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4 Supplement to the Survey ofCurrent Uusi ness

JNITED STATES DEPARTMENT OF COMMERCE



!• II

K

f A U O F F C f; f: \ G N A N D D O M E S TIC C O M M C R C E

U. S. DEPARTMENT OF COMMERCE

• CHARLES SAWYER, SECRETARY

OFFICE OF BUSINESS ECONOMICS • M. JOSEPH MEEIIAN, DIRECTOR




National Income
and Product
OF THE UNITED STATES

1929-1950
PREPARED BY THE N A T I O N A L

INCOME

DIVISION

GEORGE JASZI, CHIEF
CHARLES F. SCHWARTZ, ASSISTANT CHIEF

U. S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 1951

CONTENTS?
PAGE

PART I. National Income and Product, 1929-50: A Review
Basic Trends in the Economy
Growth of the Economy
Shifts in the Use of National Output
Changes in the Income Flow
Expansion of Personal Income
Fluctuations in Economic Activity
Gross National Product Patterns
Chronological Review: 1929-50

1
2
2
2
4
9
10
10
12

PART II. The Conceptual Framework of National Income Statistics.
Nature and Significance of National Income Statistics
Summary Construction of National Output Measures
Detailed Structure of the Accounts
Definitions of Concepts and Terms
PART III. Sources and Methods of National Income Estimation
Introduction
Section:
1. Wages and Salaries
2. Supplements to Wages and Salaries
3. Income of Unincorporated Enterprises
4. Rental Income of Persons
5. Corporate Profits
6.
7.
8.
9.
10.
11.

Interest
Personal Consumption Expenditures for Commodities
Personal Consumption Expenditures for Services
New Construction
Producers' Durable Equipment
Change in Business Inventories

12.
13.
14.
15.
16.

.

.

19
19
21
34
52

. . . .

55
55
63
67
70
79
84

Net Foreign Investment
Government Receipts and Expenditures
Transfer Payments
Personal Saving
Capital Consumption Allowances

PART IV. Gross National Product in Constant Dollars, 1929-50
Characteristics of Constant-Dollar Gross National Product
Statistical Sources and Methods
Summary Tables

90
97
107
112
116
122

. . . .

125
130
136
137
138
. . . .

141
141
143
146

PART V. Statistical Section
List of Statistical Tables




147
147
iii

ACKNOWLEDGMENTS
eign investment and personal consumption expenditures
vv ORK ON the present volume was initiated by Milton
for commodities, respectively.
Gilbert, former Chief of the National Income Division. It
In the preparation of Part IV, John W. Kendrick of the
was carried through under the joint direction of George
National Economics Division of the Office of Business EcoJaszi, the present Chief of the National Income Division,
nomics was principal assistant to Mr. Jaszi. Major conand Charles F. Schwartz, the Assistant Chief.
tributions to this part of the report were also made by
The conceptual framework and statistical methodology
Edward 0. Bassett, Carolyn G. Bernhard, Morris Cohen,
discussed in this volume are those established in the
Joseph B. Epstein, and Millard L. Gallop.
National Income Supplement to the July 1947 SURVEY
The vast statistical work underlying the estimation of
OF CURRENT BUSINESS. Mr. Gilbert directed the major
the multiplicity of income and product series contained in
undertaking of fundamentally recasting the official nathis report is the result of the cooperation of all the memtional income statistics for publication in the 1947 report.
bers of the National Income Division and others in the
His principal assistants were Edward F. Denison, now
Office of Business Economics, and is founded on their efAssistant Director of the Office of Business Economics,
fort and experience. However, in a larger sense, the staMr. Jaszi, and Mr. Schwartz.
tistics rest upon the work of Government statistical agenPart I of the present report, dealing with trends in
cies as a whole and of private agencies as well. These pronational income and product, was prepared by Carl P.
vide the basic source data and the considerable volume
Blackwell. The accompanying charts were prepared under
of supplementary information needed to construct the
the direction of Edwin C. Warren, Chief Draftsman in
national income and product accounts. The statistical work
the Printing Section of the Department of Commerce,
of the Social Security Administration, the Bureau of the
with the cooperation of Anna M. Guindon of the Office of
Census of the Department of Commerce, the Treasury,
Business Economics.
Agriculture, and Labor Departments, and the various
Numerous staff members of the National Income Diviregulatory commissions is of fundamental importance in
sion participated in the writing of the various sections of
this regard.
the technical notes in Part III. Special credit is due to HarCertain of the estimates themselves are prepared outlow D. Osbome in connection with the sections on income
side the National Income Division: farm income by the
of unincorporated farm enterprises, rental income of per- ' Bureau of Agricultural Economics of the Department of
sons, corporate profits, new construction, net foreign inAgriculture; direct estimates of personal saving by the
vestment, and capital consumption allowances.
Securities and Exchange Commission; new construction
Acknowledgments to other staff members are listed in
activity by the Building Materials Division, National Prothe sequence in which the technical notes appear in Part
duction Authority of the Department of Commerce, in coIII: wages and salaries—Franklin M. Aaronson and
operation with the Bureau of Labor Statistics of the DeLawrence Grose; supplements to wages and salaries, inpartment of Labor; net foreign investment by the Balance
come of unincorporated enterprises—Lawrence Grose;
of Payments Division; and personal consumption expendiinterest—Elwyn T. Bonnell; personal consumption extures for commodities since 1940 by the Business Structure
penditures for commodities—Edward 0. Bassett and
Division.
Raymond Nassimbene; personal consumption expenditures
Progress in the national income field has been facilitated
for services—Carolyn G. Bernhard; producers' durable
by the Bureau of the Budget, not only by its direct support,
equipment—Robert C. Wasson and Raymond Nassimbene;
but by its continuing recognition and furtherance of the
change in business inventories—George M. Cobren; govneeds of the Office of Business Economies' national income
ernment receipts and expenditures—Carl P. Blackwell;
work in the development of the Government's statistical
transfer payments—Lawrence Grose; capital consumpprogram. Finally, it is recognized that what has been
tion allowances—Robert C. Wasson.
achieved has been possible only by the support and enIn addition, the Balance of Payments and Business
couragement given by the Congress continuously since
Structure Divisions of the Office of Business Economics
.these studies were initiated at the direction of the 72nd
provided materials relating to the descriptions of net for-:
Congress.

IV




FOREWORD
IHIS VOLUME marks a further major development in
the work on United States national income statistics which
was initiated in 1932 in response to Senate Resolution
No. 220 of the 72nd Congress, and carried forward in the
Office of Business Economics. The information presented
in it is designed to meet in comprehensive fashion the
needs of business and other users of national income data.
Originally, Congress directed the preparation of measures of the national income, its industrial origin, and its
distribution in the form of wages, profits, and other types
of payments. The initial report was published early in 1934
as Senate Document No. 124, 72nd Congress, 2nd Session.
National income estimates have been published annually
since then. They were supplemented in the late nineteenthirties by estimates of the income flow to individuals, on
a monthly basis for the Nation as a whole and on an annual
basis for the various States.
The outbreak of the war expedited the measurement of
the gross national product. This estimate of the value of
the Nation's output of goods and services was essential for
the establishment of goals designed to maximize total production and for the necessary diversion of production to
war purposes, involving major changes in the structure of
output. The product estimate was required also to supplement the income measurements in the calculation of the
inflationary pressures being generated.
The gross national product was added to the income
series shortly after Pearl Harbor and was gradually expanded into an extensive body of information on the composition of the commodity flow. Quarterly estimates were
developed for both national income and national product
to provide comprehensive data on the current economic
situation.
The year 1947 was a landmark in the national income
work of the Office of Business Economics. In the National
Income Supplement to the SURVEY OF CURRENT BUSINESS
of July 1947 new estimates were published, basically recast
into the framework of a comprehensive national economic
accounting system designed to provide a systematic picture
of the economic structure and process in terms of interrelated income and product flows. All statistical series back
to 1929 were reworked to incorporate improvements in
statistical methodology, and a brief explanation of the concepts underlying the estimates was provided.




The present volume meets the need for a detailed discussion of the conceptual framework and of the statistical
sources and methods underlying the United States national
income statistics. This makes up Parts II and III. In
addition, the report contains, in Part I, a review of changes
in national income and product since 1929; series on gross
national product in constant dollars for the years 1929-50,
in Part IV; and, in the final section, a complete set of statistical tables for 1929-50.
Thus, the present report contains all the national income
statistics of the Office of Business Economics with the exception of the annual series on State income payments. As
such it will serve as a comprehensive base book superseding all previously published series, and the figures contained in it will be brought up to date in the monthly
SURVEY OF CURRENT BUSINESS.

During the past two decades national income statistics i
have become firmly established as basic tools of economic analysis—not only in the United States but elsewhere as
well. The present volume incorporates the great progress
which has been made in national income measurement over
this period. This process of development is not complete.
Many unsettled problems remain and there will be further
conceptual and statistical improvements. Particularly
pointing up the need for the development of additional
basic statistical data required for improved income measurement, the present report discusses very frankly those
areas which call for further work. It is thought that in
this manner a maximum contribution to progress in this
field can be made.
The further progress required does not impair the utility
of this volume as a source of integrated information on the
functioning of the United States economy. It provides
material equally essential for the production and marketing programs of business and for furthering the knowledge
requisite for the formulation and development of Government economic programs.
Complete recognition of the theoretical and statistical
contributions to the national income work which is embodied in this volume is not possible, but on the facing
page we have endeavored to make partial acknowledgment,
particularly to the staff and others who have had a major
share in the production of this 1951 national income report.

Director

From 1929 to 1950 THE NATIONAL OUTPUT of the
United States Increased . . .

172 % in Dollars

1929
1950
CURRENT DOLLARS

VI




80 % in Volume

44 % in Volume Per Capita

PART I

National Income and Product, 1929-50:
A Review
The national income statistics presented in this report
cover nearly a quarter of a century of highly varied economic developments in the United States.
In broad outline, this period embraces the following
sequence of events: The precipitous fall from the prosperity of 1929 into the deep depression of the early nineteen-thirties ; the subsequent recovery, interrupted by the
brief recession of 1938, but then continuing through the
remaining prewar years; the tremendous performance of
the economy in the prosecution of World War II; reconversion and the postwar boom, with attendant inflationary strains; the mild business recession of 1949; and the
rapid recovery of 1950, merging in the latter half of that
year into the partial mobilization effort now in progress.
The national income data provide a detailed statistical
description of the way the economy has functioned under
these widely diverse conditions. They reveal important
fluctuations and long-term changes in the volume, composition, and use of the Nation's output, in the industrial
structure through which it is produced, and in the distribution of the resultant income.
The nature of national income statistics is fully described in subsequent parts of this report. The following
general summary highlights their major features as a
prelude to an analysis of the functioning of the economy
and of the path traversed in reaching current peak levels
of income and production.

National product: The flotv of goods and services
Total output is measured from two principal points of
view: As the summation of final products produced by
the economy; and as the summation of costs incurred in
producing those products. Both of these approaches yield
comprehensive measures of economic activity, but the
analytical breakdowns to which they most readily lend
themselves throw light 'on different aspects of the economy.
The gross national product measures the Nation's output of goods and services in terms of its market value.
When expressed in current prices, this series reflects the
total dollar value of production; when expressed in constant dollars to eliminate the influence of price changes,
it provides an over-all index of the physical volume of
goods and services produced by the economy.
In both current and constant prices, the gross national
product is broken down to show its disposition among
broad groups of users—consumers, business, government,
and foreign countries. The commodity and service composition of purchases by each of these major groups is
delineated in considerable detail for the current dollar
series and in summary fashion for the constant dollar
series.

National income: Earnings from

production

Total output is also measured, in terms of the factor
costs of producing it, by the national income—the aggregate earnings of labor and property which arise from current production. This measure differs from the gross




national product chiefly in that it is computed after deduction of indirect business taxes and of depreciation
charges and other allowances for business consumption of
durable capital goods.
The national income is broken down by distributive
shares, by industry of origin, and by legal form of organization. The first of these breakdowns represents a
classification of earnings according to the forms in which
they accrue to residents of the Nation—compensation of
employees, profits of corporate and unincorporated enterprises, net interest, and rental income of persons. The
second indicates the use of economic resources and the
contribution to total output by each of a number of industrial subdivisions, as measured by income originating
in the respective industries. The third shows an important
special aspect of the institutional structure of the economy—the portions of total economic activity (also measured by income originating) conducted by various types
of productive units, including corporations, sole proprietorships and partnerships, other private business,
government and government enterprises, and households
and institutions.
In addition to a summary account showing the national
income and product, accounts are maintained for each of
the major sectors of the economy. These consist of current income and outlay accounts for the business sector,
for persons, for government, and for the rest of the world
in its transactions with the United States. A consolidated
saving and investment account for the economy as a whole
is also provided. The system of accounts is designed to
furnish a description of the economic process in terms of
the expenditures and receipts of the various sectors, arranged to show their interactions upon each other. The
nature and classification of the transactions recorded for
each sector are governed to a considerable extent, of
course, by the central objective of measuring total output

Personal income: Receipts of consumers
Particular interest centers upon the personal account,
which covers the activities of the consuming public. On
the one hand, it gives total personal income—the current
income received by persons from all sources, inclusive of
transfers from the government and from business; and
on the other, it indicates the disposition of personal income for consumption, taxes, and saving. Personal income
is a third major aggregate, generally coordinate in significance for economic analysis with the national income
and the gross national product.
In general outline, then, this is the body of statistical
information utilized in the following review of economic
developments since 1929. While this framework permits
a comprehensive study of such developments, it by no
means covers all significant elements in the operation of
the economy. It does not, for example, provide direct information regarding the monetary and credit system of
the United States. In the discussion below, therefore, only
incidental attention will be devoted to trends in that field
—not because they are lacking in importance, but because
they fall outside the scope of the statistics with which this

1951 NATIONAL INCOME SUPPLEMENT
review is primarily concerned. Although a number of
other relevant factors are similarly excluded, the picture
of the economy in action which emerges from the national
income accounts is a highly significant one.
BASIC TRENDS IN THE ECONOMY
Despite the violence of the economic fluctuations which
have occurred, the outstanding feature of economic developments over the past 22 years is the tremendous
growth of the United States economy.
The population increased by one-fourth, from 122 million in 1929 to 152 million in 1950, and the number of persons engaged in production rose in roughly similar proportion. This larger work force was equipped with a
greatly expanded volume and improved quality of machinery and plant facilities, as well as with such intangible assets as better education and advanced scientific
knowledge. Through utilization of these enlarged human
and material resources, the economy has been able to produce a vastly increased flow of goods and services, including a wide array of new products.
Growth of the Economy
The gross national product amounted to $283 billion in
1950, as compared with $104 billion in 1929. This comparison reflects the combined influence on the current
market value of total output of both greatly increased
physical volume and much higher prices.
Chiefly as a result of the inflation associated with
World War II and its aftermath, the general level of
prices in 1950 was more than 50 percent above that of
1929. After allowance for this factor, the physical volume
of the Nation's output, as measured by the gross national
product in constant dollars, is found to have risen 80 percent over the period. In terms of real output per capita,
the increase amounted to 44 percent.
Since 1929 and 1950 were both peacetime years of
close-to-full utilization of productive resources, a simple
and meaningful approximation of the long-term rate of
growth in national production is provided by the average
annual percentage increase in constant-dollar gross national product implied by comparison of these two terminal years. According to this calculation, the rate of expansion in the real volume of output has averaged over
this 22-year period slightly more than 2% percent per
year.
In part, this growth has reflected the gradual increase
of the Nation's manpower resources. The advance in production, however, has outstripped this increase by a wide
margin, owing to the achievement of sizable gains in
productivity per unit of manpower utilized.

Large advance in productivity
Trends in productivity may best be examined in terms
of private-industry gross product, both because interest
centers upon the private sector and for the technical
reason that the method by which the contribution of government to constant-dollar national product is estimated
makes no allowance for changes in productivity.
In the private sector of the economy as a whole, the
real increase in output from 1929 to 1950 was about 75
percent. During: the same period, the number of persons
engaged in production in private industries—full-time
equivalent employees plus active proprietors—rose by 22
percent, or about 1 percent per year on the average. An




annual rate of growth in real private product per person
engaged averaging approximately 1% percent is thus
indicated.
Moreover, this rate of increase occurred during a span
of years in which average hours worked per week in the
private economy were reduced by about 10 percent. On
a man-hour basis, accordingly, the rise in productivity
has been considerably greater. Real private product per
man-hour was well over half again as large last year as
in 1929, implying an average annual rate of increase
somewhat in excess of 2 percent.

Many factors influence productivity
It is important to recognize that productivity increases
as computed above, although expressed in terms of output
per unit of labor input, are attributable not only to labor,
but jointly to all of the factors influencing productivity.
Foremost among these, undoubtedly, have been the technological improvements and increased amounts of capital
equipment utilized by the Nation's industries. Better organization and management of productive operations
have also contributed, as have advances in the education,
training, and health of the population.
These types of influences affect directly the technical
efficiency of particular productive processes. In addition,
the productivity measures given above also register
shifts within individual industries among products involving varying amounts of output per unit of labor input
and, furthermore, shifts of workers between industries
in which output per unit of labor input differs.
An appreciable part of the productivity rise since 1929
can be traced to a shift of the latter type. The proportion
of the labor force engaged in farming—where real product per man-hour has averaged less than one-third of that
in the private nonfarm sector—has declined markedly
and almost continually. This shift of workers to nonfarm
industries has in itself contributed more than one-fourth
of a percentage point to the average annual rate of
growth in real private product per man-hour, quite apart
from the improvement of productivity in each of the sectors separately. Relative shifts of labor among industries
within the nonfarm sector have probably affected total
productivity in a similar fashion. While information is
not available for precise calculation of the effects of these
industrial shifts, indirect evidence suggests t h a t i n the
aggregate they may compare in importance with the
farm-nonfarm movement.
Shifts in the Use of National Output
Along with the huge expansion of the pross national
product since 1929, there have been significant changes
in its disposition among major groups of users and in
the composition of purchases by each of these groups.
The domestic sectors of the economy have all shared—
though to somewhat different decrees—in the increased
volume of production. Net foreign investment, which
measures net purchases of United States output by the
rest of the world, is the only principal comuonent of national product to show a decline from 1929 to 1950.
The most notable change since 1929 in the use of the
Nation's output is a shift from private to .government
use. In terms of the current dollar estimates of gross national product, government purchases of goods and services, which absorbed 8 percent of the gross national
product in 1929. took 15 percent in 1950. Personal consumption expenditures, on the other hand, dropped from
76 percent of the total in 1929 to 68V2 percent last year.

SURVEY OF CURRENT BUSINESS

Of the Increase in the Total Volume
of National Output of 80 percent
from 1929 to 1950...

Consumers received two thirds, or . . .

Government took one-fifth, or . . .

and investment required one-seNtenth, or . . .

$12.9 Billion

$9.1 Billion

IN 1939 DOLLARS

The proportion of the value of output going into domestic
and foreign investment was nearly the same in each of
these years, as a small rise in the percentage share of the
former offset the decrease of the latter.
These changes in the composition of the gross national
product were in considerable measure the result of differential price movements. In terms of the constant-dollar
gross national product, the shift to government use is
substantially reduced, the share of government rising
from 9 to 13 percent. Furthermore, it is seen to be at
the expense of both personal consumption and of investment, rather than of personal consumption alone. These
value and volume relationships are summarized in the
table below.
Percentage Distribution of Gross National Product
1929
In current dollars:
Personal consumption expenditures_._
Gross private domestic investment
Net foreign investment
___
_-_
uovernment purchases of goods and services
Total.
In 1939 dollars:
Personal consumption expenditures
uross private domestic investment
Net foreign investment
Government purchases of goods and services
Total




---

1950

75.9
15-2
•'
8.2

08.5
17.3
-.8
15.0

100.0

100.0

72.5
-4
-9
9- 2

70.4
16.1
.0
13.5

100.0

100.0

17

Consumption patterns reflect price shifts
Although the proportion of total national product going to consumers was smaller last year than in 1929,
owing to the larger share used for public purposes, the
absolute volume of goods and services purchased for
personal consumption was, of course, vastly increased.
In terms of constant (1939) dollars, the expansion
amounted to 75 percent—a gain of nearly two-fifths in
real consumption per capita.
Reflecting also a 41 percent rise in average prices, the
dollar volume of total consumer outlays last year reached
$194 billion, as compared with $79 billion in 1929. The
distribution of these outlays by major objects of expenditure shifted markedly over the two decades. Durable
goods, which accounted for 12 percent of total consumer
spending in 1929, represented more than 15 percent of
the total last year. Nondurable commodities also absorbed a substantially larger share of the consumer expenditure dollar, while the proportion spent on services
dropped from 40 percent in 1929 to 32 percent in 1950.
To a very considerable degree, these shifts reflect differential movements of prices for major items in the
respective expenditure classes, rather than fundamental
alterations of the consumption pattern in real terms.
In particular, much of the relative decline in the importance of service outlays has stemmed from the marked

1951 NATIONAL INCOME SUPPLEMENT
lag of rent and household utility charges behind the
general upswing of consumer prices in the last decade,
while most of the increased relative importance of nondurable commodities is traceable to the considerably
above-average rise in prices for food and clothing.
Shifts in real spending, however, have also occurred.
Such factors as the development and marketing of innumerable new products, increased reliance upon private
automobile transportation, and the expanding use of
household appliances have tended, on balance, to induce
proportionately greater spending for commodities—especially durables. At the same time, demands for some
classes of services—of which the employment of domestic servants is a conspicuous example—have tended to
decline or to lag behind the general advance.

