the import content of visible exports, a proportion of 15per cent was taken. This figure was deducted, and the remainder distri-buted proportionately between personal consumption of goods and transport,Government expenditure on goods (both at national cost), and invisibleexports less receipt of interest, profits and dividends from abroad. Filmsand tourist expenditure were allotted directly to personal consumption, andGovernment overseas expenditure to Government outlay. Real propertyincome payable to foreigners was offset against invisible exports.

On these assumptions, the end use of importe can be estimated as follows :3(L '000 million at 1948 prices)

1938 1946 1947 1948

2.83 2.18 2.29 2.22

1The figure for investment-good imports so obtained is, of course, c.i.f. For lack ofparticulars about the c.Lf. margin of this class of goods, the overall margin described abovewas taken to reduce it to the corresponding f.o.b. value.

'Following the P.E.P. Report, Brijain and World Trade, p. 61.'It must be noted that the estimates in the above table are not made for their intrinsIc

value. See BULLETIN, Vol. 10, p. 331. (Booklet, p. 77).

Merchandise exports (and re-exports) 0.35 0.23 0.25 0.28Invisible exports 0.22 0.16 0.17 0.20Personal consumption 1,84 1.01 1.24 1.25Capital investment 0.15 0.12 0.17 0.18Government expenditure 0.27 0.66 0.46 0.31

changes in real national income

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