Soldofsky, Robert M.

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Journal of the Arkansas Academy of ScienceVolume 5 Article 171952Methods and Problems in the Measurement ofEconomic Changes in StatesRobert M. SoldofskyUniversity of Arkansas, FayettevilleFollow this and additional works at: http://scholarworks.uark.edu/jaasPart of the Income Distribution CommonsThis article is available for use under the Creative Commons license: Attribution-NoDerivatives 4.0 International (CC BY-ND 4.0). Users are able toread, download, copy, print, distribute, search, link to the full texts of these articles, or use them for any other lawful purpose, without asking priorpermission from the publisher or the author.This Article is brought to you for free and open access by ScholarWorks@UARK. It has been accepted for inclusion in Journal of the Arkansas Academyof Science by an authorized editor of ScholarWorks@UARK. For more information, please contact scholar@uark.edu, ccmiddle@uark.edu.Recommended CitationSoldofsky, Robert M. (1952) "Methods and Problems in the Measurement of Economic Changes in States," Journal of the ArkansasAcademy of Science: Vol. 5 , Article 17.Available at: http://scholarworks.uark.edu/jaas/vol5/iss1/17METHODS AND PROBLEMS IN THE MEASUREMENT OFECONOMIC CHANGES IN STATES*ROBERT M. SOLDOFSKYUniversity of ArkansasIThis paper will deal primarily with methods and problems of measurement ofeconomic change within a state of the United States of America. However, itwill go into the details of only one of the measures of economic change, themeasurement of income produced in Arkansas by industrial origin. This topicwill be taken up in the second part of this paper.Two of the other basic measures or indicators of long-run economic changewithin a given area are data on the number of persons gainfully employed, andthe percentage employed in each particular industry. W. Paul Brann, Bureau ofBusiness Research, University of Arkansas, has prepared estimates of these meas-ures for census years from 1910 to 1940. They will be extended forward to 1950and backward to at least 1880.The two measures, income by industrial origin and the percentage of per-sons employed by industry, provide a clear picture of the economic structure ofa state at given moments in time. New theoretical tools--or at least new usesof old tools--and additional data sought out on the basis of these tools are re-quired if we are to follow the processes of economic change and gain further in-sight into their causes.One familiar tool is the measurement of physical productivity. Several ex-cellent studies of changes in agricultural productivity for this area are avail-able. A new method in macroeconomic analysis is the statement of sources anduses of funds. V. Q. Alvis has made the first local efforts toward developingsuch a statement for Arkansas. He is also working on the application of thebalance of payments concept to interstate trade, another hopeful development.Thought must also be given to the development of the terms of trade for Ar-kansas. This concept has been used to advantage by Colin Clark, the Australianstatistician, in his studies of economic progress. The "terms of trade" simplyrefers to the prices at which a country (region) buys as compared to those atwhich it sells. What determines the terms of trade? It is certainly evidentthat the list of elements important in the determination of the terms of tradebetween countries would be considerably different from those that are importantin determining the terms of trade between an area such as Arkansas and the restof the United States. Itis probable that the relative importance of the itemswhich appear on both lists differ. Werner Hochwald of Washington University hasemphasized that the "export" industry or industries of a region are strategic inthat region's economy. May Isuggest that if the income elasticity of demandfor this "export" is low, if pure competition prevails in this industry, and ifproductivity is increasing, the terms of trade willprobably be running stronglyagainst this region.All of these-- the percentage of gainfully employed by industry, changes inphysical productivity, sources and uses of funds, balance of payments, and termsof trade--should be helpful in the formulation of a complete statement of thecauses and processes of economic change in a given region.IIEstimates of income in each state of our country by industrial origin havebeen made by the Department of Commerce since 1929. Maurice Leven of the Na-tional Bureau of Economic Research has constructed estimates of income in thevarious states for 1919, 1920, and 1921. The Department of Commerce estimatesfor the United States as a whole start in 1929, but those of the National Bureauof Economic Research go back to 1909.