Equipment share of investment

higher

Gross private domestic investment last year amounted
to $49 billion, or 17y2 percent of total gross national
product, as compared with about $16 billion, or just over
15 percent, in 1929. The increased proportion of domestic investment reflected entirely a sharper rise in the
prices of capital goods than of goods and services in
general. In real terms, as shown in the table above, the
share of domestic investment in the total was slightly
lower last year than in 1929. With respect to these comparisons, it should be noted that a somewhat narrower
basis for estimating new private construction has been
employed for the earlier period, as explained in the section on New construction in Part III of this report.
There was a marked shift from 1929 to 1950 in the
general composition of investment expenditures. New
private construction put in place accounted for about
half of the total in the earlier period, but for only 45
percent last year, while business purchases of durable
equipment rose in relative importance from 41 to 46
percent. Net accumulations of business inventories differed little, percentagewise, in the two years.
The relative decline in construction activity was a net
result of sharply divergent movements of its residential
and nonresidential components. Outlays for new nonfarm
dwelling units rose from about one-fifth of gross private
domestic investment in 1929 to one-fourth last year, but
there was a far more than offsetting decrease in the
proportion of expenditures for other types of construction, consisting mainly of business outlays for plant expansion. Thus, an outstanding feature of the shift in
investment was that business expenditures for fixed capital facilities in 1950 were concentrated much more heavily upon acquisition of new equipment, and proportionately less upon plant expansion, than they were in 1929.
Over the two decades, these broad changes in the relative importance of construction and producers' durable
equipment were even greater in real terms than in current dollars, since construction costs rose twice as much
as equipment prices during the period.

Foreign transactions show relative decrease
Net foreign investment was a relatively minor component of national product both in 1929 and in 1950. In
large measure, the shift from a positive foreign balance
of $1 billion to a negative balance of $2^4 billion reflects
a change in the means by which foreign countries financed their net acquisitions of United States goods and
services. In 1950, they obtained large quantities of American exports by grants from the United States Govern


ment. Such amounts are recorded in the national income statistics as government, rather than foreign, purchases. Corresponding exports in 1929, being then financed through regular commercial channels, entered
gross national product under the net foreign investment
heading. Even with allowance for this factor, however,
there remains a relative decline from 1929 to 1950 in
the net flow of United States output to other countries.
The low ratio of net foreign investment to total production should not, of course, be interpreted as an indication of the importance of international trade to the
domestic economy. Actually, its importance is much
greater than is suggested by such a net concept. The
net balance is a composite of much larger gross flows
of United States output into export channels and of goods
and services produced abroad into domestic consumption, capital formation, and government procurement.
These gross flows in both directions, however, were also
significantly smaller in relation to domestic economic
activity last year than in 1929.

Growth of government

purchases

Combined Federal, State, and local purchases of goods
and services rose from $81/2 billion in 1929 to $42i/2
billion in 1950. As already noted, these purchases represented an increasing proportion of total national ouput.
Over the two decades, the entire increase in this proportion was attributable to expanded Federal Government activities. In the main, the expansion stemihed from
the imposition upon the economy of a national defense
burden much heavier in recent years than in the prewar
period. Defense purchases, which constituted less than
1 percent of gross national product in 1929, represented
more than 5 percent in 1950, and are now rising far
above that figure.
Fully half of the remaining increase in the share of
current production bought by the Federal Government
may be traced to the large volume of foreign aid undertaken since the war—a type of activity which was nonexistent in 1929. Federal purchases of goods and services
for all other purposes combined accounted for only a
minor portion of the 1929-50 expansion.
Changes in the Income Flow
Accompanying the expansion of the national output
and the shifts in its composition and use since 1929,
there have been marked changes in the size of the corresponding income flow, in its industrial origin, and in
the form of its distribution to residents of the Nation.
The national income rose from $87 billion in 1929 to
$239.billion last year—an increase of 175 percent. This
rise, of course, reflected not only the expansion of the
physical volume of production, but also the sharply
higher prices prevailing in 1950.

Shifts in industrial pattern
Perhaps the most important of the changes in the
income flow since 1929 are those relating to its industrial origin. Such changes are indicative of the way in
which the allocation of economic resources has been
altered to meet the shifting character of demand for
the Nation's output.
Income originating in each industry measures the
earnings of the economic resources—both labor and
property—utilized by it. Accordingly, the breakdown of
the national income by industry of origin provides a

SURVEY OF CURRENT BUSINESS
measure of the net contribution of each industrial segment of the economy to the total value, at factor cost,
of the net national output.
In 1929, private nonagricultural domestic industries
contributed 84 percent of the national income, while
the remainder originated in three segments of somewhat
different character—government and government enterprises; agriculture, forestry, and fisheries; and the rest .
of the world. With the expansion of government operations, the contribution of the private nonagricultural
domestic sector to the total in 1950 was reduced to 82
percent.
Large increase in manufacturing
Industrial shifts within the private nonagricultural
domestic sector from 1929 to 1950 are illustrated in
summary fashion in the accompanying chart, which shows
for each of these years the proportionate contributions
of several broad groups of industries. Since 1929 and
1950 were both prosperous, full-employment years, this
comparison is little affected by cyclical influences. Corresponding data in somewhat greater detail, covering
also the intervening years, are presented in the table on
page 17.
The most striking feature of the 1929-50 comparison
is the large increase in the relative importance of the
manufacturing industries. From 30 percent in 1929, their
contribution to private nonagricultural domestic income
rose to 3714 percent last year. This rise is a direct reflection of the increasing degree to which demand for
the output of private industries, and production to meet
it, has centered upon commodities, in general requiring
fabrication and processing of a progressively more complex character.
Parallel growth in distribution
Also immediately affected by the relative increase in
demand for commodities were the wholesale and retail
trade industries, whose share of the private nonagricultural domestic total was 22 percent in 1950, as compared with 18 percent in 1929. This substantial expansion was closely allied with the growth of manufacturing
output, the bulk of which is distributed to ultimate
buyers through trade channels.
With the relative growth of manufacturing and trade,
the percentages contributed by all other private industrial
divisions declined except that for contract construction,
which advanced from 5 to 6 percent of the total. By far
the greatest decline in relative position from 1929 to
1950 was registered in the finance, insurance, and real
estate division. Its share, which had matched that of
wholesale and retail trade in the earlier period, was
down to about 10 percent last year.
Factors in decline of finance group
Two major factors contributed to this drop in the finance group. Earnings in the real estate industry—especially on residential property—were relatively depressed, both because the industry was little affected by
the growth of commodity output and because rents did
not keep up with the general price rise. In banking and
other financial industries, income originating was much
lower relative to the total than in 1929, owing mainly
to an approximate halving of average interest rates and
to the marked shift from external financing of business
investment to financing out of retained earnings. The
large expansion in public debt obligations held by banks



by no means compensated for the fact that the volume
of private debt was sharply reduced in relation to total
economic activity.
With reference to the real estate industry, it should
be pointed out that the valuation of a large portion of
its product—residential housing—has been held down
by war and postwar rent controls. Most of the relative
decline in real estate occurred, however, long before the
imposition of such controls. Among the broad factors
contributing to it was the necessarily slow adjustment
of the supply conditions emerging from the building
boom of the 1920's to the depressed housing demand
of the prewar decade, when there was a temporary slackening in the rate of family formation and population
growth.
PERCENTAGE DISTRIBUTION OF PRIVATE
NONAGRICULTURAL NATIONAL INCOME
Since 1929, some industries- notably manufacturing and tradehave grown markedly in relative importance. .
while others— such as finance, insurance, and real estatehave not kept pace with the general expansion.
Percent
100
*

1

I

TRANSPORTATION,
COMMUNICATIONS, AND
PUBLIC UTILITIES

60

-

^ ;
J§$^
^$J§

FINANCE, INSURANCE,
REAL ESTATE, AND
SERVICES

Z V|

80

CONTRACT CONSTRUCTION

• '.-•
• -;•:."

WHOLESALE AND
RETAIL TRADE

I
1ft
ft
i
I1
'''!
i%^^--%**

40

1
1

HI

iIlIl
I

20

i

m
m

WM
^ j

AND MINING
MANUFACTURING

I
Hi

1929

1950

Two other major industrial divisions experiencing
fairly substantial declines in relative importance from
1929 to 1950 were transportation and services. The share
of the former in total private nonagricultural domestic
income fell from 9 percent to 6% percent, entirely as a
result of the much below-average expansion of the railroad industry. In the case of services, the decrease—
from 14 percent to 11 percent—was centered in the
private household segment, where the relative decline of
domestic service was an important factor.

1951 NATIONAL INCOME SUPPLEMENT
The proportions of income originating in the remaining industries—mining and communications and public
utilities—declined only moderately. These are the two
smallest divisions, contributing 2i/2 percent and 3 % percent, respectively, to the 1950 total.
Increase in Federal employment
Outside of the private nonagricultural domestic sector,
the most significant change over the period under review was the sizable increase in the contribution of
government. As a percentage of total national income,
it rose from 6 in 1929 to 10 in 1950. These percentages, it
should be emphasized, represent only the return to resources (in this case, labor) directly employed by government and government enterprises—not the production of other industries whose output is purchased by
government.
The increase was almost entirely in the Federal Government component, which expanded over 1 the two decades from less than 2 percent to about S /^ percent of
the national income. The compensation of military personnel accounted for half of this growth, and much of
the remainder, of course, was in civilian payrolls associated with the expansion of the defense establishment.
Income from agriculture
The share of the national income originating in agriculture, forestry, and fisheries, which consists almost
wholly of income from farming, amounted to 71/2 Percent last year. This was appreciably below the 9 percent
contribution of the agricultural sector in 1929. Because
of the erratic annual movements which characterize
farm income, however, no significant conclusions can be
drawn from this comparison.
The decline in agriculture's percentage of the national
income from 1929 to 1950 was by no means commensurate with the decrease over the same period in the
proportion of the population engaged in agricultural
production. Accordingly, the net value of output per
person engaged in production rose by more than 180
percent in agriculture, as against about 100 percent in
the private nonfarm sector.
The remaining segment of the economy, the "rest of
the world", is not really an industry, but a balancing
item consisting almost exclusively of net property income receipts from abroad. Amounting to less than 1
percent of the national income in 1929, it had declined
to a still less consequential share by 1950.

not reflect the relative distribution of total income among
various groups in the population, since many of these
have multiple sources of income. Nor do the distributive shares indicate the relative renumeration of the
various factors of production in a theoretical sense;
most of them include more than one element of factor
cost, and each of them represents only a partial measure
of the factor cost suggested by its caption.
Owing to the fact that the contribution of government
to national income is measured solely by compensation
of government employees, it is useful to confine the analysis of changes in the pattern of distributive shares to
income originating in private industries. The table on
page 17 contains relevant 1929-50 data.
Over these two decades, there has been a marked increase in the relative importance of employee compensation and corporate profits and a parallel decline in net
interest and rental income of persons. The percentage
of the total going to proprietors of unincorporated enterprises was about the same last year as in 1929, with,
however, the share of farm proprietors somewhat lower.
Employee share of private national income
Compensation of employees in private industries rose
from $45V2 billion in 1929 to $130 billion in 1950, or
Employees on a full-time basis in all industries earned
an average of 113 percent more in 1950 than in 1929..,

\




1

-—

^

$1,421
4

.— ^
-

1929

Changes in distributive shares
Along with the shifts in the industrial origin of the
national income, there have been noteworthy alterations
of its composition in terms of distributive shares. Some
of these alterations have represented fundamental
changes in the relative importance of various forms of
income as such, while others have merely reflected the
influence of industrial shifts in combination with the
existing differences among the respective industries as
to prevalent forms of organization and characteristic
types of income arising therefrom. Both sorts of changes
in the distributive-share pattern, of course, are of considerable interest.
This breakdown of the national income is simply a
classification of total earnings, before deduction of direct taxes, according to the forms in which they accrue—
compensation of employees, corporate and unincorporated business profits, rental income of persons, and net
interest. Such a classification, it should be realized, does

$3,024

y

1950

and after allowance for higher prices the purchasing
power of this income was 52 percent larger.

$1,421 ;
y

1929

1950 in 1929 prices

SURVEY OF CURRENT BUSINESS
from 55 to 60 percent of total private national income.
Essentially, this increase in the percentage share going
to employees reflects merely a marked growth in the
proportion of total economic activity conducted through
regular business enterprises—corporations, proprietorships, and partnerships—as contrasted with that portion
taking place in certain other economic entities, such as
private households and incidental landlordships.
In prosperous peacetime years, employee compensation has represented over three-fifths of total income
originating in regular business enterprises, but only a
minor fraction of the total for the other types of units,
' where rent (including that imputed on owner-occupied
homes) and interest have a very heavy weight. Accordingly, the much faster growth of business enterprises
proper, especially in the nonfarm sector, than of these
other private economic entities has had the effect of
raising the relative importance of the income shares—
corporate profits and nonfarm proprietors' earnings as
well as employee compensation—which predominate in
the former group. Within the regular business enterprise sphere, there was little change from 1929 to 1950
in the proportion of income paid out.as compensation
of employees.
There was, however, an internal shift in the composition of employee compensation, to a somewhat lower
proportion of wages and salaries and a higher proportion in the form of supplements to wages and salaries.
The latter were an inconsequential element in 1929, consisting chiefly of compensation for injuries. Their growth
to significant proportions—nearly 3 percent of private
national income in 1950—stems from the creation and
expansion of the various social insurance programs,
and from the marked growth in recent years of private
pension and welfare funds. Employers' contributions to
these funds, both public and private, are viewed as
supplementary compensation of employees.
Shifts in proprietors9 and rental income
The advance of entrepreneurial earnings from $14
billion in 1929 to $36 billion last year was very nearly
proportionate to the rise in private national income.
Within this category, however, the movements of the
farm and nonfarm components diverged to some extent.
For reasons already indicated in the discussion of
total income originating in agriculture—of which farm
proprietors' earnings constitute the bulk—little long-term
significance dan be attached to the decline of the farmers'
percentage share from 7 in 1929 to 6V2 in 1950. As an
indication of the erratic behavior of this component,
it may be noted that as recently as 1948, the percentage
was far above that of 1929—or, indeed, of most years
since then. In view of the 21 percent decline in the
number of farm proprietors from 1929 to 1950, even the
lower percentage share of the latter year represented a
substantial relative improvement in the position of the
average farmer.
Nonfarm business and professional proprietors' income was 10 percent of the private-industry total last
year, about the same as two decades earlier. An appreciable rise in the relative importance of the retail and
wholesale trade component was largely offset by the
fapt that entrepreneurial earnings in the service industries did not maintain their relative standing.
One of the two distributive shares exhibiting a sharp
proportionate decline over the past 22 years was rental



income. The $5% billion going to persons in this form
in 1929 constituted 7 percent of private national income,
while last year's $8 billion represented only about half
that much, percentagewise.
The principal reasons for the diminished importance
of rental income in relation to the total are those outlined above in connection with the real estate industry
as a whole. It should be remembered, however, that the
rental income share—including imputed net rent on
owner-occupied nonfarm dwellings—consists only of net
rents and royalties accruing to persons not primarily
engaged in the real estate business. Other rents are
merged unidentifiably with noncorporate business earnings and with corporate profits.
Combined profits and interest share
The corporate profits share of the national income—
corporate profits and inventory valuation adjustment—
increased from $10y2 billion in 1929 to $36 billion last
year. In terms of percentages of private national income, the increase was from 121/2 to nearly 17. In large
measure, however, this rise was simply a reflection of
the greatly reduced burden of corporate debt, and does
not signify a commensurate expansion of the property
CORPORATE PROFITS have exhibited much sharper cyclical
fluctuations than total income originating in corporate business. .

. * but the percentage share of profits in prosperous peacetime
years has been relatively uniform.
40

35

I
t

1
5

O
U
PROFITS AS PERCENT
OF INCOME ORIGINATING

* AFTER INVENTORY VALUATION ADJUSTMENT

-5

I
20

I
40

1
60

80

100

INCOME ORIGINATING I N CORPORATE BUSINESS
(BILLION DOLLARS)

120

140

1951 NATIONAL INCOME SUPPLEMENT

TAXES have taken an increasing share of both Individuals' and
Corporate Incomes.
PERSONAL INCOME AND TAXES

CORPORATE PROFITS AND TAXES

CORPORATE INCOME
AFTER TAXES
$8.4 Bil.
TAXES
$1.4 Bil.

DISPOSABLE
PERSONAL
INCOME
$ 8 2 . 5 Bi!

1929
$85.!
Billion

DISPOSABLE
PERSONAL INCOME
$204.3 Bil.

1950

Billion

Billion

$ 224.7
Billion

share of current income. In combination, profits and interest originating in corporate business rose from 1929
to 1950 by only half as much as profits alone in relation to total private national income.
Moreover, the rise which did occur in the combined
corporate interest and profits share was a reflection
primarily of the growing weight, already noted in connection with employee compensation, of regular business
enterprises as contrasted with such other private economic entities as incidental landlordships. Neither within
the whole business enterprise sector proper, nor within
the corporate business segment alone, was the percentage
of income taken by profits and interest together significantly higher in 1950 than in 1929. The combined
property share of total income originating in corporate
business has been remarkably uniform in prosperous
peacetime years of the period under review. This uniformity is brought out in the chart on the preceding page,
and contrasts with the extreme variability of the property
income share during the business cycle.
Influence of inventory profits and losses
The foregoing remarks are based upon measures of
corporate profits after inventory valuation adjustment.
Profits before tax as reported under prevalent inventory
accounting practices, which generally charge goods to
cost of sales in terms of prior-period inventory costs
rather than current replacement costs, showed a somewhat greater increase from 1929 to 1950. These figures
included moderate inventory losses in 1929, when—with
prices falling—book costs of goods sold exceeded replacement costs, and included sizable inventory profits



last year, when—with prices rising rapidly—the reverse
was true.
Such inventory profits and losses are eliminated, in
order to secure an economically more meaningful measure of income, by application of the inventory valuation
adjustment. In effect, this adjustment substitutes the
current replacement cost of goods sold for their book
cost in the computation of profits.
It is upon reported book profits, however, that corporate income taxes are based. Partly for this reason,
but primarily because of the very large increase in
Federal corporate income tax rates, the percentage of
private national income taken by such taxes, in combination with similar State levies, rose fourfold from
1929 to 1950. The share of profits after tax (including
inventory profits) changed little over the two decades.
One of the salient trends in corporate financing during
this period—toward greater reliance upon internal funds
—is reflected in the sharp divergence between the terminal years with respect to the disposition of profits
after tax. In 1929, 70 percent .was paid out as dividends
and 30 percent retained, whereas in 1950 only 40 percent was distributed to stockholders and 60 percent was
retained. It is significant to note, however, that this
disparity between the two years is reduced if inventory
profits and losses are excluded from the comparison. On
this basis, undistributed profits rose from 35 percent
of profits after tax in 1929 to 48 percent last year.
Net interest
The remaining distributive share, net interest, was
the only one to register an absolute decline from 1929

SURVEY OF CURRENT BUSINESS
to 1950. It fell from $6i/2 billion, or 8 percent of private
national income, to $5y2 billion, or only 2V2 percent.
The major factors underlying this decline are those
cited above to explain the diminished proportion of income
originating1 in the financial industries—namely, the virtual halving of average interest rates and the relatively
small expansion of private debt since 1929.
In addition, part of the decline is attributable to a statistical peculiarity of the series. To offset the inclusion in
business incomes of government interest, which is viewed
as a transfer in the national income accounts, government interest received by business is deducted from the
interest component of national income. Had the statistically more difficult procedure of deducting it from business incomes been followed, the relative decline in net
interest from 1929 to 1950 would have been less, while
the other affected shares would have shown correspondingly smaller increases.

Expansion of Personal Income

bonuses have contributed in recent years, but most of the
increase has been in special types of public assistance for
such groups as the blind, the aged, the disabled, and dependent children. It may be noted that while these payments are made by State and local governments, they are
financed in part by Federal grants-in-aid.

Growth of social insurance contributions
For the personal sector of the economy as a whole, the
growth of transfer payments has been partly offset by
the concomitant expansion of social insurance contributions. Confined in 1929 to a few public employee retirement systems and veterans' life insurance funds, but
since extended by the establishment and development of

Per Capita real personal income in 1950 was
50 percent above 1929...

Personal income differs from national income by the
exclusion of those portions of income earned in current
production which are not paid out to persons, and by the
inclusion of certain items not arising in current production—chiefly transfer payments and government interest.
In 1929, personal income totalled $85 billion; by 1950,
it had mounted to $225 billion. On a per capita basis, the
increase was from $700 to $1480, or more than 100 percent.
Along with this advance in the total, there were- significant shifts in its composition. Most of these—the increased relative importance of payrolls and the reduced
proportions of interest, rental income, dividends, and farm
proprietors' earnings—have already been noted in the discussion of distributive shares.

Transfer payments increase in importance
In addition, there have been important changes, stemming from the expanded role of government in the economy, in other elements of personal income. Foremost
among these developments is the growth of transfer payments. From $114 billion, or less than 2 percent of personal income, in 1929, they rose to $15 billion, or nearly
7 percent, in 1950. They were inflated in the latter year
by an extraordinary volume of special insurance dividend
payments to veterans, but represented 5Vo percent of the
total even apart from this unusual factor.
Most of the rise was in the Federal Government component, which in 1929 consisted chiefly of military pensions and related items. By 1950, as a result of World War
II, these payments were greatly enlarged, both absolutely
and in relation to personal income, and new classes of
veterans' benefits under the Servicemen's Readjustment
Act were flowing in large volume. Moreover, payments
from Federal social insurance funds, which in 1929 had
been confined to civilian retirement and veterans' life
insurance benefits, last year included not only increased
amounts under these headings, but also close to $3 billion
of old-age and survivors', railroad retirement, and unemployment insurance benefits, as well as $2% billion of the
special National Service Life Insurance dividends mentioned above.
State and local government transfer payments, although overshadowed by those of the Federal Government, have also risen markedly since 1929. State veterans'



1929

1950 in 1929 prices

but because of higher taxes in 1950, per capita
real disposable income was 41 percent above
1929

$957

$677

1929

1950 in 1929 prices

1951 NATIONAL INCOME SUPPLEMENT

10

the various Social Security programs, these now take an
appreciable portion of current personal earnings. To date,
contributions for social insurance have consistently exceeded benefit payments from the funds—in most years
by a sizable margin. On balance, however, the combined
effect of social insurance transactions and transfer payments from general government funds has been a material net addition to currently earned personal income.

Government interest increases with debt
Also of consequence in the expansion of personal income since 1929 has been the sharp increase of government interest payments associated with the tremendous
growth, mainly during World War II, of the public debt.
Owing to the inclusion of government interest, which is
treated in the national income accounts as a transfer
item, personal interest income declined much less in relative importance from 1929 to 1950 than did the net interest component of the national income.

Real income up substantially
Each of the elements of personal income is measured
without reference to the impact of direct personal taxes.
Much of the increase in the total over the past two decades, however, has been absorbed by such taxes. Personal tax and nontax payments amounted to about $21/2

PERSONAL INCOME Increased from
$85 Billion in 1929 to $225 Billion in 1950

After deduction of these taxes, there remained disposable personal income of $204 billion last year, as compared with $821/2 billion in 1929. Corresponding figures
on a per capita basis were approximately $1350 and $680,
respectively. With consumer prices averaging 41 percent
higher in 1950 than in 1929, the increase in real disposable income per capita was thus about 40 percent.
A slightly lower proportion of disposable income was
spent for current consumption last year, when just over
5 percent went into personal saving, than in 1929, when
414 percent was saved. However, significance cannot be
attached to a difference of this magnitude, since the saving
estimates—computed as residuals—are particularly sensitive to minor statistical imperfections in the measurement
of personal income and consumption expenditures.
FLUCTUATIONS IN ECONOMIC ACTIVITY
The substantial growth of the economy, as revealed by
the foregoing summary comparison of national income
and product data for 1929 and 1950, was extremely irregular. Likewise, the associated changes in the economic
structure did not occur in smooth progression, but
emerged from a series of fluctuations of unprecedented
magnitude, including the great depression and the vast
expansion of World War II. In order to illuminate the
processes by which the economic scene has been transformed, it is desirable to trace in a general way the
course of economic development during the period under
review.

Gross National Product Patterns
In 1929 three percent
went for Taxes and 4.5
percent of what was
left was S a v e d . . .

but in 1950 nine percent
went for Taxes and
5.2 percent of what was
left went into Savings.

-100

billion, or 3 percent of personal income, in 1929..In 1950
they were nearly 8 times as large, totalling $201/2 billion
and absorbing more than 9 percent of personal Income.
The relative increase was entirely in the Federal Government component, and resulted almost wholly from the
broadened base and sharply higher rates of the individual
income tax. State and local personal taxes, although
doubling from 1929 to 1950, declined slightly as a percentage of personal income.



Before this summary is given, some of the major factors in the fluctuations of economic activity since 1929
will be highlighted with the aid of two interrelated percentage distributions of the gross national product—one
by type of expenditure and one by type of receipt—
which are presented in tabular form on page 17.
The distribution by type of expenditure indicates the
proportions of total output bought by each major sector
of the economy—by persons, by business (for fixed investment and inventory accumulation), by the rest of
the world (net), and by Federal, State, and local governments.
The percentage breakdown of gross national product
by type of receipt reflects broadly the corresponding distribution of currently-generated purchasing power, exclusive of borrowing transactions. It shows the proportions of the gross income flow received by consumers as
disposable personal income; by the business sector in the
form of gross retained earnings, including capital consumption allowances; and by all levels of government in
the form of tax and nontax receipts net of amounts transferred (such as interest and transfer payments) to other
sectors.
Each of these breakdowns of gross national product is
of interest in itself, but they provide particularly valuable insight into the functioning of the economy when
studied in combination, with the respective expenditure
and receipt shares of each major sector paired. Such an
arrangement of the data is shown in the chart on the opposite page.
In each panel of the chart are plotted the percentage
receipt and expenditure shares of one of the major sectors, the rest of the world sector being included with the
business sector for this purpose. The shaded areas between the lines measure, respectively, the government

SURVEY OF CURRENT BUSINESS
surplus or deficit; personal saying or dissaving; and the
excess or shortfall of gross investment in relation to
gross business saving—each expressed as a percentage
of gross national product. It will be noted that the three
expenditure percentages, represented by the solid lines,
add to 100 in every year, as do the three receipt percentages, except for the statistical discrepancy between
the estimates of national income and national product.
THE PERCENTAGE DISTRIBUTION OF
GROSS NATIONAL PRODUCT among
major economic sectors has fluctuated
widely over the period since 1929

Government Sector
Percent

50

40 -

MA

Jilt

30 GOVERNMENT PURCHASES
OF GOODS AND SERVICES

20

^ ^ ^ ^ M
tmSf^^^M

SURPLUS
1

10
N i NET GOVERNMENT
RECEIPTS

1 1 1 , 1 ,

0

1

1

1

1

1

I

1

1

1

1

1 1

1

1 (

90

80 -^*&£r
Wr

PERSONAL
DISSAVING

^^«^-..T-^

-

DISPOSABLE PERSONAL

^s^v:^>---

INCOME

70
Y^:;

SAVING •:_.'/

-

60

50

_

PERSONAL CONSUMPTION
EXPENDITURES

^S

-

40

-

30

GROSS
INVESTMENT

20
few

GROSS BUSINESS

EXCESS OF
INVESTMENT

-

y f S \

10
^
0

i

i

1929 31

/ Sjf
V y ^
iTi
i

w

33

i

35




i

•
37

EXCESS OF
\ ^
SAVING
- ^ \
i i i i i
r•

•
39

41

43

fl

I I 1 l
45

47

49

Strategic role of investment
The bottom panel strikingly displays the strategic role
of investment expenditures in the business cycle. Clearly
depicted are their disproportionate collapse in the great
depression and their gradual rise in relative importance,
briefly reversed in the 1938 recession, during recovery.
Also illustrated is the severe cut in private capital formation required during World War II and its resurgence
afterwards. In connection with the wartime figures, however, it should be remembered that sizable installations
of plant and equipment undertaken directly by the Government are reflected in the top panel rather than as business investment.
The uniformity of the proportions of output going into
investment in prosperous peacetime years is noteworthy,
as is the contrast between these proportions, all in the
neighborhood of 16 percent, and the limitation of investment to 2 or 3 percent of the gross national product at
the bottom of the depression.
Gross business saving, while also showing a disproportionate swing in the major business cycle, has been a
great deal steadier than investment, reflecting the relative stability of depreciation allowances. In the expanding United States economy, gross business saving has
usually fallen short of gross investment. Apart from the
war period, this has been true in all years except those
of the great depression and 1938. The financing of the
excess of investment has required funds made available
by the other sectors, including those left on deposit with
banks, as well as those provided through purchase of
stocks or bonds.

Cyclical stability of consumer spending

Private Sectors
JSffm/^

11

1 ,

The percentage of output bought by consumers—
charted in the middle panel—has exhibited a contracyclical tendency, as attested by its rise from 1929 to
1932, in 1938, and in 1949. It should be remembered, of
course, that these were rising proportions of a diminishing total output. Except in the mild recession of 1949,
they represented declining physical volumes and dollar
values of consumption expenditures in absolute terms.
Conversely, falling percentages are observable in most
years of peacetime expansion in economic activity. These,
however, have been associated with increases in the absolute volume and value of consumer spending.
Another outstanding feature of the middle panel is the
broad picture it gives of the wartime characteristics of
consumer finances. Disposable income was reduced by
heavy taxation, but consumption expenditures were cut
far more by the diversion of productive resources to war
use, in combination with price controls and exhortations
to save. The resultant extraordinary volume of personal
saving is clearly illustrated.

War generates large Government deficit
The counterpart to these wartime personal savings, as
well as to the concurrent excess of gross business saving
over investment, appears in the upper panel of the chart,
where the huge wartime Government deficit stands out.
Although government purchases reached a peak of about
45 percent of total output, government at no time claimed
a commensurate proportion of currently-generated purchasing power. Net government receipts averaged 22 percent of gross national product at their relative maximum
in 1943 and 1944.

12

1951 NATIONAL INCOME SUPPLEMENT

The difference between the share of output bought by
the Government and its share of receipts was financed
by borrowing on an unprecedented scale. The inflationary
impact of this deficit financing was restrained to a considerable extent during the war period itself, despite
scarcities of civilian goods and services, by such factors
as price control, rationing, and the willingness of the
public not only to buy Government bonds, but also to
accumulate other liquid assets. After the cessation of
hostilities, however, the postponed effects of wartime
deficit financing contributed to the postwar inflation.
It should be noted, especially in connection with the
postwar figures, that the relative rise in total tax and
nontax receipts of Federal, State, and local governments
has been greater than that of the net receipts item plotted
in the chart. There has been a material increase in the
divergence between these two measures because of proportionate expansion of the volume of gross receipts required to finance veterans' benefits, interest on the public
debt, and other transfers deducted in deriving the net
figures.

Basic expansion in role of government
A final feature of the three panels in combination is
the shift from private to public consumption, which has
already been noted in the foregoing discussion of long-run
changes in the use of current-dollar gross national product.
The shift is evidenced by comparison of the two upper
panels, which show a distinct, although irregular, uptrend
in the government share, whether in terms of purchases
or of net receipts, together with a generally offsetting longterm decline in the personal share. The latter movement
is reflected in disposable income, as well as in consumption
expenditures, and does not appear to reveal any marked
secular—as distinguished from cyclical and wartime—
changes in the relative proportions of consumer spending
and saving. Primarily, of course, the rising percentage
share of government reflects the increasing responsibilities
—especially with respect to national defense—assumed by
the Federal Government.
Neither in gross investment nor in gross business saving has there been any noticeable long-term change in
relative importance, despite extreme cyclical and wartime variations.
Chronological Review: 1929—50
The year 1929 marked the end of an era of relatively
full employment, business confidence, and general prosperity. Economic activity had been advancing strongly,
with only minor interruptions, for eight years.

Business decline: 1929—33
The 1929 downturn, the ultimate causes of which are
still a matter of controversy, was most clearly reflected in
the collapse of investment demand. Gross private domestic
investment dropped about one-third from 1929 to 1930,
as new construction and producers' purchases of durable
equipment were cut sharply and the accumulation of
nonfarm business inventories ceased. Foreign purchases
also declined in 1930, although the drop was not reflected
in net foreign investment because of a matching reduction in import demand.
With employment and incomes adversely affected by the
sharp reduction of investment, consumer purchases also
decreased, contributing to the general contraction and
inducing still further cuts in outlays for investment.



Consumer purchases, however, held up much better in
1930 than investment demand. The aggregate income
flow to individuals shrank less than production and the
incomes generated by it, as undistributed corporate profits
absorbed a disproportionate share of the over-all decrease
in earned income. Also, consumers tended to spend a higher
proportion of current income or to dissave in the attempt to
preserve previous living standards.
Essentially the same pattern of cumulative decline persisted, and in fact accelerated, during 1931 and 1932. By
the latter year, gross private domestic investment had
fallen to the very low level of less than $1 billion, as contrasted with $16 billion in 1929. The further moderate
decline of the gross national product in 1933 was in consumer purchases, where it reflected primarily lower average prices rather than a further decrease in volume.
National product halved in value
Over the entire period of contraction from 1929 to 1933,
the gross national product dropped by nearly one-half,
from $104 billion to $56 billion. At the bottom of the depression less than 3 percent of the Nation's output went
into business investment, as compared with 15 percent in
1929. Conversely, consumer purchases rose from threefourths of the total in 1929 to five-sixths in 1933. Government purchases, although little changed in absolute dollar
volume, were considerably increased in relative importance by the collapse of private demand.
Roughly one-half of the 1929-33 decline in the market
value of the national product stemmed from lower prices.
As measured by the gross national product in constant
(1939) dollars, real output fell by about one-fourth.
Foremost among the factors underlying the shrinkage
of real output was the reduction of employment. At the
depth of the depression, the number of persons engaged
in production was almost one-fifth lower than in 1929,
and unemployment exceeded 12 million—close to onefourth of the Nation's labor force. Moreover, average
hours worked per week by those who remained employed
were considerably reduced.

Recovery: 1933-37
Some of the most serious deflationary forces underlying
the post-1929 collapse were by 1932 beginning to spend
themselves. Installations of new plant and equipment had
virtually ceased in most segments of the economy, and
such gross fixed business investment as did persist represented primarily the fulfillment of minimum replacement
needs. As replacements had been cut to the bone for
several years, the feasibility of further postponing them
was rapidly diminishing by the end of 1932. Business
purchases of durable equipment, accordingly, fell no lower
in 1933. Private construction activity did continue downward, but the drop was smaller than in any of the three
preceding years, and it is noteworthy that the volume
of industrial building turned up after 1932.
Sizable inventory liquidation continued in 1933, but as
it had already carried working stocks close to a minimum
even in relation to the low current volume of sales, the
rate of liquidation was considerably reduced. It had previously been possible for businesses to meet the sagging
volume of sales partly out of relatively excessive existing
inventories, with the consequence that production—and
hence total income—was reduced even more than consolidated business sales. Now, however, this possibility
was vanishing, and it became necessary to keep output at
least on a par with current demand. Here too, then, a
weighty deflationary force was exhausting itself.

SURVEY OF CURRENT BUSINESS
With the marked retardation of income declines stemming directly from reduced investment expenditures,
the fall in consumer demand was measurably slowed in
1933. The stage was thus finally set for recovery. It was
evidenced in a few industries as early as the fall of 1932,
but appears to have dated generally from the spring of
1933. Monthly personal income data show the low point
in March, after which there was a slow and uneven rise
during the remainder of the year.
With its decline arrested in 1933, fixed business investment turned up moderately in 1934, when both construction and equipment putlays began to expand again.
Nonfarm inventory liquidation ceased, and a general
trend toward rebuilding of stocks depleted during the
depression set in. It was stimulated not only.by the
emerging recovery of sales, but by the rise in prices
already under way during 1933.
Government supplements private recovery
In the meantime, the Federal Government had assumed an active role in the economy, and was making
strenuous efforts to promote recovery. Along with the
adoption of other measures, it entered the market directly on an expanding scale, especially in its work relief
activities, and also provided substantial aid to State and
local governments.
With the increase of incomes generated by the pick-up
of business investment and the growth of government
purchases, personal consumption expenditures also rose
in 1934. Their expansion, in turn, fed the income stream
and provided stimulus for a further upsurge of investment. This was at first mainly confined to long-deferred
replacement of capital facilities which had deteriorated
during the depression; but as profits reappeared and
business confidence in future prospects was gradually
restored, an increasing proportion went into wholly new
plant and equipment, and inventories were expanded to
meet the rising volume of sales. Residential building,
spurred in part by Federal aid to homeowners, moved
ahead once more, and total gross private domestic investment advanced steadily from only a little over $1
billion in 1933 to $liy 2 billion in 1937.
Consumer purchases also continued to rise. At $67
billion in 1937, they were 45 percent above the low mark
of 1933. Although their rate of increase was proportionately smaller than that of domestic capital formation, they represented quantitatively the largest element
in the upward spiral of employment, production, and
incomes.
Apart from the newly expanded role of government, the
whole mechanism of the recovery was thus very similar
to that of the downswing, except that it operated in reverse
and also more slowly. Of the $34 billion increase in gross
national product from 1933 to 1937, about 30 percent was
in private domestic investment, raising it from 2% to 12J/2
percent of the total. Consumer outlays accounted for about
60 percent of the change—substantially less than their
share of total output—and government purchases, dropping slightly in relative importance, absorbed the remaining 10 percent of the increment*

13

Domestic investment per capita has shown the
widest swings in the general business
fluctuations since 1929 in real terms . . .
1939 DOLLARS (Ratio

Scale)

2OO

WO

-

I

I

I

I I

I I

I

I

I

I

I I

while real consumption expenditures per capita
have been relatively stable, but expanding substantially since mid-nineteen thirties.
/ : • • • :

••

-

I

I

I

I

I

I

I

I

I

I

I

I

t

I

I

I \ I

Except for the World W a r II years, real
government expenditures per capita
have tended steadily upward.

The recession of 1938
Incomplete as was the recovery of the economy by
1937, it was interrupted by a downturn beginning in
the latter part of that year and extending through mid1938. Although of brief duration, this downturn was



i
1929

31

i
33

I

i
35

I

i
37

I

i i

i i

t i I

39

41

43

45

I

47

49

/

14

1951 NATIONAL INCOME SUPPLEMENT

relatively severe. Within a few months, unemployment
rose sharply. Industrial production fell by nearly onethird from August, 1937 to January, 1938, and personal
income dropped at a pace comparable to that prevailing in 1931-32. The decline tapered off thereafter, however, a ' d production began to pick up again in the second half of 1938. For the year as a whole, the decrease
in gross national product was about 6 percent.
The 1937-38 recession was much steeper in its initial
descent than the previous downswing, but it was of a less
basic character. Of the §51/* billion decline in gross national product from 1937 to 1938, three-fifths was attributable to a shift from accumulation to liquidation
of business inventories. Inventory shifts accounted for
only 14 percent of the drop in output from 1929 to 1930.
Business plant and equipment expenditures contracted
about as sharply in 1938 as in 1930, but residential construction activity, contrastingly, continued to rise, and
consumption expenditures, despite the drop in employment and personal income, declined by only 4 percent,
as compared with 10 percent in 1930. The consuming
public as a whole sustained its spending close to the
1937 rate by a $3 billion cut in personal saving. Moreover, the moderate decline in consumer outlays which
did occur was very largely counterbalanced by increased
government buying and net foreign investment.
Altogether, purchases of goods and services by final
users of the Nation's output declined by less than 3
percent in 1938, as compared with 11 percent in 1930,
and the major portion of the swing in production was
absorbed by the change in inventories. Curtailment of
production ceased as soon as the strength of final demand became apparent. The drop in fixed business investment proved to have been instigated by short-run
considerations, rather than by any fundamental lack of .
investment opportunities. The basic underlying situation, in fact, was that large capital requirements accumulated during the depression still remained to be fulfilled,
and that many new investment opportunities stemming
from technological advances remained to be exploited.

Reneived recovery: 1938-41
Following the jar of the 1938 recession, the recovery
was renewed and continued steadily into 1941, when it
was merged with the first stages of military preparation for World War II.
All forms of business investment were expanding
steadily during this period. Purchases of producers'
durable equipment nearly doubled in dollar volume from
1938 to 1941, and private construction activity also rose
strongly. Inventory liquidation ceased in 1939, when production was brought back in line with current sales, and
inventories were accumulated on a mounting scale in
the next two years.
By 1941, total gross private domestic investment was
not far from three times as large as in 1938. For the
first time, it surpassed the 1929 total, both in value and
in physical volume. Net foreign investment was also sizable in the three years following 1938, being especially
stimulated in 1940 and 1941 by foreign demand for
munitions and other supplies required for the Allied
war effort.
Responding to the increased incomes generated by expanding employment—and contributing, in turn, to the
advance of profits, business investment, employment,
and incomes—"Personal consumption expenditures rose
from $641/7 billion in 1938 to over $82 billion in 1941.