•Research Paper No. 1039 Journal Series. University of Arkansas99Journal of the Arkansas Academy of Science, Vol. 5 [1952], Art. 17Published by Arkansas Academy of Science, 1952100 ARKANSAS ACADEMY OF SCIENCEOne object of my research is the construction of estimates of the net in-come of Arkansas industries from 1909 to 1929. This willprovide a series ofincome estimates which can be spliced to adjusted Department of Commerce esti-mates to provide a continuous series from 1909. Such a series will be a valua-ble aid in studying changes in the structure of the Arkansas economy.Before reviewing the methods used by the Department of Commerce and the Na-tional Bureau of Economic Research, and the content of their estimates, Iwilldefine the principal concepts, show the relationship between these concepts, anddemonstrate that the aggregate net income-- i.e., the earnings of the factors ofproduction which arise from the current production of goods and services--can beestimated in two ways.We can start either by adding the earnings of the productive factors em-ployed in an industry, or with the sales o f an industry. Let us start with thelargest aggregate—sales. For example, data for the total sales of the manufac-turing industries are available in the Census of Manufactures. The term used inthe census for sales is "value of products." This is defined as "the sellingvalue, at factory, of all products shipped or delivered. " In the manufacturingindustries, however, these sales include large elements of duplication becauseof sales between firms in different manufacturing industries. Interfirm salesmust be deducted to arrive at value added by manufacturing. The items deductedin the Census from value of products to leave value added are: cost of materi-als, supplies, containers, fuel, and purchased electric energy. Value added isgreater than net income because this list omits several important expenses,other than factor payments, such as capital consumption allowances, insurance,rent, selling expenses, and indirect business tax and nontax payments. If wecould deduct the items just mentioned from value added the remainder would benet income from manufacturing.This aggregate, net income, can in no wdy be estimated from Census informa-tion alone. Nevertheless, there is no conceptual barrier to stating the rela-tionship between value added, as defined by the Bureau of the Census, and netincome. Ifall expenses, except factor earnings, which were not previously de-ducted in calculating value added are now deducted from value added, the remain-der is net income. Incidentally, once all of the expense items which are de-ducted from value of product to arrive at net income are known and the physicalquantities of each item purchased are also known, we have the basis for the typeof "input-output" analysis being developed by Wassily Leontief of Harvard.The Department of Commerce and the National Bureau of Economic Researchbuilt up net income in each industry by adding the earnings of the factors ofproduction which arise from the current production of goods and services. Theitems added by the National Bureau are: wages, salaries, entrepreneurial with-drawals, dividends, interest, entrepreneurial income, net savings of entrepre-neurs, and net savings of corporations. The procedures of the National Bureauand the Department of Commerce are similar. Detailed statements of the proce-dures of both agencies have been published. 1The components of factor income for each industry, when added, give the netincome for the industry. The "difference" between net income and value addedcan be easily calculated by subtracting net income from value added. 2 When this"difference" is added to net income along with the other expenses enumerated bythe Bureau of Census, the sum is value of product. The following table summa-rizes the relations which have been stated:The description of the procedures, methods, and terminology of the Department of Commerceis published in the National Income Supplement to the Survey of Current Business, (Bureau ofForeign and Domestic Commerce, United States Department of Commerce, July 1947); that of theNational Bureau is found in Simon Kuznets' ,National Income and its Composition, 1919-1938, 2Vols., (National Bureau of Economic Research, 1941) The latter contains an extended treatmentof the theoretical and practical problems involved in the construction and interpretation ofNational Income and its components.2Itshould be noted that these two aggregates are independently determined.100Journal of the Arkansas Academy of Science, Vol. 5 [1952], Art. 17http://scholarworks.uark.edu/jaas/vol5/iss1/17rMEASUREMENT OF ECONOMIC CHANGES 101Read ReadDown UpVALUE OF PRODUCT =Cost of materials, supplies,containers, fuel, and purchasedelectric energy= VALUE ADDEDSuch items as capital consumptionallowances, insurance, rent, sellingexpenses, and indirect business taxand nontax payments= NET INCOME =Wages +Salaries +Dividends +Interest, etc. +The net income of each industry in the United States has been estimated bythe National Bureau for the period 1909-1938. State income estimates are notavailable before 1929 except for 1919, 1920, and 1921 as stated above. Thevalue added by manufacturing is available for 1909, 1914, 1919, and every secondyear thereafter to 1939 for both the United States and Arkansas. On the basisof the value added in manufacturing in Arkansas it is