The rise was particularly marked—about two-thirds—
in outlays for durable goods. Higher prices figured in
the advancing rate of consumer spending, but the major
portion represented enlarged quantities of goods and
services. The real volume of personal consumption per
capita increased 17 percent from 1938 to 1941, and exceeded the 1929 figure from 1939 on.
Military requirements become dominant
Government purchases were approximately stable until
the latter part of 1940. After the fall of France, the
national defense program got under way on a rapidly
expanding scale with progressively greater influence upon economic conditions. Throughout 1941 and thereafter
it was the dominant factor in the economy.
In this second stage of recovery from the depression,
the dollar value of the Nation's output advanced by
almost 50 percent, to $126 billion. With a general price
rise in the neighborhood of 8 percent, the increase in
the physical volume of production was close to two-fifths.
The year 1941 was one of marked expansion, and on
the average did not represent full peacetime capacity.
During much of the year, there were idle manpower
resources, as is attested by the fact that the proportion
of the labor force unemployed was slightly higher than
in 1930, the first year of the depression.
Nevertheless, the degree of recovery evidenced by
1941 was impressive. In constant dollars, the gross national product stood one-third higher than in 1929. This
expansion of real output was achieved with an increase
of only 15 percent in the total number of persons engaged in production. Moreover, average hours worked
per week were reduced considerably over the 12 years.
In the private sector, where the increase in output was
30 percent, total man-hours utilized were but little above
those in 1929.
That so large an increase in the volume of output was
nonetheless accomplished was attributable to the rise in
real product per man-hour worked in the private economy. Although lagering in the depression, productivity
had advanced rapidly after 1934, and by 1941 was near
the level indicated by its long-term trend.
The larger output of 1941 was being distributed to
maior economic oronps in a somewhat different fashion
from that of 1929. The most noteworthy change was in
the share bought by government. With substantial military
preparations getting under way, this share—including a
slightly smaller portion for State and local governments—
amounted to roughly one-fifth of the gross national product
as compared with less than one-tenth in 1929. The proportion purchased by consumers, on the other hand, was reduced from 76 to 65 percent, while the percentages going
into gross private domestic and net foreign investment
were little changed.

The ivar economy: 1942-45
Preparations for war beeran at a time when the economy was operating at less than full capacity, with unemployed labor, plant, and equipment, and an abundance
of raw materials. At first, because of the availability
of these unused economic resources, war production
could be superimposed upon the civilian economy. It
acted as a stimulant, and civilian production increased
concurrently. Gross private domestic investment proceeded at a high rate, and consumer purchases—especiallv of durable goods—were buoyant.
During most of 1941, the needs of the war program
were thus compatible with expanding civilian produc-

SURVEY OF CURRENT BUSINESS

15

GROWTH in the volume of national output has been about
three percent per year
Billion Dollars (Ratio Scale)
20
0
^ = 5 S —

GROSS NATIONAL PRODUCT
JN 1939 DOLLARS

100
90
80
70

60

50

40

I

I

1910

I

I

I

I

I

1915

I.I

I

I

I

1920

I

I

I

I

1 I

I

1925

tion. Moreover, much of the capital equipment acquired
during this period later proved to be readily convertible
to war production. Also, the additions to the stock of
capital, along with additions to the stock of durable
consumer goods, subsequently permitted the diversion
of more productive resources from civilian use than
would otherwise have been possible except with sharper
cuts in living standards.
Emergence of ivar-time problems
As the dimensions of the war effort expanded, however, serious problems emerged. Although the rising volume of war production generated a rapid expansion of
incomes, it provided no goods and services to satisfy
the resultant growth of civilian demand. Instead, it impinged upon their availability as soon as the slack in
the economy had been taken up. Shortages of specific
labor skills, capital facilities, and raw materials began
to be more and more frequently encountered. After Pearl
Harbor, it became obvious that the war program would
take proportions of output so huge that they could not
be provided by enlarged production alone, and that civilian demand would have to be restricted.
During the period of transition to a full war economy, accordingly, a succession of measures was adopted
with a view to ensuring maximum war production to


I

1930

I

I

1935

I

I

I

I

I

1940

I

I

I

I

1945

I

I

I

I

I

1950

gether with the optimum functioning of the civilian
economy. Rates of taxation were steeply increased, not
only to help finance Government war expenditures, but
also to restrict the amount of civilian purchasing power
available to bid for the limited volume of goods and services remaining after military requirements had been met.
Fiscal measures were supplemented by the imposition
of direct controls, including priorities, inventory limitation orders, allocations, manpower regulations, price and
wage controls, and rationing. In addition, individuals
were urged to restrict consumption voluntarily and to
invest their surplus purchasing power in Government
bonds.
On the whole, the flexibility of the economy in the
transition to full-scale war production proved great and
total production continued to rise rapidly despite conversion.
War peak reached in 1944
In 1944, the peak year of war production, the dollar
value of the Nation's outuut was $214 billion—§87 billion higher than in 1941. Because of the extreme changes
in the nature and composition of output, it is difficult
to measure how much of this dollar increase reflected
physical volume. According to the constant-dollar gross
national product series, the expansion of real output

16

1951 NATIONAL INCOME SUPPLEMENT

from 1941 to 1944 was more* than one-third. Whatever
the precise figure, it is clear that there was a large rise
in physical production during World War II. The major
underlying factors were an extraordinary expansion of
the labor force and employment, an increased stock of
capital equipment, large-scale operations and technological progress in war production, and a better utilization of labor and productive capacity in many civilian
industries.
The increase in physical output was by far the most
important source of war output. Next in importance
were reductions in gross fixed investment, consumer durables, and government nonwar purchases. According to
available evidence, real consumption of nondurable goods
and of services was more than maintained in total.
While the wartime level of personal consumption is
somewhat exaggerated in the constant dollar figures because of the impossibility of measuring fully the actual
price rise which occurred during the war, it is evident
that, in the aggregate, real consumption was not curtailed.
Although personal consumption held up during the
war, it was much lower in relation to income than it
would have been in ordinary peacetime years of high
economic activity. An unprecedented proportion of wartime incomes was absorbed by taxes, and the saving
rate was abnormally high. The latter reflected a combination of restricted civilian supplies regulated by price
control and rationing and the response to patriotic appeals for investment in war bonds.
War changes distribution of output
As a result of these wartime changes, the composition
of gross national product in 1944 differed drastically
from that in 1941. Government purchases amounted to
45 percent of the total in 1944. The comparable figure
for 1941 was only 20 percent, including twice as large
a proportion for civilian programs of Federal, State,
and local governments.
AH other major uses of output were reduced far below
their usual relative importance, with the sharpest cuts
being those in domestic and net foreign investment and
in consumer durables. Private fixed capital formation
fell to about 4 percent of the national product as compared with IIV2 percent in 1941; and requirements were
also met in part through a net drain upon both business
inventories and foreign sources of supply. The proportion representing consumer outlays for durable goods
was more than halved as compared with that of 1941,
and the relative share of personal consumption expenditures for nondurables and services also decreased—
though by a much smaller margin.
Reconversion and postwar boom: 1945^8
At the end of World War II, the Nation faced a set
of economic problems which in some ways were the
counterpart to those of the original mobilization. It was
widely recognized that the transition from a situation
in which roughly two-fifths of economic resources were
being employed in war production to one in which most
of the resources would again be devoted to civilian output could only be accomplished in an orderly fashion
by widespread cooperation among all major groups in
the economy. As in the mobilization itself, the striking
flexibility of the economy was demonstrated.
A broad Government program designed to speed reconversion, and to ease its impact upon the returning
soldier and upon business, was enacted. With the quick



resurgence of business, personal, and foreign demands,
as well as the vast Government programs undertaken
to aid in the rehabilitation of war devastated areas, the
immediate postwar economic decline was held to moderate proportions.
Although war purchases of the Federal Government
were cut back with great speed—from an annual rate
of $90 billion in the second quarter of 1945 to $28 billion
in the first quarter of 1946—much of the slack was
quickly taken up by «the rapid expansion of private
spending. Total gross national product dropped 11 percent over these three quarters, or by $25 billion at annual
rates; thus more than half of the drop in war expenditures was offset. Discharged servicemen and war plant
workers were speedily absorbed in civilian pursuits, and
at no time did unemployment rise appreciably above 2V2
million.
After the first quarter of 1946, the buoyancy of private demand more than offset the moderate further declines in government purchases. Strong inflationary pressures characterized the 1945-46 reconversion, even before
controls were eliminated, and continued to dominate the
economic scene for the next two years.
Influence of liquid saving and backlog demands
Several key factors underlay the strength of private
demand. During the war, both consumers and businesses
had accumulated an enormous volume of savings—much
of it in liquid form. At the same time, they had built
up a backlog of urgent demands for all types of civilian
goods, and especially for durables.
As regards the purchasing power of consumers, it may
be further noted that in the brief contraction from mid1945 to early 1946 the flow of disposable personal income
was maintained. Undistributed corporate earnings absorbed a large share of the swing in total income arising
from production, and the Government disbursed mustering-out payments and other veterans' benefits in large
volume and lowered the wartime tax rates. Not only did
the pent-up demand for durable consumer goods materialize as expected, but an insistent consumer demand for
nondurables and services also became an active and powerful force in the economy.
Business speeds investment
At the same time, business plant and equipment investment programs were pushed ahead fast in the immediate reconversion period and continued to expand
strongly thereafter. Inventories, very low at the close of
the war, had to be accumulated rapidly to bring working
stocks into line with the heavy volume of business. The
pace of residential building activity also accelerated
steadily.
Moreover, net foreign investment assumed a relative
importance far beyond its usual role. With financial support provided both by wartime accumulations of gold
and dollar balances and by a large volume of United States
Government loans, and under the stimulus of world-wide
shortages stemming from the impairment of productive
facilities abroad, net foreign purchases of American output reached unprecedented proportions.
In combination, these heavy demands placed a severe
strain upon the productive capacity of the economy,
which was reduced considerably below the wartime peak.
Despite low unemployment, the number of persons engaged in production was 7 million, or 11 percent, lower
in 1946 than in 1944. This was due to the withdrawal
from the labor force of sizable classes of individuals—

SURVEY OF CURRENT BUSINESS

17

Percentage Distributions of Gross National Product, 1929-50
1929 1930 1931 1932 1933 193-1 193." 1930

1943

1910 1917 1948;

100.0
52.0
2.9
-1.2
45.0
41.8
3.8

100.0 100.0 100.0 100.0 100.0 100.0 100.0
71.0 08.7 70.0 08.5
3.0
12.9 10.5 12.8 17.3
-1.0
3.8
.2 - . 8
.7
45.2 38.;'
12.3 14.1 10.9 15.0
41.7 34.8 9.9 0.
8.1 9.9 8.1
4.7 5.5 6.0 7.0 7.0
3.5 3.

1938 1939 1940 1941

By type of expenditure
Total

100.0 100.0 100.0
75.9 77.9 80.5
15.2 11.2 7.1
.7
.3
.8
8.2 10.1 12.1
1.3 1.6 2.0
6.9 8.5 10.1

Personal consumption expenditures
_
_
Gross private domestic investment
Net foreign investment
Government purchases of go6ds and servicesFederal
_
_
_
State and local
_
_

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
84.3 83.1 80.0 77.9 75.8 74.4 70.2 73.9
1.5 2.3 4.3 8.5 10.1 12.7 7.5 10.9
.3
.3
.7 - . 1 — 1 .1 1.3
1.0
13.8 14.3 15.0 13.7 14^2 12.8 15.1 14.3
2.5 3.6 4.6 4.1 5.8 5.0 0.2 5.T,
11.3 10. 10.4 9.6 8.4 7.8 8.8 8.7

100.0 100.0 100.0
71.0 05.1 50.4
13.8 14.5 0.7
.9
1.5
13.7 11). 5 37 !o
6. 1 13.4
7.7 G.2 4.8

By type of receipt
Total

100.0 100.0 100.0 100.0 100.0
79. 81.1 82.9 82.0 81.0
11.4 9.9 7.0 4.6 4.8
-.1 -.8
1.6 2.5 2.2
9.2 9.8 8.5 10.9 12.0
2.4 1.9 - . 7
1.3
6.8 7.9 9.2
10.7

Disposable personal income
Gross business saving 1
Statistical discrepancy
Net government receipts
Federal 2
State and local 3

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
79.0 80.3 80.1 78.8 77.3 76.8 74.7 72.
7.7 9.1 8.1 8.8 9.5 i). 4 10.5 9.2
1.0 - 1 . 2 - . 1
1.3 - . 5
1.5 1.0 1.3
11.4 11.1 10.8 13.0 13.3 12.3 13.2 lfl.8
.2
1.0 4.9 3.9 3.2 4.7 9.5
9.2 8.7 9.4 9.1
11.2!
7.3

1
Consists of undistributed corporate profits and corporate inventory valuation adjustment, capital consumption allowances, and excess of w^age accruals over disbursements.
2 Hnnciote nf nnrcntinl t n v r m r l nnntnv r<ir>ointc

PrtrnnMtn TirrkfHe tuv on/>rn>i1e

inAimnt

Vitiei,

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
72.3 68.1 G8.8 70.2 75.3 72.7 72.7 72.4 72.3
8.0 8.4 8.2 7.3 7.1 9.0 11.2 12.0 10.5
.5 1.9 2.3
1.4
.1 - 1 . 2 - . 3 - . G
.8
17.7 23.0 21.1 20.2 10.8 18.2 17.3 15.9 17.9
11.8 17.0 10.4 15.3 11.2 12.3 11.4 9.2 11.2
5.9 5.1 4.7 4.9 5.0 5.9 5.9 0.7 G.G

3
Consists of personal tax and nontax receipts, corporate profits tax accruals, indirect busi •
ness tax and nontax accruals, contributions for social insurance, current surplus of government
enterprises, and Federal grants in aid, less transfer payments and net interest paid.

Percentage Distribution of Private National Income by Distributive Shares, 1929-30
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1039 1940 1941 1942 1943 1944 1945 1910 1947 1948 1949 1950
Total private national income x_

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.C 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
55.5 59.1 63.7 70.3 70.0 65.6 60.7 61.0 60.0 61.5 61.4 59.3 57.6 56.7 57.5 58.1 58.9 59.9 00.8 59.1 GO.G 60.3
55.0 58.5 62.9 69.3 69.1 64.8 59.9 59.8 58.4 58.8 58.G 50.7 55.2 54.5 55.3 55.8 50.5 57.5 58.2 50.7 58.0 57.4
.8
.7
.7 1.2 2.2 2.8 2.7 2.6 2.4 2.2 2.2 2.3 2.4 2.4 2.6 2.4 2.6 2.9
.9
.6
1.0

Compensation of employees
Wages and salaries
Supplements to wages and salariesIncome of unincorporated enterprises
Business and professionala
Farm
Rental income of persons

16.9 15.7 15.4 13.5 15.2 15.6 19.7 17.6 18.0 18.3 17.6
17.7 19.1 18.8 19.4 21.5 22.4 19. G 19.5 17.4 1G.7
10.0 10.1 10.0 8.8 8.5 10.1 10.0 10.7 10.1 10.8 10.6 10.6 10.2 10.4 10.5 11.5 12.9 13.1 11.0 10.8 10.7 10.3
G.9 5.G 5.4 4.7 6.7 5.5 9.7 6.8 8.5 7.
7.0 6.8 7.4 8.7 8.3 7.9 8.G 9.4 8.7 8.7 0.7 6.4
6.8

6.9

Corporate profits and inventory valuation adjustment
- 12.5 9.4 3.1
11.9 4.7 - 1 . 5
Corporate profits before tax
.9
Corporate profits tax liability.- 1.7 1.2
10.2 3.5 - 2 . 4
Corporate profits after tax
7.1 7.9 7.7
Dividends
3.2 - 4 . 4 -10.1
Undistributed profits
Inventory valuation adjustment
.6 4.7 4.5

-5.5
-8.3
1.0
-9.4
7.0
-16.4
2.9

8.0

Net interest
1

7.1

6.9

5.9

5.0

4.G

4.7

- 5 . 8 2.6 6.0 8.7
.5 4.1 G.4 10.0
1.5 1.8 1.9 2.5
- 1 . 1 2.3 4.5 7.6
6.0 6.1 5.7 8.1
- 7 . 1 - 3 . 8 -1.2 - . 5
-6.3 -1.5 - . 5 -1.3

8.9 11.1 14.9 14.6 11.2

9.1

7.9

4.8

5.6

5.4

5.0

9.4 7.3 9.0 12.6
9.4 5.7 10.1 12.9
2.3 1.8 2.3 4.0
7.1 3.9 7.8 8.9
7.1 5.4 5.9 5.G
.0 - 1 . 5 1.9 3.3
.0
1.6 - 1 . 1 - . 2
6.G

7.3

6.6

5.7

15.7 16.5 17.0
18.5 17.5 17.0
8.4 9.7 10.1
10.1 7.8 7.5
4.8 3.G 3.2
5.3 4.3 4.3
—2.8 - 1 . 0 — .5
4.4

4.3

4.3

4.G

3.2

2.4

3.7

1G.1 13.2 11.6 13.7
10.3 13.0 14.9 1G.9
9.0 7.7 G.I 6.6
7.2 5.9 8.8 10.3
3.1 3.2 3.7 3.6
4.1 2.0 5.1 6.7
- . 4 - 3 . 3 -3.2
2.1

2.1

1.9

2.0

15.0
10. G
0.4
10.2
3.G
6.0
-1.0
2.1

3.9

3.7

15. G

16.8

2.5

2.5

14.5 19.2
5.6 8.6
8.9 10. G
3.9 4.3
5.0 6.3
1.1 - 2 . 4

includes noncorporate inventory valuation adjustment.

National income excluding compensation of government and government enterprise employees.

Percentage Distribution of National Income by Sector of Origin, 1929-50
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 194G 1947 1948 1949 1950

\

National income

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

-

Government and government enterprises.

7.1 9.3 12.4 13.5 13.0 11.9 12 G 10.G 12.7 11.8 10.8 10.1 12.0 1G.1 18.6 20.5 12.6 9.3 8.8 10.1 9.8
8.0 7.9 7.4 8.9 7.3 11.0 8.2 9.9 8.9 8.4 8.1 8.6 9.4 8.0 8.1> 8.G 10.1 9.8 9.8 7.9 7.4
.3
.2
<
.6
.5
.5
.2
.3
.3
.4
.6
.5
.4
.6
.4
.6
.4
.8
.9
.9
1.0
84.0 83.9 81.9 79.3 76.8 79.1 76.5 78.7 79.1 77.8 79/4 80.7 81.0 78.3 75.1 73.1 70.7 77.0 80.4 81.0 81.G 82.3
5.9
9.2
.9

Private nonagricultural industries

Percentage Distribution of Private Nonagricultural Income by Industrial Division, 1929-5C
Private nonagricultural industries
Mining
Contract construction

___~

Wholesale and retail trade
Finance, insurance, and real estate
Communications and public utilities
Services




100.0 100.0 100.0 100.0 100.0 100.0 100.0
2.9 2.6 2.1 2.1 2.2 3.0 2.9
5.0 4.9 4.4 3.1 2.4 2.7 2.9
29.9 29.0 25.7 21.7 24.8 28.4 30.0
17.8 19.0 19.9 19.0 17.7 20.5 20.7
17.8 17.0 17.6 19.5 18.7 15.2 14.4
8.9 8.8 8.9 9.5 9.7 8.6 8.3
3.9 4.4 5.4 6.9 G.G 5.7 5.2
13.8 14.3 16.0 18.2 17.9 15.9 15.0

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ioo.o 100.0 100.0 100.0
3.0
3.8
31.7
20.2
14.0
8.2
4.8
14.3

3.3
3.5
33.0
20.4
13.6
7.8
4.6
13.8

2.8 2.8 2.9 2.8
3.7 3.9 4.0 5.2
28.0 31.1 34.0 39.0
22.2 21.0 20.9 18.9
15.3 14.3 12.9 11.3
7.5 7.9 7.5 7.4
5.2 5.0 4.0 3.9
14.7 14.0 13.2 11.5

2.4 2.2 2.2 2.2 2.2 2.7 3.0 2.6 2.6
6.2 4.3 3.3 3.5 4.8 5.3 5.8 6.0 6.2
40.1 35.2 37.1 37.0 35.6 37.5
42.1 45.5
44.9
17.7 17.5 18.7 21.6 24.5 23.3 23.2 23.5 21.9
10.2 9.6 9.7 10.3 10.6 9.8 9.8 10.4 10.3
7.9 8.4 8.3 8.1 7.3 7.2 7.0 .6.7 G.7
3.4 3.1 3.0 3.3
3.2 3.3 3.7 3.7
11.2
10.9
10.1 9.4 9.9 10.9 3.5
11.5
11.9 11.4

18

1951 NATIONAL INCOME SUPPLEMENT

such as adolescents, housewives, and persons past the
normal retirement age—who are not ordinarily employed,
but who had been induced by special wartime circumstances to accept employment. In addition, average hours
worked per week fell off as overtime schedules were abandoned, and there appears to have been some loss during
the reconversion period in real output per man-hour
worked in private industries.
Rapid price rise until 1948
With the physical volume of production thus pressing
against capacity, much, if not most, of the pressure exerted by intensive consumer, business, and foreign buying
was reflected in price movements. Prices were already
advancing, though often in covert fashion, in the early
reconversion period. After the termination of wartime
controls in the latter half of 1946, they spurted up very
sharply, and except for a brief interlude of hesitation in
the spring of 1947, serious inflationary tendencies accompanied the postwar boom until 1948.
In that year a better balance between supply and demand emerged, and the price rise tapered off. This was
brought about partly through an appreciable expansion
of real output and partly through a diminution in the
intensity of some of the demands, including those from
abroad, from which the greatest pressures had emanated.
There was a break in agricultural prices early in 1948.
Although these recovered briefly, their downward slide,
influenced by the prospect of excellent domestic harvests
and an improved crop situation abroad, was resumed after
midyear. Agricultural prices are a substantial element in
the total price picture, and their decline was an important factor shaping the course of economic developments
during 1948.
More notable, however, was the increasing stability in
consumer markets. The upsurge in personal consumption
expenditures, stimulated by backlog demands and reinforced by large holdings of liquid assets and a low volume
of consumer debt outstanding, had constituted one of the
main foundations of the boom. As the more urgent backlog demands were satisfied, and as the abnormally high
spending rate of 1947 made inroads into the liquid asset
and debt positions of many consumers, the rising trend
of consumption flattened out in 1948.
Closely allied with this tapering-off was the appearance
of substantial inventory accumulations, prevented in 1947
largely by the intensity of consumer demand. These related developments, more than any others, slowed the
price rise and brought the inflationary spiral to an end
during 1948. Late that year, there came a general downturn in prices, and the postwar economy entered a new
phase.

Business readjustment

and recovery: 1949—50

Businessmen adopted more cautious buying policies
toward the end of 1948, and the large inventory accumulations of that year disappeared in the first quarter of
1949. Substantial inventory liquidation emerged in the
next quarter, and the drain upon stocks persisted, though
it did not deepen, during the remainder of the year. The
shift in the inventory position was reflected in a curtailment of production, mainly in the manufacturing industries, where the bulk of all inventories held in the economy is produced.
By contrast, total final purchases—that is, elements of
the gross national product other than the change in inventories—held up extremely well during 1949. Consumer



spending in the first quarter dropped but slightly below
its dollar volume at the crest of the postwar boom, then
climbed slowly upward again during the remainder of
the year. Residential building activity decreased from a
peak in the third quarter of 1948 but picked up again
in the spring and advanced strongly thereafter. And government purchases, chiefly because of the expanding Federal foreign aid and farm price support programs, more
than offset the moderate declines which occurred in business outlays for plant and equipment. For the year as a
whole, total final purchases actually exceeded those of
1948.
That the curtailment of employment and payrolls in
the manufacturing sector had no greater impact upon
consumption expenditures in 1949 was attributable in part
to the payment, of sizable unemployment compensation
benefits, and also in some degree to the cushioning effects
upon disposable personal income of lower Federal income
taxes as a result of the previous year's Revenue Act. It
may also be noted that diyidends were sustained on a
better-than-even keel, notwithstanding the sharp fall in
profits. Perhaps more important than any of these factors,
however, was the apparent willingness of the consuming
public as a whole to spend markedly increasing proportions of current income to maintain living standards during the recession.
It became apparent in the second half of 1949 that the
curtailment of output had been excessive in relation to
the existing stable volume of business sales. Accordingly,
production was stepped back up, and the accumulation of
inventories was resumed. Meanwhile, the recovery of residential construction had grown into a sustained building
boom, and consumer demand, already strong, was being
bolstered by large Government payments to veterans.
These factors, moreover, were being reinforced by a renewed upturn in fixed business investment.
This widening resurgence of production generated increases in employment and incomes, adding further impetus to consumer purchasing. Before mid-1950, a business upswing of substantial dimensions was under way
and was carrying the economy close to full-capacity operation.
Impact of rearmament program
It was upon this expansionary situation that the economic forces unleashed by the Korean invasion were superimposed. With the decision to undertake large-scale
rearmament, it became clear that the next phase of economic development would be one in which aggregate demand for the Nation's output would exceed available
supplies. The Nation, therefore, was confronted with the
major tasks of achieving maximum output, diverting an
adequate proportion of it to military use, and restraining
the attendant forces of inflation.
By the end of 1950, then, the economy—having recently
demonstrated its flexibility in the war and postwar periods—was being subjected to still another severe test.
Output rose quickly to record heights. With inflationary
pressures again a national problem, the reimposition of
both direct and indirect controls became necessary. Personal consumption and business investment were expanding, with the Government gradually drawing an increasing share of national output to reestablish its military
strength in line with the necessities of the international
situation. Thus, at mid-century the economy was giving
another impressive demonstration of its vast technical
resources, its flexible adaptability to shifting demands
made upon it, and its unparalleled capacity for expansion.

PART II

The Conceptual Framework of National
Income Statistics
NATURE AND SIGNIFICANCE OF NATIONAL
INCOME STATISTICS

Purpose of national income statistics
In the past two decades, particularly the latter, national
income statistics have undergone a basic transformation.
This is manifest in the considerably broadened scope of the
field.
The traditional purpose of national income research is
to provide information on the outcome of economic activity
through comprehensive measures of the size, composition,
and use of national output. In the more recent period, the
measurement of national output has continued to be the
basic aim. But, with the growing realization that they can
furnish a statistical picture of the economic structure and
process, national income statistics have been used also to
an increasing extent to facilitate an understanding of the
factors which determine the outcome of economic activity.
Much more fully and systematically than in the past, national income statistics have been designed with the dual
objective of measuring the national output and placing it
against the background of the transactions which underlie
its production and distribution.
The national income statistics for the United States
contained in this report are constructed according to# this
broader plan. They are therefore a comprehensive single
source of integrated information on the Nation's economic
life.

Uses of national income statistics
Because they reduce the voluminous detail of economic
activity to intelligible proportions, national income statistics have become widely used as the factual background
for economic analysis and the preparation of economic
programs. They provide the basic statistical framework
required for the study of long-term economic trends and
of business fluctuations, and for the formulation of business
and government economic policies. Needless to say, the
statistics do not throw light on all aspects of the economy,
and often must be supplemented by other bodies of economic information.
Two broad, practical uses of national income data may be
cited. These data are needed, in the first place, when the
automatic working of the market mechanism cannot be
fully relied upon and steps must be taken to modify its
functioning. The mitigation of business cycles in times of
peace and the current planning for national defense are
important instances in which an understanding of the
economic mechanism, such as is facilitated by the use of
national income statistics, is the prerequisite to intelligent
action designed to improve its operation.
Secondly, even when active influencing of economic
events is not the aim, it is desirable to have some knowledge of these events so that the best possible adjustments to
them can be made. For example, the businessman wants to
gauge the probable market for his output so as to obtain
a more rational basis for determining his policies; and the
tax administrator must estimate what governmental rev


enues are likely to be so that intelligent decisions can be
made about matters relating to the expenditure and revenue
policies of the various levels of government.
Whether for the purpose of exerting active influence on
economic events or for passive adaptation to them, national
income statistics are the most important single tool for
orientation in the economic world. They do not, of course,
furnish direct answers to the economic problems involving
their use, but they do provide the relevant, and often indispensable, statistical background for arriving at intelligent solutions. This statistical background consists of a
quantitative description of the structure of the economy
over a period of years. The framework of this description
is a national economic accounting system which summarizes
the transactions linking the economic units whose interplay determines the functioning of the economy.

Economic .accounting system
The production and distribution of the Nation's output
necessitate countless transactions of buying and selling,
hiring labor, investing capital, renting property, paying
taxes, and other operations inherent in the functioning of
the economic system. The records of these transactions
kept by the business, consumer, and governmental units
participating in them obviously are highly relevant for
obtaining a statistical view of the economy because they
reflect the most concrete manifestations of the Nation's
economic life. However, these innumerable records must be
summarized into a limited number of significant categories
if a comprehensible and useful description of the economic
process is to emerge. This is the basic task of the national
economic accounting system.
The plan of the accounting system underlying the United
States estimates is based upon a division of the economy
into four major sectors—business, consumers, government,
and foreign. The economic behavior and motivation of these
four sectors is quite different; to distinguish among them
appears necessary for an understanding of the economy in
terms of the interactions of its constituent parts.
In the construction of the economic accounting system,
a national income and product account is first established.
This account provides measures of total national output,
which is the sum of the outputs produced by the four sectors
of the economy.
Next, accounts are set up for the sectors. In addition
to showing the portions of national output originating in
each of them, they are designed to depict the economic
structure in terms of the interrelated transactions of the
four major economic groups.
Specifically, four current accounts are shown, one each
for business, consumers, government, and the rest of the
world. These trace the transactions determining the current
income of each of the sectors, and what part of that income
is used up and what part is devoted to saying. The sector
account for business is in essence a consolidated profit and
loss account for the business system as a whole. For the
other sectors, the accounts represent current receipt and
expenditure accounts, in conformance with the nonprofitmaking character of their transactions.
19

20

1951 NATIONAL INCOME SUPPLEMENT

Most of the current transactions that appear in the account of one sector are matched by corresponding entries in
another. However, this is not so with respect to the items
of saving or investment. With these, the corresponding
entry is found in the capital or gross saving and investment
account, which shows on a consolidated basis the saving
and investment for the economy as a whole. This is the
sixth account in the national economic accounting system.

Main advantage of accounting approach
The principal advantage of formulating and presenting
national income statistics as a system of accounts has been
intimated in the preceding discussion. Such a system
yields a set of interrelated tables which are a tremendous
aid in revealing the structure of the economy and thereby
contribute toward a better understanding of its functioning. Two aspects of the analytical value of the accounting system may be considered.
It throws into clear relief the nature of accounting relations that must always hold true among the component
transactions summarized. The sense in which saving and
investment are necessarily equal is a prime example of
such a relationship. The establishment of an economic
accounting system displaying this and other accounting
relationships has been an aid to simplicity and clarity in
economic discussions.
Also, light has been thrown on the relative magnitudes
of the component flows of the economic process, and the
study of the functional relationships among them has been
facilitated. In contrast to the accounting relationships,
which are a matter of definition and must always hold,
these functional relationships are regularities that hold
by and large as a matter of economic experience, but which
can and do change in response to technological, institutional, and psychological changes. Measurement and study
of these relationships—such as those between consumption and disposable income and between wages and profits
—are essential for an understanding of the working of the
economy. However, because they cannot be counted upon to
hold without fail, these relationships must be the object of
continuing investigation.

Technical uses of economic accounting system
The establishment of a system of national economic
accounts has benefited also the producers of national
income data. It has aided their work in both its theoretical
and statistical phases.
With respect to the former, it must first be recognized
that national economic accounting has been of some aid
in improving the definition of national output. It is true
that no genuinely new criteria for solving definitional
problems have been provided, and also that many definitions
of national output are compatible with the principles on
which the system is based. Yet, it has helped the discussion
in several ways.
A great deal of the discussion of definitions was obscured
by the failure to distinguish clearly between the income
and product measurements of output and by the lack of a
clear grasp of the relation between them. The development
of national income statistics in an economic accounting
framework has made for clarity. Some of the larger issues
involved in the definition of output were brought into better
focus, and a powerful tool was provided for the consistent
treatment of financial intermediaries, nonprofit institutions, imputed income and product, and similar problem
areas in the formulation of national income concepts.



Economic accounting has contributed to problems of
definition also by depriving them of some of their importance. In substantial part, these problems revolve around
the question of whether or not certain items—such as government interest, business taxes, transfer payments, and
subsidies—should be included in the aggregate measures
of national output. Prior to the establishment of the system
of accounts, the decision to omit such moot items from
total output meant that their record, insofar as national
income statistics were concerned, was lost. Since the items
are germane to economic investigations in which national
income data are used, there often was reluctance to exclude
them, even though this may have been indicated from the
standpoint of measuring output. With the presentation of
national income statistics in the form of a complete statistical picture, the record of transactions excluded from the
principal aggregates is no longer lost. The problem of
defining output can be faced squarely on its own merit.
Moreover, to the extent that fully satisfactory solutions
to definitional problems cannot be found, the economic
accounting system has made it easier to live with them.
Many of the controversial items (irrespective of whether
defined as part of the output aggregates) are shown separately in the account tables, and alternative measures of
output can be constructed depending on particular needs
and preferences.
In two general ways, the accounting approach is an aid
to the statistical aspect of national income work. To begin
with, it is of considerable help in defining the task of statistical data collection. Once the particular accounting
framework providing the most useful summary of the
economic structure has been decided upon, a comprehensive
list of requirements for economic statistics emerges rather
automatically. A list obtained in this way provides a useful
guide for planning the collection of primary statistical
data so as to yield the information most relevant to economic analysis.
The use of the accounting approach also facilitates the
estimation of the various national income aggregates and
their components from the available statistical material.
It does this by making clear that many items of information
can be obtained from the records of either the buyer or the
seller, and hence affords flexibility in adapting estimating
methods to available information.
In addition, this approach enables one to check every
account for internal consistency by comparing the debit
and credit totals as well as the relations among the various
debit and credit entries. It also enables one to derive as
residuals components of the national economic accounts
which cannot be estimated directly from available data.

Improvements of the accounting system
In the derivation of the definitions and classifications
used in the national economic accounting system, an attempt is made to set forth the distinctions that are most
meaningful from the standpoint of economic analysis, taking account of the limitations imposed by the nature of the
accounting data available for the four major economic
groups. Fortunately, there is a great deal of parallelism
between the requirements of economic analysis and those
of the accounting systems used by business and other
economic units. Over wide areas no conflict arises from
the fact that economic questions have to be answered by
reference to measures constructed from such accounting
data. On the contrary, a major advantage of the system
of national economic accounts is that it summarizes the
actual transactions of economic units as reflected in their
own accounting records.

SURVEY OF CURRENT BUSINESS
However, some of the most difficult problems of national
income estimation arise when the definitions underlying
these records do not yield the type of information demanded
by economic analysis. National income work is continually
concerned with the modification of the basic accounting
data in order to improve their economic significance. Often
these data can be adjusted to meet the requirements of
economic analysis, but when the transition cannot be accomplished supplementary information must be introduced
to complete the picture.
Comprehensive national economic accounting is a recent
development the potentialities of which have not yet been
fully realized. The set of accounts presented in this report
should not be regarded as the definitive system. Apart from
possible improvements in the formal design of the accounts,
several elaborations of the present system would be desirable.
For instance, only four major economic groups are
distinguished, whereas, in view of their heterogeneity,
further breakdowns would be useful for many types of
analysis. Also, saving and investment accounts for each
of the four major sectors would constitute an important
supplement to the consolidated account for the economy as
a whole. The construction of balance sheet accounts, showing the structure of the assets and liabilities of the various
sectors, likewise would expand the scope and usefulness
of the national economic accounting system.
It is to be emphasized, however, that further expansion
of the national accounts must be made with due regard
to the flow of statistical information (which would constitute a generally limiting factor) and to the danger of
an over-elaboration that might add unduly to their complexity and not proportionately to their value.
Coordinate in importance to further work on the conceptual framework, articulation, and coverage of the economic accounting system is the improvement of its statistical reliability. For the entries in the national economic
accounts represent estimates which are subject to error.
The problem of statistical reliability is discussed in Part
III of this report.

The detailed statistics
In the preceding discussion the main emphasis was on
the summary aspects of the economic accounting system
underlying United States national income statistics. However, sight should not be lost of the wealth of statistical
information that now exists to elaborate and supplement
various aspects of this accounting system. For in many
uses of the data it is specifically this information which
is of primary interest and value.
Attention may be drawn first to the many statistical
tables in Part V of this report, of which the six national
account tables briefly described above are but highly condensed summaries. These detailed tables present further
information on the breakdowns of the income flow by type
of income and legal form of organization and of the product
flow by type of product. Also given are breakdowns of national income and its constituent distributive shares by industry of origin.
Secondly, the conversion of gross national product and
its components into constant dollars, which is presented in
Part IV, represents an important addition to the current
dollar series in terms of which the complete accounting system is stated. Prior to its completion and release in early
1951, this physical volume measure of national production
was perhaps the top requirement for further elaboration
and supplementation of the system of accounts.
Thirdly, the annual estimates of State income payments,



21

not included in this report, present considerable information on the income flows of the various States and may be
regarded as the elaboration in a regional dimension of the
depiction of the economic structure. Of a similar nature, as
also involving further articulation of the consumer sector,
are the estimates of the size distribution of income now in
preparation in the National Income Division.

Plan of the folloiving discussion
In the following pages of this Part of the report, the conceptual framework of the United States national income
statistics is explained in greater detail. Since the measurement of output totals is the prime objective of national income statistics and, moreover, is largely independent of the
full-fledged economic accounting system depicting the economic structure, the derivation of these totals is first explained, in a summary manner. Next, the structure of the
complete accounting system is developed. In the course of
this discussion, the more detailed aspects of the definitions
of the output totals are also covered. A final section provides, for convenient summarization, a series of definitions
to which the national income and product aggregates and
their components conform.
SUMMARY CONSTRUCTION OF NATIONAL
OUTPUT MEASURES
In this section the basic notions underlying national income and product are stated; the derivation of these measures in terms of their conceptual content is explained; and
the adequacy of definition of the resulting aggregates is
examined.
Basic Notions Underlying National Output
Measurement

Economic production
In the definition of a measure of national output, the first
task is to delimit economic production from the pursuit of
other activities that resemble it in that they involve the
use of human effort and other resources and are useful. For
instance, the production of radio sets has its counterpart in
the hobbies of the radio amateur, commercial shaves are
akin to self-administered ones, and the educational services
of teachers often are supplemented by those of parents. In
spite of resemblances, a distinction must be drawn between
economic production and non-economic pursuits. For a
measure of national output must, broadly speaking, be confined to the former; it cannot, in any systematic way, take
account of activities outside the economic sphere.
In the present report, the basic criterion used for distinguishing an activity as economic production is whether
it is reflected in the sales and purchase transactions of the
market economy. The exclusion of illegal transactions is a
tradition-based convention which is an exception to this
general rule.

Product and incorne flows
A fundamental distinction relevant to the measurement
of economic production so delimited is suggested by observation of the operations of a typical business firm. On the
one hand, such a firm produces and sells a flow of product
values. On the other hand, it pays out (or retains) incomes
that accrue in the course of its operations. This double aspect of the activities of the single business firm suggests
that the measurement of national output can be approached
in a two-fold manner, either by summing product values or

1951 NATIONAL INCOME SUPPLEMENT

22

The VALUE of the




GROSS
NATIONAL
PRODUCT

$21 Billion of
Capital Consumption Allowances

COVERS { a n d
$24 Billion of

IN

1950

Indirect Business Taxes

AT

WHICH ARE THE MAIN ITEMS DEDUCTED

$283 Billion

TO ARRIVE AT THE

NATIONAL
INCOME

Retained Corporate Earnings,
Corporate Income Taxes

and

OF
Y MINUS

Contributions for Social
Insurance Totaling $34 Billion.

PLUS (+)
Transfer Payments and Government
Interest of $20 Billion

EQUALS THE

PERSONAL
INCOME
OF

$225 Billion

$239 Billion

SURVEY OF CURRENT BUSINESS
by summing income flows. It will be seen that the measure
of national output in terms of product flows which is obtained by pursuing this approach is the gross national product and that the corresponding measure in terms of incomeflowsis the national income.

Final and intermediate

products

In the measurement of national output via product flows,
a further distinction, between "final" and "intermediate"
products, must be made. A nonduplicative total is desired,
one that is confined to the value of the final, or end, products
of the economy and excludes all others, labelled intermediate. To use a simple example, if the production process
during a year involves the production of wheat, its milling
into flour, and the baking of bread which is sold to consumers, then the value of national output should equal the
full value of the bread and should not count also the separate values of the wheat and flour which have been used up
in the course of producing it. This result is obtained by
counting only the value of the bread, as the end product,
and ignoring the other product values.
A distinction between final and intermediate products
cannot be drawn on the basis of the technical characteristics of the output involved. In the above example, for instance, flour is an intermediate product. If, however, the
flour is sold not to bakeries, but directly to housewives for
home baking, it becomes the final product of the economy,
even though in a technical sense it is not fully fabricated.
However, an effective criterion for distinguishing betweenfinaland intermediate products can be established by
reference to business practices followed in the production
of goods and services. There emerges a working definition
offinalproduct as a purchase that is not resold, and of intermediate product as one that is resold. A more technical, but
sometimes more convenient, phrasing of the same idea is
that a final product is a purchase that is not charged to
current cost whereas an intermediate product is one that
is so charged. The phrase "during the accounting period"
is sometimes appended to these formulations so as to make
them more exact.

imputations
In the measures of national output shown in this report,
the foregoing criteria are the basic tools for distinguishing
economic production from non-economic pursuits and the
part of economic production which is final from that which
is intermediate. However, modifications in the definitions
are made in certain instances to enhance the significance of
the measurements.
, The most important of these modifications concern the
inclusion in national output of the so-called "imputations,"
or items of production and income "in kind." For instance,
iood furnished to employees would not become part of the
national output if the initial definition were rigidly followed.
^ would be an intermediate product, since it is an element
oi the current cost charges of the employer furnishing the
Jood. However, it seems desirable to count it as part of national production, if only to secure uniformity of treatment
with respect to employees who buy food out of the correspondingly higher money wages given them. Other imputations that are made in measuring national output are for the
va ue of food produced and consumed on farms, the rental
value of owner-occupied houses, and for nonmonetary income and product flows arising in connection with financial
intermediaries.