possible to construct es-timates of net income from manufactures for the state for census years.In preparing estimates of net income from manufactures in Arkansas the fol-lowing procedure was used. The relationship between net income (National Bu-reau) and value added (Census) --which aggregates, it will be recalled, come fromindependent sources- -proved to be stable when tested for the United States. Itwas then assumed that the relationship between net income and value added inArkansas would also be stable. However, the percentage relationship between netincome and value added in Arkansas is not the same as it is for the UnitedStates because of local differences in various costs. The Department of Com-merce estimates of income 3 from manufactures in Arkansas and the United Stateswere calculated as percentages of the corresponding value added in manufactur-ing. This calculation indicated that income from manufactures in Arkansas asa percentage of value added was on the average almost three per cent higher thanthe corresponding figure for the United States. The percentage relationshipbetween net income from manufactures and value added by manufacturing for theUnited States for 1929 and prior census years back to 1909 was adjusted on thisbasis in order to have an estimated relationship for Arkansas for years in whichno estimate of net income is available. This estimated relationship for Arkan-sas was then applied to value added from manufacturing in Arkansas for the cor-responding census years in order to estimate net income from manufacturing inArkansas back to 1909.The precedure for estimating net income in the other industries, with theexception of agriculture, is similar. Itmay be possible, however, to estimatenet income from manufacturing and the other industries in Arkansas by addingfactor earnings. This is essentially the method used by the Department of Com-merce for estimating income by industrial origin by states for the period 1929-1949. However, several types of data, such as those given in the Statistics of¦The Department of Conmerce estimates of income in the various industries in Arkansas con-sist of: wages and salaries, entrepreneurial income, property income, and other income.Other income includes public assistance, veterans' pensions, social insurance benefits, andother government transfer payments. Property income includes dividends, interest, net rentsand royalties. Income received (Department of Commerce) is not identical with net income forvarious reasons such as: (1) property income is shown on a "where received" basis; (2) otherincome is composed largely of transfer payments which are not a part of net income; (3) corpo-rate profits before income taxes are not included in the Department of Commerce income series,owever, wages and salaries, and entrepreneurial income are included in both concepts and com-prise the bulk of both income received and net income.101Journal of the Arkansas Academy of Science, Vol. 5 [1952], Art. 17Published by Arkansas Academy of Science, 1952102 ARKANSAS ACADEMY OF SCIENCEIncome, published by the Bureau of Internal Revenue, are not available for theindividual states. Futhermore, the National Bureau of Economic Research em-ployed a staff of workers for several years in preparing its estimates. Suchan undertaking for a state is obviously beyond the capacity of any individual.Even if it were undertaken its success would be doubtful.The method of estimating income suggested in this paper has several advan-tages. First, estimates can be made with limited resources; second, these esti-mates are sufficiently accurate for the purpose of revealing the importantchanges in the economy of a state in so far as this is possible for income sta-tistics; third, precautions are taken to insure that secular changes, cyclicalfluctuations, and cost structures peculiar to an area are not removed; fourth,these estimates may be readily compared with estimates of the United States, orfor other states, when such estimates are made.For agriculture, detailed estimates of income from both home consumptionand cash sales, and expenses, can be made for each year back to 1909. A studymade by the Department of Agriculture to supply data for the purchasing powerparity concept contains complete details for agricultural income back to 1924.The coverage for the years 1909-1923 is about 75 per cent complete-- that is,about 75 per cent of the farm income in Arkansas has been estimated by theUnited States Department of Agriculture. My estimates for the remainder of farmincome are now being prepared and will be completed within a few weeks. It ishoped that estimates of net income for all the industries in Arkansas from 1909-1929 will be completed by next fall.102Journal of the Arkansas Academy of Science, Vol. 5 [1952], Art. 17http://scholarworks.uark.edu/jaas/vol5/iss1/17

Methods and Problems in the Measurement of Economic Changes in States

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Methods and Problems in the Measurement of Economic Changes in States

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