23

Charges against final product
In this report, the product measure of national output is
derived by adding the values of final products and omitting
intermediate products, as in the bread and flour example.
It is termed the gross national product. However, the same
total could be obtained also by adding in the first instance
the total product (final and intermediate) of each producing
unit and then deducting for each the intermediate product
it bought from other units. For the economy as a whole,
purchases and sales of intermediate products would cancel,
and what would remain would be the value of final products.
The total value of final products can thus be broken down
into elements consisting of the total product of each producing unit less its purchases of intermediate products.
However, for each producing unit the difference between
the value of its product and its intermediate purchases consists of the incomes that accrue in the course of production
(wages and salaries, interest, profits, etc.) plus certain
"non-income" charges against the value of its production,
the most important of which are taxes (such as property,
excise, and sales taxes) and depreciation charges for the
wear and tear and obsolescence of fixed capital.
Thus, since (1) the value of the final product of the economy equals the sum of the total product of each producing
entity less its purchases of intermediate products, and (2)
for each producing entity, product less intermediate purchases equals income plus non-income charges against the
value of production, it follows that (3) for the economy as
a whole the total value of final product equals the sum of
incomes accruing in production plus non-income charges
against the value of production.

Factor incomes and other charges
A measure of national output in terms of total charges
against the value of gross national product, and therefore
numerically equivalent to it, can thus be obtained. However, this is not the income flow measure generally used.
The common measure, national income, is derived by emphasizing the distinction, which has already been emerging, between two types of charges against the value of final
product: factor costs and other costs.
Briefly, the sum of employee compensation, interest, and
business incomes is considered to represent the remuneration of factors of production. In national income terminology, their aggregate measures the total factor cost incurred in producing the output of the Nation. By contrast,
no factor incomes correspond to the other charges against
gross national product. Indirect business taxes do not form
the cost or income of any factor of production. Depreciation
and kindred charges reflect allowances for the consumption
of fixed capital, and not its net income or return. Thus, a
further total is distinguished—the national income—which
represents the sum of factor incomes or factor costs. This
is the income measure of national output most widely used.
Two other magnitudes can be derived by recombining the
components so far discussed. Net national product may be
obtained as gross national product less depreciation and
kindred allowances for the consumption of fixed capital. A
corresponding measure of total charges against net national
product may also be obtained by deducting these allowances
from total charges against gross national product. These
two aggregates are in a theoretical sense more clearly defined than the corresponding measures of gross national
outnut. since some duplication is involved by the inclusion
in the latter of the production of fixed capital which serves
merely for replacement purposes. However, as a practical

1951 NATIONAL INCOME SUPPLEMENT

24

matter, a meaningful measure of net capital formation, and
hence of net national product, cannot be calculated since depreciation charges are not available on a basis of valuation
comparable to that of the gross production of fixed capital.

Personal and disposable income
Another aggregate, personal income, measures the actual
current income receipts of persons from all sources. It differs from the national income in that it excludes certain
types of income which accrue in production but are not received by persons (for instance, the undistributed part of
corporate profits) and, on the other hand, includes certain
types of income which do not arise in current productive
activity but constitute personal receipts (such as relief and
unemployment benefits). Hence personal income, unlike
the national product and national income aggregates, is not
a measure of national production. Since the bulk of personal
income is derived from production, however, it can in ordinary circumstances be used as an indicator of productive
activity and has, in fact, gained prominence in this use as
the only comprehensive income or product total available
on a monthly basis. Personal income net of taxes—disposable personal income—is another useful aggregate, being
the closest over-all statistical approximation to consumer
purchasing power derived from current incomes.

National Income and Product Account
The foregoing basic notions underlying national output
measurement are incorporated in the National Income and
Product Account shown in table I, which presents for 1939
the several alternative measures of United States output.
The right side of this account shows the gross national
product as the sum of final product flows. The summary
listing includes personal consumption expenditures, gross
private domestic investment (consisting of new construction, purchases of producers' durable equipment, and the
change in business inventories), net foreign investment

(reflecting, in general, net purchases from abroad), and
government purchases of goods and services. These components represent purchases of the four major sectors
into which the economy has been divided and conform to
the operational definition of final products as purchases
not resold during the accounting period. However, certain
modifications in this definition, especially with respect to
imputed income and product, have been made in deriving
the national income and national product measures.
On the left side of the account are listed the charges
against the value of gross national product. In principle,
the sum of these charges should numerically equal the value
of gross national product. However, because of statistical
estimating errors, the nature of whifch is discussed in Part
III, this is not actually the case. To secure balance, an item
termed "statistical discrepancy" is entered on the left side
of the account.
Total charges are broken down into factor costs and other
charges. The former, consisting of employee compensation,
net interest, and the various types of business incomes,
corporate and noncorporate, are added to obtain the na-.
tional income. The other charges against the value of gross
national product are arranged so as to permit a further subtotal of charges against net national product.

Coverage of National Income and Product Account
The economy covered by this account, and hence by the
various income and product aggregates, is the continental
United States. Thus it does not coincide with the customs
area of the Nation since territories and possessions are excluded. Also, it is important to note, the account measures
the income and product attributable to factors of production supplied by residents of the country, rather than the
income and product of factors physically located in the
country.
Not only individuals who contribute their labor and property to the productive process, but nonprofit institutions

Table I.—National Income and Product Account, 1939
[Millions of dollars]
Compensation of employees:
Wages and salaries
Supplements

Personal consumption expenditures

45,745
2,075

Gross private domestic investment

Income of unincorporated enterprises and inventory valuation adjustment
11,282
Rental income of persons

Net foreign investment
Government purchases of goods and services

3,465

Corporate profits and inventory valuation adjustment:
7
8
9
10
11
12

Corporate profits before tax:
Corporate profits tax liability
Corporate profits after tax:
Dividends
Undistributed profits, _
Inventory valuation adjustment- _

1,462
3,796
1,209
_ „ — 714

13

Net i n t e r e s t . . _ _ _ _ . _ _

14

National income

15
16
17
18

Indirect business tax and nontax liability^
9 365
Business transfer payments
II"I"
'451
Statistical discrepancy
1 375
Less: Subsidies minus current surplus of government enterPoises
485

19

Charges against net national product

20

Capital consumption allowances

21

C H A R G E S AGAINST GROSS NATIONAL P R O D U C T . . . 91,339




^

4 212
__ 7 ^ gg%

g$ g^g
g JQJ
26

GROSS NATIONAL PRODUCT

67,466
-

9,917
888
13,068

SURVEY OF CURRENT BUSINESS

25

Table II.—Consolidated Business Income and Product Account, 1939
[Millions of dollars]
Compensation of employees:

Consolidated net sales:

Wages and salaries:
Disbursements
Excess of accruals over disbursements
Supplements:
Employer contributions for social insurance
Other labor income

To
To
To
To

36,250
0
1,330
431

persons
government
abroad
___
business on capital account

-

Change in inventories

__

_
__

64,003
5,375
1,123
9,476
441

Income of unincorporated enterprises and inventory valuation adjustment
11,282
Rental income of persons

3,465

10 Corporate profits and inventory valuation adjustment
11
12
13
14
15
16

Corporate profits before tax:
Corporate profits tax liability
Corporate profits after tax:
Dividends
Undistributed profits
Inventory valuation adjustment

17 Net interest.__

.

18 Income originating

1,462
3,659
1,162
—714
3,284
61,611

19 Indirect business tax and nontax liability
9,365
20 Business transfer payments
451
21 Statistical discrepancy
1,375
22 Less: Subsidies minus current surplus of government enterprises.

485

23 Charges against net product

72,817

24 Capital consumption allowances

8,101

25 CHARGES AGAINST BUSINESS GROSS P R O D U C T . . . 80,418

and governmental bodies supplying capital resources are
viewed as residents supplying factors of production.1 Corporate enterprises, as such, are not considered residents in
this connection since corporate income is viewed as accruing ultimately to the holders of their securities.

Anatomy of the Output Totals
The foregoing discussion has attempted to give a general
notion of the major concepts underlying the measurement
of national output and of the nature and relation of the
major alternative output measures. However, it has passed
overmuch that is essential to a precise understanding of the
output concepts.
National income and national product are comprehensive
Measures of total national output. They include not only
business production, but also production contributed by the
nonbusiness sectors of the economy—households and institutions, government, and the rest of the world. Measurement of output in each of these sectors is subject to special
Problems of its own. The principles underlying the measurement of production in the various sectors are next exPlamed. The sector measurements based on these principles
are then added to obtain the national income and product
^ t e h
in table I.
of S i

meant ng of

.
"resident individuals" is largely self-explanatory. The usage
" " ' « United States national income statistics may be more precisely
however, by reference to the following three attributes: permanent
DPlace of performing work, and location of employer. A worker is
"T resident individual if at least two of these attributes refer to the
-" *.__....
~
m t m nitary and
nited States are
WorVo™ e* " p*'rolu«ira. even though they are stationed aoroaa. J\ISO, foreign border
* l
nsidSS n i t ?y^ n»ne d S t a tcountry by domestic employers, as well as permanent
h e U i t this € S
O r S °l
employed in this country by foreign governments
international government organizations, are counted as resident individuals.


+

32

BUSINESS GROSS PRODUCT

_ 80,418

Measurement of business output
The bulk of national output originates in the business
system, and the framework adopted for the measurement
of business output sets a pattern for the whole. In deriving
national output as the summation of the outputs originating in the several sectors of the economy, it is therefore
convenient to start with the business sector.
The Consolidated Business Income and Product Account,
presented in table II, shows the portion of national output
originating in the business system. Business output is
measured in terms of the concepts underlying the major
income and product aggregates covered in table I and discussed in connection with it.
The right (or credit) side of the account shows the market value of the consolidated production of the business
system. On the left side of the account appear the charges
against this production. The two column totals are equal in
principle, for reasons which have been stated in broad
terms.
The nature of the equality can be understood in an alternative, and perhaps more precise manner, if it is realized
that the business income and product account is similar to
a profit and loss account for the business system as a whole
from which intra-business sales and purchases on current
account and intra-business flows of interest and dividends
have been eliminated by a process of consolidation. The
two sides of such an account must always balance because
profits are derived as the residual of sales and costs. However, for statistical reasons equality is not achieved in
practice, and in the estimates embodied in table II the "statistical discrepancy" is entered on the debit side as a reconciliation item.

26

1951 NATIONAL INCOME SUPPLEMENT

In addition to consolidation, certain other operations
have been performed to transform the column totals of the
profit and loss account into a measure of business output.
Capital gains and losses have been eliminated as not reflecting the value of current production. Inventory change has
been entered on the right side of the account to convert sales
into a measure of production, and subsidies have been transferred to the left side as not being part of the market value
of the products shown on the right side. Further, certain
items have been netted, also with the aim of obtaining column totals that measure the contribution of the domestic
business system to national output.
In the first place, imports, which in a consolidated statement of domestic business would appear on the left side of
the account, have been transferred to the right side and
netted against exports (under consolidated net sales to
abroad). Imports must be deducted from the credit side
since they reflect foreign production included in the value
of the column totals prior to the deduction. The fact that,
in table II, they are netted against the export item is merely
a matter of convenience.
The second netting which is made in table II is in connection with property income flows. In a consolidated account
not further adjusted, receipts of interest and dividends
from other sectors would appear on the credit side and
would be reflected correspondingly in the total of the
charges entered on the debit side. Since receipts of interest
and dividends from other sectors do not represent output of
the business system, it is necessary to remove them from
the credit side of the account and to net them against elements of factor income in order to make the sum of factor
incomes on the debit side of the account reflect the factor
cost of business output. In practice, interest received is
netted against interest paid under the heading "net interest," and dividends received are netted against dividends
paid under the heading "dividends." In these instances also,
the particular matching adopted is essentially a matter of
convenience.
The components of business production listed on the
credit side of table II conform to the definition of final product specified in connection with table I. It may also be
noted that the entries are very similar. Differences arise
because table II is confined to business output, whereas
table I provides a summary of national output which covers
the nonbusiness sectors as well Similar comments apply to
the charges against the value of business product listed
on the debit side of the account. Factor income charges
differ from those in table I in maernitude only, because table
I includes nonbusiness items. Nonfactor cost charges are
identical, in magnitude as well as with respect to classification, because, as will be seen, these charges are confined to
the business system.
Treatment of taxes and subsidies
Some of the most important decisions that must be made
in defining business output have to do with the classification
of charges against the value of business product between
factor-cost and nonfactor-cost charges, and involve in particular the treatment of taxes and subsidies.
According to the definitions used in this report, employment taxes under the Social Security and related programs
are included in the compensation of emplovees (the employers' share as a supplement to wages and salaries and
the employees' share as a part of them). This is don^ on the
ground that these taxes are an element of the cost of hiring
labor and accordingly should be included in a measure of
total factor costs. A supplementary argument is that social
insurance contributions reflect a benefit received by the



employee in the wage bargain which should be taken into
account in calculating total employee compensation. It may
be noted that alternative classifications of employment
taxes underlie many other national income estimates and
cannot be ruled out as erroneous.
Secondly, a distinction is made in this report between
corporate profits taxes, which are considered as part of
factor cost—corporate profits are measured before deduction of these taxes—and other (indirect) business taxes,
which are considered nonfactor charges—business incomes
are calculated net of them. This distinction is based upon
the following reasoning.
Since national income is designed to measure output in
terms of the costs or incomes of the factors of production,
it should change only if either the volume of factor services
or their unit remuneration changes, and not because of a
mere change in tax rates. If it is assumed that corporation
profits taxes are not shifted and indirect business taxes are
generally shifted forward, inclusion of corporate income
taxes in national income and exclusion of indirect business
taxes from it are clearly indicated, since on these assumptions mere changes in tax rates will not cause changes in
an income total so defined.
The classification of business taxes in this report is dictated by the belief that the above assumptions about tax
shifting are the most realistic summary ones that can be
made. It may be noted, however, that the entire subject of
tax shifting and incidence is a rather controversial one and
that definitive and final conclusions are not available.
Moreover, the operational definition of indirect taxes is
drawn in a rather summary fashion. All taxes that are
chargeable as business expense (other than employment
taxes) are classified as indirect business taxes. Thus certain
taxes—business property taxes, for instance—are included
in this group even though a detailed study of their proper
treatment from the standpoint of tax shifting and incidence
might call for a different classification.
The classification of taxes in the national income represents an instance in which an accounting distinction—
whether a tax is chargeable to expense or not—is adopted
as a basis for classification and yields, broadly speaking,
satisfactory results. In instances in which it fails to do so
and can be superseded by a superior distinction—as in the
case of employment taxes—modifications are made. However, where the disadvantages of the accounting distinction
are less apparent and less easily remediable because of conceptualor statistical difficulties, it is maintained.
Subsidies, which are a type of business receipt, appear on
the debit side of the account (with a negative sign) because
they are not part of the market value of business output ; the subsidized products are included at their market
values under business sales. As a matter of long-standing
convention, subsidies are regarded as payments necessary
to elicit factor services. Accordingly, they are included in
the sum of factor incomes (by considering them as a gross
receipt in the calculation of business profits) and are deducted in reconciling the factor income originating in the
business system with the market value of business output
Other aspects of business output
The measurement of business output has, in addition to
the treatment of taxes and subsidies, many other aspects
which must be discussed—such as the precise delimitation
o± the business sector; the classification of income shares
and nonfactor charges; the measurement of capital formation and consumption, including inventory change; the
imputations for wages and salaries in kind, food produced
and consumed on farms, and the rental value of owner-occu-

SURVEY OF CURRENT BUSINESS
pied dwellings; the imputations made in the case of financial institutions; and the special methods adopted in
measuring the transactions of these institutions and of
other organizations such as government enterprises.
Decisions that are made in these areas affect the definition of national output and hence are relevant to the present
discussion. However, these decisions are regarded as less
crucial to the definition of national output than those concerning taxes and subsidies that have been reviewed; also,
the treatment of some of them is rather complex. Therefore, their discussion is postponed until later (to the detailed presentation of the business sector) so as not to interrupt unduly the derivation of the national output or to blur
its outline by excessive detail

27

Government
The value added by government to total output is shown
in exhibit 2. As in the case of households and institutions,
it is measured by the value of factor services purchased,
except that in this instance only payments for labor are considered payments for factor services. Interest paid by government is not counted.
Exhibit 2.—Income and Product Originating in Government, 1939
[Millions of dollars]
1. Compensation of employees:
2.
Wa^es and salaries..
-._
3.
Supplements:
4.
Employer contributions for social
insurance
o.
Other labor income
(i. Income originating
product

Measurement of nonbusiness output
Production included in the measures of national output,
is not confined to the business system,, but occurs also in
each of the nonbusiness sectors of the economy: households
and institutions, government, and the rest of the world. In
the household sector, account is taken of certain services—
such as domestic service—which, although of a market
character, are better thought of as involving direct factor
services rather than business production. In the government sector, the services provided by the government to
the community are accounted for. In the rest-of-the-world
sector, the production accruing to United States residents
by virtue of their net claims on foreigners is measured.
For each of these sectors, the measurement of output differs basically from that employed for the business sector.
The two-fold measurement of output in terms of product
flows and factor costs is not available for the nonbusiness
sectors of the economy, and factor cost must be used for
both aspects of the value added by them to total output. A
single measure must be used in these instances to depict
both income and product originating because there is no
sales transaction involving the output produced as distinguished from the purchase of the ingredient factors of production and supplies and materials. It may be noted parenthetically that the factor cost measurement of output in
the nonbusiness sectors also conforms to the definition of
final output underlying national income accounting: the
factor services purchased, in terms of which output is
measured, are not resold.
Households and institutions
Exhibit 1 presents the measurement of output originating in the personal or consumer sector of the economy. Its
measurement is in terms of the direct factor services
bought by households and institutions, consisting of employee compensation and payments of interest. The latter
represent payments by households to nonpersonal lenders
and payments by institutions. As in the case of business
Production, discussion of more detailed points is postponed.
Exhibit 1.—Income and Product Originating in Households
and Institutions, 1939

and

net and yro&s
:..

7,343
l\)\)
87
7,02 ( ,>

The accounting for government production in general
and government interest in particular is, and probably will
remain, a controversial point in national output measurement. Basically, this seems due to the fact that government
activities are substantial and quite different in economic
character from other types of production. Accordingly,
they are difficult to put on a common denominator with
other types of production in a summation designed to obtain
a comprehensive measure of national output.
The exclusion of government interest paid from factor
incomes stems, as a practical matter, from the fact that the
bulk of government debt was created to finance wars and
current expenditures. In no common sense use of the term
can interest payments on such debt be taken to represent
currently produced goods and services or the current use of
economic resources. For example, it seems sensible that a
comparison of the prewar and postwar volumes of production should not be distorted by the continuing interest
on the national debt that arose during the war. The treatment of government interest is given further consideration
in the discussion of the government sector below.
Rest of the tvorld
Finally, account must be taken of United States production arising in the rest-of-the-world sector. As stated
in connection with the National Income and Product Account, the output of the United States economy is defined
as that accruing to factors of production supplied by residents of the United States, as distinguished from the
alternative of defining national output in terms of the
physical location of the factors of production.
Hence, to obtain a measure conforming to the definitions used in this report, there must be deducted from the
components derived so far a measure of the output produced in the United States but accruing to foreign residents, and there must be added a measure of the value of
output not produced in the United States but accruing to
United States residents. The deduction and addition are
accomplished, on a net basis, by the separate measurement
of United States output originating in the rest of the world,
equal to the net international inflow of factor incomes,
as shown in exhibit 3.

[Millions of dollars]
1. Compensation of employees:
2.
Wages and salaries paid
3.
Supplements paid:
4.
Employer contributions for social
insurance
5.
Other labor income
6. Interest paid
7. Income originating
product




Exhibit 3.—Income and Product Originating in the
Rest of the World, 1939
2,loO
J*
17
801

and net and gross
2,979

[Millions of dollars]
1.
2.
3.
4.

Wa?es and salaries
Interest (net)
Dividends (net)_
Branch profits (net)

5. Income originating and net and gross products.

2
127
137
47
313

1951 NATIONAL INCOME SUPPLEMENT

28

Table la.—National Income and Product Account, by Sector of Origin, 1939
[Millions of dollars]
Income originating in
Households iind institutions (exhibit 1, item 7)
Government (exhibit 2, item 6)
Host of the world (exhibit 3, item 5)
_

2,970
7,629
313

Gross product originating in
Households and institutions (exhibit 1, item 7)
Government (exhibit 2, item 6)
Rest of the world (exhibit 3, item 5) — .

~-

Income originating in nonbusiness sectors

10,921 Gross product originating in nonbusiness sectors

Income originating in business (table II, item 18)

61,611 Gross product originating in business (table II, item. 32)

National income (table I, item 14)

2,979
7,629
313
10,921

72,532

80,418

Other charges against net national product (table II, items 19, 20,
21, and 2 2 ) . . :
Charges against net national product (table I, item 19)

-.

-- 10,706
—

83,238

Capital consumption allowances (table II, item 24)
8,101
CHARGES AGAINST GROSS NATIONAL PRODUCT (table I,
itcm521)
- - 91,339 GROSS NATIONAL PRODUCT (table I, item 2 6 ) . . . ,

National income and product, by sector of origin
In table la the contributions of each of the four major
sectors are summed to yield the totals of national output
as shown in table I, in a breakdown, however, which displays more clearly their conceptual building blocks. The
items in table la are cross-referenced to tables I and II and
exhibits 1-3 so as to permit a precise tracing of how
national output is derived from the component output
series of the four sectors.
Little need be said about table la since it represents only
a summary of the preceding discussion. However, certain of the major points may be repeated for emphasis.
In table la, the measures of national output given in
table I are derived by summing the values added to
total output by each of the four major sectors of origin.
For the nonbusiness sectors—households and institutions,
government, and the rest of the world—contribution to
total output is measured identically in the product and
factor income measures, since a distinction between the
two is not possible. For the business sector, however,
the product measure differs from the factor income measure. The difference represents nonfactor charges against
the value of business production, which are entered in
table la and reconcile the value of national income with
that of the gross national product.

91,339

Gross national product
Personal consumption

expenditures

The personal consumption expenditures shown in table
I are derived as in exhibit 4. The bulk of them consists of
purchases from the business system. Direct purchases
of factor services by households and institutions account
for another part. These two are entered as the first and
second items in exhibit 4, with references to the previous
tabulations in which they have been included. It will be
apparent, upon reflection, that the sum of these two items
falls short of a complete enumeration of consumer expenditures by the amount of direct purchases from abroad
(mainly tourist expenditures). This item, which has not
so far appeared in the derivation of national output, is
entered as the third item in the exhibit.
Exhibit 4.—Derivation of Personal Consumption
Expenditures, 1939
[Millions of dollars]
Consolidated net business sales to persons
(table II, item 27)
Gross product originating in households and
institutions (exhibit 1, item 7)_
Net purchases of households and institutions
fromabroad

64,003
2,979
484

Personal consumption expenditures (table I,

Anatomy of Product and Income Components
A tolerably precise derivation of the measures of total
output presented in table I has been obtained in table la.
However, it will be noted that the components of output
as given in the second table differ from the conventional
classifications shown in table I. Those of table I are
drawn up, on the credit side of the account, in terms of
the purchases of product by the four sectors of the economy; and, on the debit side, they do not separate the
costs incurred in production by each of the sectors. By
contrast, the classifications in both sides of table la refer
to sector of production.
As the next step in explaining the content of national
income and national product, each of the components as
given in table I is derived from the measurements underlying table la. Product and income items are taken up in
turn.



item22)__

67,466

Gross private domestic investment
Gross private domestic investment as shown in table I
is derived simply by combining consolidated net sales to
business on capital account and the change in inventories,
each as taken from the business account (table II). The
derivation is given in exhibit 5.
Exhibit 5.—Derivation of Gross Private
Domestic Investment, 1939
[Millions of dollars]
Consolidated net business sales to business on capital account (table II,
item o\))

„

__

9,4/0

Change in business inventories "(table" 11^ item~3l)"""II""r"r"---__j5fl.
Gross private domestic intestme?U (table I, item 23). _ _

9

•9l7

SURVEY OF CURRENT BUSINESS
Government purchases of goods and services
The derivation of government purchases of goods and
services is indicated in exhibit 6. The procedure is similar
to that employed for consumer expenditures. In addition
to purchases from business and purchases of direct factor
services, which are entered as the first and second items
in exhibit 6, government makes purchases from abroad,
which have not appeared so far in the accounting for
national output. These purchases are entered as the third
item in exhibit 6 to complete the enumeration of government purchases as shown in table I.
Exhibit 6.—Derivation of Government Purchases of Goods
and Services, 1939
[Millions of dollars]
Consolidated net business sales to government (table II, item 28)
Gross product originating in government (exhibit 2, item 6)
Net purchases of government from abroad
Government purchases of goods and services (table I, item 25)

5,375
7,029
64
13,068

29

National income
Wages and salaries
This is done for wages and salaries in exhibit 8. They
are obtained by summing wages and salaries accruing in
the four sectors of the economy.
Exhibit 8.—Derivation of Wages and Salaries, 1939
[Millions of dollars]
Business (table II, item 2)..
Households and institutions (exhibit 1, item 2).
Government (exhibit 2, iUin l 2)
Rest of the world (exhibit 3

..

3> ,250
f
2 ,1.W
7 , 343
2

Wages and salaries (table I, item 2)

..

45 ,745

Supplements to wages and salaries
Supplements to wages and salaries are obtained in a
similar manner, as shown in exhibit 9.
Exhibit 9*—Derivation of Supplements, 1939
[Millions, of dollars]
1 ,701

28
Households and institutions (exhibit 1 , item 3)
Net foreign investment
280
Government (exhibit 2, item 3)
2 ,075
Supplements (table I, item 3)
With two exceptions, all of the elements, underlying the
construction of gross national product by sector of origin
in table la have now been used to derive components of
Income of unincorporated enterprises and inventory
gross national product as shown in table I. These two
valuation adjustment, and rental income of persons
exceptions are "consolidated net business sales to abroad"
and "gross product originating in the rest of the world."
These two items are taken directly from table II.
On the other hand, in the derivation of personal consumpCorporate profits tax liability
tion expenditures and government purchases two items
were added which have not appeared as components of
This item is taken directly from table II.
gross national product by sector of origin. These are "net
purchases of households and institutions from abroad"
Dividends
and "net purchases of government from abroad." Hence,
The calculation for dividends is shown in exhibit 10.
adding the first two of these items to the components
derived in exhibits 4, 5, and 6 and then subtracting the
Exhibit 10.—Derivation of Dividends, 1939
second two items will yield the correct total of gross na[Millions of dollars)
tional product.
Business (table I I , item 14)
3,059
Rest of the world (exhibit 3, item 3) _ _
137
But the difference between these additions and subDividends (table I, item 10)
_ - . 3,790
tractions is numerically equal to "net foreign investment,"
the remaining component of gross national product in
table I which has not yet been derived. This is so because
Undistributed corporate profits
the four items combined equal the net receipts of the
Undistributed corporate profits are obtained in exhibit
United States from abroad, from factor incomes as well
11.
as from the sale of goods and services. These net receipts
represent the balance of payments on current account,
Exhibit 11.—Derivation of Undistributed
Corporate Profits, 1939
and their financing implies a change in the net interna[Millions of dollars]
tional asset position of the United States, which is net
2
foreign investment. The derivation of net foreign investBusiness (table I I , item 15)
1,162
ment is shown in exhibit 7.
Branch profits (rest of the world) (exhibit 3, item 4 ) . .
47
Undistributed profits (table I, item 11)

1,209

Exhibit 7.—Derivation of Net Foreign Investment, 1939
[Millions of dollars]
Consolidated net business sales to abroad (table I I , item 29). - - - 1 - J23
v^ross product originating in rest of the world (exhibit 3, item 5)
__-_
aid
^ess: Net purchases of households and institutions from abroad (from
4
exhibit 4)
jr}
^ess: Net purchases of government from abroad (from exhibit 6)
64
Net foreign investment (table I, item 24)

8 8 S

The derivation of gross national product as shown on
the credit side of table I is now complete. The next task is
to derive the income flows shown in the breakdown on
the debit side of that table.
2
In the definitions adopted in this report, international cash gifts, which are
aiso current account items, are included with goods and services.




Corporate inventory valuation adjustment
This item is taken from table II.
Net interest
The calculation necessary to derive net interest, as shown
in table I, is given in exhibit 12.
Exhibit 12.—Derivation of Net Interest, 1939
[Millions of dollars!
Business (table I I , item 17)
Households and institutions (exhibit 1, item 6)
Rest of the world (exhibit 3, item 2) „

3,284
801
127

Net interest (table I, item 13)

4,212

1951 NATIONAL INCOME SUPPLEMENT

30

Of the GROSS NATIONAL PRODUCT totaling
$283 billion in 1950 . . .
$194 billion, or
about two-thirds,
was bought by
$47 billion, or about
one-sixth, went into
domestic investment
($49 billion) and
foreign investment
(minus $2 billion). . .

while the remaining
$42 billion was taken
by Government.

Of the PURCHASES BY CONSUMERS
Nondurable Goods
accounted for
$102 b i l l i o n . . .

Durable Goods for
$29 billion. . .

and services for
$62 billion.

DOMESTIC INVESTMENT Included . . .
$22 billion in new
construction. . .

$22 billion in producers'
durable equipment... .

and $4 billion in
business inventories.

GOVERNMENT PURCHASES of Goods and Services Comprised , . .




$23 billion by the
Federal Government. . .

and $20 billion by State
and Local Governments.

SURVEY OF CURRENT BUSINESS

Nonfactor cost charges

31

It is believed that this is a realistic description of the
general nature of consumer, government, and business
All the components of national income, as listed in table
purchases and that the criteria employed in United States
I, have now been derived by allocating the entire national
national income statistics for distinguishing between
income as constructed in table la. The nonfactor charges
final and intermediate products are accordingly useful for
against the value of gross national product shown in table
segregating the major types of goods and services proI are all taken directly from table II.
vided to satisfy the needs of individuals.
It is evident, however, that, because of different instiThe Output Measures Examined
tutional arrangements, certain anomalies may result from
The measures of national output have now been derived
the restriction of the national output measure to the
with sufficient precision to make possible their evaluation
market economy and from strict application of the purin terms of the basic concepts that underlie them—of the
chase-not-for resale convention. Thus, the dividing line
national product as an aggregate of final product values
between the final products enumerated and similar non3
and the national income as an aggregate of factor costs.
market benefits excluded may not be appropriate. For
instance, literal implementation of the operational definiThe concept of final product
tion of final product would count the services rendered
by rental housing but would exclude those of owner-occuAs noted earlier, measures of national output must be
pied housing. Moreover, within the market economy the
defined essentially in terms of the market economy. They
distinction between final and intermediate product would
cannot encompass the broad range of nonmarket activisometimes be unsuitable. Food purchased by employees,
ties that may bear some resemblance to economic producfor example, would be classified in national income and
tion. In this report the market economy is taken as the
product whereas food furnished to them by their emarea over which sales and purchase transactions occur.
ployers would not.
Once this criterion has been adopted, there remains the
Peculiarities of this type can be dealt with to some
necessity of distinguishing between final and intermediate
extent by appropriate modification of the definitions, but
production within the market economy.
the potentialities of this approach are limited. This is
The operational definition of final product underlying
obvious with respect to the extension of output measures
the present national product measures rests on the obvious
beyond the market economy, but it also holds true of
fact that purchases not resold do not become elements in
modifications in the basic convention for distinguishing
the value of other goods and services, and that hence there
between final and intermediate production.
is a presumption that they should be counted in a comIn the first place, it is not feasible from a purely physiprehensive enumeration of the value of the final output
cal standpoint to examine every purchase by consumers,
of the Nation's economy. It also takes cognizance of the
government, and business so as to determine which were
corollary fact that purchases which are resold are used
simply means of facilitating production, and hence interup in further production and included in the value of
mediate, and which served an end use, and hence were
other goods and services, and hence may be presumed
final products. As a practical matter, one must generally
to be intermediate products which should not be counted
deal with types of buyers and categories of goods and
separately in an unduplicated measure of production.
services.
The practical consequence of this general definition is
But more important, one must place basic reliance on
to enumerate capital formation and purchases by cona broad convention because in most cases in point there
sumers and general government, and to exclude from
final production the raw materials used up by business in is no alternative. No precise line can be drawn between
final and intermediate products from mere observation
the course of further production.
of the nature of the products or the uses to which they
Capital formation is clearly a part of final product to
are put. It would be easy, for example, if all consumer
the extent that it consists of items that are not used up
purchases were for goods like Sunday clothes and holiday
but are added to wealth. (Only the inclusion in gross
dinners, which are obvious elements of the good life, and
national product of capital formation for replacement purif all business purchases were raw materials for further
poses must be noted as a limitation in this connection.)
processing, which are obvious intermediate goods. BeThe inclusion of consumer and government purchases and
tween these two extremes, however, there is a wide range
the exclusion of business current-account purchases also
of purchases for which neither the motivation nor the
are broadly reasonable.
; use is so clear-cut and which must be placed in one cateSince the expenditures of individual consumers and nongory or the other by somewhat arbitrary rules.
profit institutions serving individuals are incurred largely
For this reason any measure of total production must
to meet the needs of individuals, they consist in the main
be somewhat conventional. For instance, it must over°i goods and services that determine what is commonly
look the fact that the expenditures of individuals in their
regarded as the standard of living. Government purchases
business capacity are influenced by their standards as
consist essentially of goods and services provided on beconsumers, and that expenditures of consumers are inhalf of the community as a whole, which it has been
fluenced by their activities as producers. It must overlound better to secure collectively rather than individulook also the fact that the conditions under which work
ally. They should likewise be included in a measure of
is performed have an important bearing on the welfare
$ e * u a l £ ° o d s an<l services provided to satisfy the needs
of individuals. These conditions are affected by business
°i the members of the community. In contrast, the bulk
expenditures on goods and services that are classified as
?i business purchases of goods and services consists of
intermediate just because there is no satisfactory way to
items that are raw materials in the production process,
take account of their benefits in a quantitative measure
rather than items that directly satisfy human needs.
of final output.
Aneir separate count is accordingly not necessary in
^™ierating the flow of final goods and services.
Adjustment by imputation
1 6 detai
In the present estimates, adjustments have been made
Edw^y^ "
Ied discussion of these concepts see Milton Gilbert, George Jaszi,
ment •'V* P e n i s °n. Charles F. Schwartz "Objectives o^ National Income Measureto take account of institutional peculiarities to the extent
«" Kevww of Economics and Statistics, August, 1948.



32

1951 NATIONAL INCOME SUPPLEMENT

of imputing factor returns in the form of income in kind
and entering corresponding imputed items in personal
consumption expenditures. Even in this direction cognizance has been taken, in the main, only of sizable and unequivocal types of factor income in kind which have come
to be recognized through tradition as elements of real
income. It is apparent that other additions to the national
output could be made if the relevant information were
available. For example, income and consumption expenditures could be imputed for health services and recreational
facilities provided by business, which are not counted because they are charged to current cost by business.
The limitation of imputations to cases clearly associated
with factor incomes serves to confine the field, but it is
not a principle of selection which could be firmly defended
on theoretical grounds. The services of the radio broadcasting and television industries are an outstanding example of an item which is not listed in the national product because it is financed by business via charges that are
made to current cost. Yet radio broadcasting and television are important forms of recreation, similar to legitimate theaters and motion pictures for which explicit
entries, representing admission fees, are made in consumer expenditures.
No imputation is made for radio broadcasting and television in measuring national product. Formal neatness
can be given to this omission by general reference to the
limitation of imputations to items that are associated
with factor incomes, on the ground that broadcasting
services do not accrue to a distinct factor of production,
but to the consuming public owning receiving sets at
large. However, it would seem preferable not to stress
this point unduly and to recognize the essentially arbitrary and tradition-based nature of the decisions that
must be made in this area.

the handling.of subsidies, to eliminate them from government purchases and the national product. Such a treatment, it should be recognized, would be somewhat artificial
and statistically difficult, and would obscure the national
economic accounts in their capacity as records of actual
transactions, thus rendering them less meaningful for
many purposes. Also, the feasibility of its application to
government services used jointly by business and individuals, like the maintenance of highways, is highly questionable.
If government services consisted of the running of
public recreation grounds on the one hand and of the provision of free raw materials to business on the other, a
classification of the latter as subsidies in kind might be
useful and important. This is not, however, the actual
character of government operations. Clear-cut types of
direct subsidies in kind that are of any quantitative importance have not come to attention. Even if account is
taken of the more consequential cases of government
services involving the use of a public service jointly by
individuals and by business, the problem remains quantitatively small. It looms large only if the concrete notion
of aid to business is stretched to cover the broad range
of government services to the public which actually reflect
a complexity of causes and purposes and cannot appropriately be classified under any such narrow head.
Neither government expenditures nor consumer expenditures, it is to be emphasized again, are susceptible
in logic or statistical practice to any detailed, selective
functional classification to add up those particular items
which may be considered "final." However, when any
sort of concrete, workable criterion of intermediate product is applied, it becomes evident that the present scheme
of summary classification does not lead to significant distortion.

Quasi-intermediate products
The process of reclassification of intermediate products
could be extended in the opposite direction by deducting
from factor income, and hence shifting from consumption
expenditures to business costs, business-type expenses incurred by individuals. As an example, "miners' expenditures for explosives, lamps, and smithing" (listed as a
consumer expenditure in table 30, Part V) are certainly
the sort of cost ordinarily borne by business rather than
by the wage earner, and are unlike the vast bulk of consumption goods. It is a peculiarity of the coal mining
industry that these materials customarily are paid for
by the miner rather than purchased by the enterprise and
charged to current cost.
No attempt has been made to adjust the pattern of consumer transactions along this line because there is no
tradition of adjustment that provides an adequate standard of what is appropriate. In any event, it would appear
that the magnitude of such adjustments would be very
limited, unless the concept of "production" expense" were
stretched far into the broad region of mixed motivations
in which no useful and commonly accepted exclusions
from final product can be made.
Similar considerations apply to government purchases
as well as to consumer purchases. It is possible to think
of cases in which the treatment of government purchases
as final product would not necessarily be the best procedure. For example, if certain government purchases
reflected clear-cut aid to business it might be preferable
to view them as "subsidies in kind" and, in accord with

Need for market-type measures of output
It is apparent that even if substantial departures from
the present definition of final product were logically defensible and statistically feasible, they would not result
in a measure of national product that could serve as a
substitute for the present one. This measure is tied close y
to the modern market-economy and is obtained, broadly
speaking, by summing actual transactions of its major
constituent economic groups. As such it is an important
element of the economic accounting system designed to
facilitate an understanding of the functioning of the economy in terms of the interaction of these groups.
For this purpose,' the definition of the consumer and
government purchases components of national product
is generally appropriate, as is the exclusion of intermediate production according to the present definition oftne
term. Even if basic departures from these definitions
could be justified on other grounds, the resulting measure
of national output would probably not be useful in tne
study of business cycles, in problems of economic mobilization and fiscal policy, in market research, and in man.
other types of investigations in which national income
statistics are increasingly employed.




The concept of factor cost
Underlying the definition of national income in terg
ot factor cost is the general idea that the output ot w
-nation is the result of the services rendered by agen
? r o m u c t l o n w h o ^operate in the production of that ou
put. These agents of production are the labor and cap

SURVEY OF CURRENT BUSINESS

33

Of the NATIONAL INCOME amounting to
$239 billion in 1 9 5 0 . . .
$153.3 billion was
Compensation of
Employees. . .
$44.0 billion was
Proprietors' and
Rental Income . . .

and $41.6 billion was
Corporate Earnings*
and Net Interest.

Of the COMPENSATION OF EMPLOYEES.
$145.8 was in the form of wages and salaries. . .
= = = ^ with $123.6 billion in
private industries. . .
and $22.3 billion
in Government. .

while $7.5 billion was
in the form of supplements
to wages and salaries.

Of PROPRIETORS' AND RENTAL INCOME . . .
$22.3 billion represented
nonfarm business and
professional earnings . . .

^

$13.7 billion went
to farmers. . .

^

^

^

^

and $8.0 billion was
rental income of persons.

^

The REMAINDER included . . .
$36.2 billion of
Corporate Earnings*. . .

mmmsmsmam
'Corporate Earnings represent Corporate Profit* (before taxes) and Inventory Valuation Adjustment.




and $5.4 billion
of Net Interest.

34

1951 NATIONAL INCOME SUPPLEMENT

tal, the entrepreneurial ability and natural resources
which are used in the production process. It is the services
of these agents or factors as valued in the market by their
earnings for which a quantification is sought in the national income, to the extent permitted by the data available as statistical raw material.
It is hardly necessary to stress the importance in
studies of resource allocation of such a measure of the
services rendered by productive agents. To give only a
few examples, one may wish to know the incomes of the
various factors of production used in each industry^ in
order to compare the relative importance of industries,
or to marshal information about the relative amounts
of factors of production that are available for allocation
to various uses, or to compare the relative importance
of labor and property factors in the outputs of various
industries.
It must be recognized, of course, that the concept of
factors of production is not given precisely in economic
theory but must, to some extent, be formulated with
reference to the problem at hand. Furthermore, the use
of factor returns for some problems of the type indicated
is limited by such facts as the temporary or permanent
non-transferability of factors to other uses, and by monopoly and imperfect competition. In addition, property
income is only tenuously related to the type of measure
of the contribution of property and enterprise which
might be desired for problems involving resource allocation. This is because it includes a residual share,
profits, which fluctuates widely over the business cycle.
In spite of these limitations and difficulties, the idea
of factor costs has always been of fundamental importance
in economic analysis, and national income defined as an
aggregate of factor earnings is the only general measure
by which the idea can be quantified.
It is true that difficulties are encountered in the course
of this quantification. The assumptions about tax incidence that are made in the classification of taxes as
between factor income and nonfactor cost, the somewhat
conventional rationale that leads to the calculation of
national income gross of subsidies, and the common sense
consideration on which the exclusion of government
interest is based are all open to criticism.
Yet it would appear that for the items that are large
and of strategic importance in the dynamism of the
United States economy, the assumptions made are sufficiently realistic to provide useful economic measurements. For instance, in spite of the theoretical uncertainty
which surrounds the incidence of corporate profits taxes,
it appears in statistical investigation that corporate
profits before taxes are more invariant to mere changes
in tax rates than are profits after tax, and that the beforetax series must be used in studying the economic regularities reflected in the movement of the various income
shares. Nor would any realistic study of national output
be advanced by the inclusion in national income and
product of interest paid by the government.
One important aspect of the factor-cost definition of
national income should be understood. The constituent
income shares of national income so defined cannot be
construed as measures of benefits accruing to the recipient groups. For instance, the definition of the income
shares gross of direct taxes levied on them is necessary
in order to reflect the factor costs of current production,
but would not be appropriate for measuring benefits received.



DETAILED STRUCTURE OF THE ACCOUNTS
As noted at the outset, an important recent development in national income research is the expansion of
national income statistics from measures of the national
output into an economic accounting system giving a
statistical picture of the economy. The national output
aggregates and their major components now having been
derived in broad outline, and presented in the National Income and Product Account in table I, the groundwork has
been laid for an explanation of how a comprehensive national economic accounting system is constructed. Incident
to this explanation, further light will be shed on the definition of national output and its various components.
The plan is to derive a set of accounts which will
summarize the economic process in terms of the interrelated transactions of the four major economic groups into
which the economy can be divided—business, persons
(households and institutions), government, and the rest
of the world. This will involve the construction of a
current account for each of the constituent economic
groups or sectors and of a consolidated saving and investment account for the economy as a whole.

The Business Sector
The business sector is defined broadly to include all
organizations which produce goods and services for sale
at a price intended at least to approximate costs of production. In the main, it covers all private enterprises
organized for profit, both corporate and noncorporate,
including farm operators, independent professional practitioners, and lessors of real property. Mutual financial
institutions, cooperatives, and nonprofit organizations
serving business are also included, as well as government
enterprises. Owner-occupied houses and buildings used
by nonprofit institutions serving individuals ^ are considered to be business establishments selling their current
services to their owners.
The business sector thus covers a wide variety of organizations, and for some purposes it would be desirable
to distinguish further between corporations and unincorporated enterprises, financial institutions and nonfinancial business, and so forth. Also, it would be
instructive to treat industries or industry groups as
separate sectors in order to reveal the flow of intermediate output among them, and to show their complete sales,
cost, and profit structures.
Such breakdowns of the business sector are not presented in this report, although important elements of tnein
are contained in Part V. (See the tables on national
income by legal form of organization and by industry
of origin.) To regard the business system as an entity
is sufficient for many purposes, and the statistical •information for establishing further sectors within it either
is unavailable or could be assembled and utilized only at
the expense of disproportionate effort. However, a furtnei
development of national income statistics does He alon^
these lines and would serve to integrate them with otner
studies of the industrial structure, such as the inteiindustry relation studies now being conducted by various
governmental and private agencies.

The business account
The receipts of the business system and their disposition have already been exhibited in table II, in connection
with the derivation of national income and product^
the summation of sector incomes and products.
^

SURVEY OF CURRENT BUSINESS
Consolidated Business Income and Product Account
serves as the current account for the business sector in
the present economic accounting system. Several essential features of this account—its basic affinity to a consolidated profit and loss statement. and the netting,
transposition, and classification of items necessary to
obtain significant measures of output originating in
business—have already been explained. At this point
further characteristics will be considered.

Classification of business transactions
The right side of the business account consists of the
consolidated net sales of the business system, adjusted
for the change in inventories in order to measure business output. Since this account covers all types of
enterprises that are included in the business sector,
the definition of "sales" is broad. For instance, fees for
professional services and gross rental receipts are included, although they are not always thought of as sales
in the daily meaning of the term.
Sales are subdivided according to the four major
purchaser groups: consumers, government, business
(on capital account) and foreign nations. To a large
extent the content of the items is adequately conveyed
by their designations. Aspects needing further explanation will be taken up later, particularly in the discussions of capital formation (which concerns sales to
business on capital account and the change in inventories) and of imputations and the treatment of financial
institutions (which affect the definition of business sales
to persons).
Types of factor income
The left side of the business account lists the charges
against the value of national product. These charges
are classified into factor costs or incomes and nonfactor
charges. The former are listed in five main categories—
compensation of employees, income of unincorporated
enterprises and inventory valuation adjustment, rental
income of persons, corporate profits and inventory valuation adjustment, and net interest.
The compensation of employees consists mainly of
wages and salaries but includes additional forms of compensation under the heading of supplements to wages
and salaries. Wages and salaries include payments received in kind in addition to monetary remuneration.
They are subdivided into "disbursements" and "excess
of accruals over disbursements" to take account of differences during any period of time between amounts
charged to cost and actual disbursements to individuals.
Supplements to wages and salaries consist of employers' contributions for social insurance and of "other
labor income." The former item comprises employer
taxes, or contributions, under Social Security and kindred
publicly administered schemes. The corresponding employee contributions are included in wages and salaries.
Other labor income includes employer contributions to
Private pension funds, compensation for injuries, and
certain minor items which are charged against the value
of business production and can conveniently be classified
as factor charges under the heading of supplements to
wages and salaries.
Income of unincorporated enterprises and inventory
valuation adjustment, rental income of persons, and
corporate profits and inventory valuation adjustment
cover the business incomes of the private enterprises
that are counted as part of the business sector ot tne



35

economy. Within the noncorporate part of the business
sector a distinction is drawn between unincorporated
enterprise and rental income. The former covers the earnings of sole proprietorships and partnerships (including
farm and nonfarm businesses as well as independent professional practitioners) and of producers' cooperatives;
the latter consists of the net rentals of individual landlords who are not primarily engaged in the real estate
business. The earnings of professional real estate operators are classified under income of unincorporated enterprises. Both the income of unincorporated enterprises and
rental income include, in addition to monetary earnings,
important items of income in kind.
The definition of monetary business earnings is in
general accordance with Federal income tax regulations.
Significant modifications are made, however, in the treatment of capital gains and losses, depletion charges, and
receipts of property income.
Business incomes in the national income and product
accounts are stated exclusive of capital gains and losses,
because these do not represent a return for the current use
of economic resources. The "inventory valuation adjustment" is designed to eliminate from corporate profits
and the income of unincorporated enterprises an element
which is very similar to capital gain or loss. The adjustment is often large and uncertain statistically, and there
is a great deal of intex-est in the corporate profit figure
prior to the adjustment. Hence the accounts are set up
to give the unadjusted figures and the adjustment separately, with the two adding up to the proper total for
purposes of national income measurement. By contrast,
ordinary capital gains and losses are eliminated outright.
With respect to depletion charges, no deduction is made
for them in computing business net incomes. The value
of new discoveries of natural resources is not counted
as part of capital formation or of profits, and consequently
deduction of a capital consumption charge for impairment
of the stock of natural resources would be inappropriate.
Finally, all corporate receipts of dividends are netted
out of corporate profits (and dividends) to avoid double
counting and to arrive at income originating in the business
system; and interest and dividends received by the
owners of unincorporated enterprises are considered to
be received by them in their personal capacity, rather
than treated as an element of business income, except in
a few financial industries in which the earning of property
incomes is an integral part of business operations,
In table II corporate profits before tax are broken
down further to show tax liability, dividends, and undistributed profits. A similar breakdown is not presented
for unincorporated business and rental incomes. With
few exceptions, there are no taxes levied specifically
against these types of income (business incomes are
merged with other types of income in determining individuals' income tax liability). Moreover, in the noncorporate area a realistic distinction between distributed and
undistributed business income is difficult to establish
in principle and to measure statistically.
Net interest measures the excess of interest payments
of the business system over its receipts. In addition to
monetary interest flows, it covers imputed interest arising in connection with the operations of financial intermediaries.
Nonfactor charges listed in table II consist of indirect
business tax and nontax liability, business transfer payments, the statistical discrepancy, subsidies minus the
current surplus of government enterprises, and capital
consumption allowances.

36

1951 NATIONAL INCOME SUPPLEMENT

The classification of indirect business tax and nontax
liability as a nonfactor charge already has been discussed
in summarizing the derivation of national output.
Business transfer payments
Business transfer payments represent transfers from
business to persons which are charges against business
product but for which no return in the form of factor
services is received. Major items included are corporate
gifts to nonprofit institutions and allowances for consumer
bad debts. The nature of the latter item can be understood as follows. Sales to consumers, on the credit side
of the account, are stated at full market value and are
not (except in the case of professional fees) adjusted by
an allowance for consumer defaults. However, the incomes
of sellers and lenders, on the debit side, have been calculated
net of these defaults. Hence, an accounting discrepancy
between the two sides arises which can best be resolved
by regarding the value of consumer bad debts as reflecting goods and services transferred from business to consumers with no quid pro quo.
Subsidies are listed as a (negative) nonfactor charge
against the value of business output. They are not considered part of the value of product, but are included as
receipts in calculating profits. The current surplus of government enterprises is an item akin to business profits
earned in the course of making the sales listed on the credit
side of the account. Plence it must be included on the debit
side to ensure balance. However, for reasons to be noted
later, it is classified as a nonfactor rather than a factor
charge.
The foregoing nonfactor charges reconcile the income
originating in business with the market value of business
net product. To arrive at the total designated in table II
as charges against business gross product, capital consumption allowances must be added.
Capital consumption allowances
Capital consumption allowances consist of depreciation proper, capital outlays charged to current expense,
and accidental damage to fixed capital. The first of these
items measures the wear and tear and obsolescence of
fixed capital and (with the exception of agricultural depreciation, which is on a replacement cost basis) is based
on accounting practices used for tax purposes—largely
straight-line amortization of original cost to the current
owner.
Capital outlays charged to current expense are an entry
in lieu of depreciation proper for items of durable capital
listed on the credit side of the account (on the basis of the
three-year durability definition there adopted) but charged
to current cost in common business practice. It is apparent that the value of these items must be entered on the
debit side also in order to preserve the balance of the
accounts. In a stationary economy capital outlays charged
to current expense would, for business as a whole, approximate the charges for depreciation which would have
been made for these items had they been capitalized instead of expensed. In a situation in which net capital formation occurs, the entry will overstate actual depreciation;
when capital formation falls below replacement needs, it
will fall short of an adequate capital consumption allowance for the types of equipment involved.
Accidental damage to fixed business capital measures
the value of such capital destroyed by accidents. The accounting necessity for an entry of this type stems from the
fact that business profits are net of such losses on the



debit side while no corresponding entry appears on the
credit side. Its classification as a species of capital consumption allowance is based on the practical fact that,
for the business system as a whole, the magnitude of
the item is steady and can be regarded as akin to regular
depreciation. If there were large fluctuations in these
losses, a strong argument could be made for treating them
like other capital losses—that is, calculating profits and
total income without deduction for them. This treatment
would prevent fluctuations in national income due to the
accidental destruction of fixed business property.
As has been noted, depletion charges are not deducted
in calculating profits, since the value of the corresponding
discoveries of natural resources is not an element of capital formation or profits. Similarly, these charges are not
included with capital consumption allowances.
interpretation of income share breakdown
The breakdown of the income shares given in table II
reflects to a large extent the actual institutional, legal,
and financial arrangements in force at any particular time
which determine the form in which income accrues to
individuals. An additional, broader grouping sometimes
found helpful consists of employee compensation and net
interest, which are contractual incomes, and of other incomes, all of which are residual shares.
The recording of earnings in the forms in which they
accrue means, for example, that shifts in the legal form
of organization as between corporations and unincorporated enterprises, or changes in the relative importance
of internal and external business financing, will be reflected in the several income shares. In many economic
investigations which deal with the concrete arrangements
of economic society, a breakdown of this type will be
appropriate. However, it will present handicaps in analyses in which it is desired to abstract from such arrangements.
The attempt to use the income share breakdown to
study the ultimate factors which cooperate in production
is a case in point. It deserves special mention because it
is directly suggested by the definition of total income
originating as the sum of factor incomes or factor costs.
In the light of this general definition, one is tempted to
go further—to make identifications of particular income
shares with the various factors of production envisaged in
economic theory.
Along these lines, it is possible to say that employee
compensation consists of labor income, that unincorporated enterprise and rental incomes are mixed returns to
labor and other productive factors, and that corporate
profits and net interest are components which do not contain a labor return element, in any ordinary sense of the
term. However, in view of difficulties attaching to the
factor of production notion and in view of the lack of
statistical information, one cannot go much further in the
way of identifying factors with the income shares, and
it is important to have in mind the limitations of the
data for this general type of use.
With respect to a segregation of the returns to the
factor of production "labor," it should be noted that employee compensation is heterogeneous in character. It
includes the wages of the charwoman as well as the bonuses of the corporation executive: Moreover, it is not
the only income share in which returns to labor are reflected. In the income of unincorporated enterprises and
the rental income of persons the labor of the owner is
an important element, although it cannot be quantified
and segregated.

SURVEY OF CURRENT BUSINESS
In connection with the classification of income shares
other than employee compensation, it should be noted
that no identification can be made between the rental income of persons and the rent concepts of economic theory.
Rental income is confined to the net rentals of individual
property holders (including imputed rentals on owneroccupied nonfarm homes) whose main occupation is not
the renting of property. Rental income of professional
real estate operators is classified under the income of
unincorporated enterprises; gross rental receipts of corporations are merged with their other business receipts
and transmuted into corporate profits; both the imputed
net rental value of farm homes and agricultural net rents
received by farmer landlords are included in the income
of unincorporated farm enterprises; and the return on
user-owned business real estate becomes a component
either of the income of unincorporated enterprises or of
corporate profits.
The dividing lines between profits and net interest also
call for comment. First, net interest represents the payments less the receipts of the business system. An increase in corporate interest receipts from other sectors
(most importantly from government) is therefore reflected in a decrease of net interest and an offsetting
increase in profits, and vice versa, even though no change
in the profit and interest flows that are an integral part
of business operations has occurred.
Also, the breakdown of property income between interest and profits is affected by the manner in which
interest flows are channelled through the economic system. For instance, if money is lent by corporate or other
professional lenders the interest paid on it is counted in
business receipts and reflected in profits. But if individual lenders are involved, the interest appears as such in
the business account.
Finally, of course, the breakdown between profits and
interest is influenced by the choice between external and
internal financing. For all these reasons, it is more appropriate for some types of economic analysis to combine the interest and profit shares than to consider them
in isolation.
Fixed investment
Fixed investment by business (business purchases on
capital account) includes new construction and durable
equipment acquired by private business enterprises. New
residential construction purchased by owner-occupants
(as well as by business proper for rental purposes) is included because home-ownership is treated as a business
ln
the national income accounts. Acquisitions of fixed
capital by nonprofit institutions serving individuals also
are included.
Fixed capital formation is defined, in the United States
statistics, as including all newly produced durables (goods
with an average life exceeding three years) acquired by
ttieir ultimate business users. Thus fixed capital formation is stated gross of capital consumption, and includes
Plant and equipment bought for replacement purposes.
From a theoretical standpoint, a net concept would be
Preterable. For the definition of gross capital formation
ttust needs be somewhat arbitrary. The size of the category will depend on the particular definition of durability
adopted—the shorter the average life used in defining
^urability, the larger the apparent volume of gross capital formation. In addition, the considerations dictating
eim
iination of intermediate production to achieve output



37

measures without duplication also call for the statement
of fixed capital formation on a net basis, since, broadly
viewed,, capital outlays for replacement purposes are really
a species of intermediate product.
Measurement of fixed capital formation on a gross basis
has been advocated as being more appropriate for certain
types of analysis concerned mainly with the short-term
availability of resources. If fixed capital need not be
replaced in the short run, the total value of production
available for alternative uses is measured better, it is
contended, by the gross than by the net totals.
While this argument has some merit, there is no reason to believe that gross fixed capital formation as measured in the business account is appropriate for the purpose. It would give an exaggerated view of production
available for alternative purposes in the short run if it included essential replacements that could not be postponed
without interfering with the operations of the productive
apparatus. On the other hand, it would fail to reveal the
true short-run production potential if there were ways of
utilizing the fixed capital more intensively than normal or
of postponing maintenance and repair, as distinguished
from replacement. In short, the use envisaged calls for
estimation of the capital stock that is consumable in the
short run, including the stock of business inventories as
well as consumer and government held tangible assets;
it cannot be served adequately by a fixed capital formation series defined on the gross basis used in the national
income and product accounts.
Measurement of fixed capital formation gross of replacement may be preferable for certain purposes in business cycle and market analysis. Replacement demand is
an important factor in aggregate demand and it is useful
to have an explicit record including it. However, in this
as in the preceding case, the present definition of gross
capital formation is imperfectly adapted to the purpose
envisaged. For instance, it excludes maintenance and
repair outlays although these too have a significant bearing on cyclical fluctuations in demand.
In any event, in designing an unduplicative measure
of national production these and related considerations
must remain subsidiary. Defining fixed capital formation gross of capital consumption allowances must rather
be justified on the ground that a meaningful net measure
is not possible given the present state of theoretical and
statistical knowledge.
The problem of what is meant by "keeping capital intact'*
is a most controversial one in economic theory, basically
because in a dynamic economy the nature of capital equipment changes and the notion of replacing worn out capital
consequently loses its simplicity. But even apart from
theoretical difficulties, the statistical problem of estimating capital consumption in a manner consistent with gross
capital formation is quite formidable. The bulk of the
capital consumption allowances recorded in table II is
derived from financial accounting records and is on an
original cost basis. While from the standpoint of accounting consistency these allowances are appropriate for inclusion on the debit side of the business account—business
profits are calculated as a residual consistent with them—
they do not measure capital consumption on the same price
basis which underlies the values shown for fixed capital
formation on the credit side, and hence cannot be used to
obtain a meaningful measure of net capital formation.
The statistical information, on prices and on the age
composition of the capital reflected in depreciation charges,
that would be necessary to convert these accounting-

38

1951 NATIONAL INCOME SUPPLEMENT

charges into a price level comparable to that of gross capital formation is deficient. Useful approximations in this
direction have been made (see the pioneering study of
Solomon Fabricant: Capital Co7isumption and Adjustment,
National Bureau of Economic Research, 1938). However,
in the national income and product accounts no revaluation of the accounting charges is attempted, and consequently a measure of fixed net capital formation is not
presented.
It will be noted that business profits, income originating in business, and national income all incorporate the
same depreciation charges which are considered inadequate as measures of capital consumption for the purpose
of arriving at fixed net capital formation, business net
product, and net national product. Net measures of income had long been established before the problem of
valuing depreciation charges was met in particularly acute
form in connection with fixed capital formation, and their
continued use reflects in part the accident of this historical sequence.

Inventory change and the inventory valuation
adjustment
The measurement of inventory change in business accounting practice is subject to the same type of deficiency
from the standpoint of national income and product as
fixed capital depreciation. As a broad proposition, original
cost instead of current replacement cost is used to value
inventories consumed in the process of production, and
hence a measure of net change based on business accounting records would be misleading for national income purposes.
In this instance, however, an adjustment is made in the
national accounts to convert reported "book" Value data
to a current replacement cost valuation. The distortions
that would result from failure to make such an adjustment would be more disturbing here. It is not possible
to sidestep the issue by dealing with a gross concept, as
in the case of fixed capital formation; also, short-term
comparisons, for which national income data are frequently used, are particularly affected by the methods of
inventory valuation.
Moreover, the conceptual and statistical difficulties that
stand in the way of an adjustment, although formidable,
are less overwhelming than in the case of depreciation.
Use over a long period of years is not involved, as with
fixed capital formation, and consequently the conceptual
problem of defining replacement which stems from quality
change and the emergence of new products looms less
large. In addition, information on prices and age composition is more readily available for inventory goods than
for capital goods.
Nature of inventory valuation adjustment
According to the prevalent methods of business accountting, the book valuation of the physical volume of inventories used up in production differs from current replacement cost in times of changing prices.4 When prices are
rising, book charges fall short of current replacement
cost; when prices are falling, they exceed it.
No deviation from a current price valuation occurs with
goods added to inventory during a given accounting period.
These are valued at prices current in that period.
4 The following1 discussion is concerned with the treatment of nonfarm inventories. The estimates of farm inventory change are computed directly from data on
physical stocks and current prices. No problem of adjusting book value data is
involved; that is, an "inventory valuation adjustment" is not necessary.



The change in the book value of inventories represents
additions to inventories minus inventories used up.
Hence it reflects not only (1) the change in the physical
volume of inventories valued at current prices, but also
(2) the excess of the replacement cost of inventories used
up in production over their book valuation.
The former element of book value change is appropriate
for inclusion as a component of national product, because
it conforms to the principle of current price valuation
applied to all the other components. To include, however,
the "inventory gain" or "inventory loss" measured by
the second element of book value change would be misleading. In extreme cases the inventory movement as
indicated by the change in book values would differ in
direction from that of the actual volume of inventories.
Therefore, the "change in inventories" line in business
and national product is derived by adjusting the reported
book value change in inventories to exclude the inventory
gain or loss element.
For similar reasons, business profits as initially calculated on the basis of business accounting methods of inventory valuation are, for purpose of inclusion in national
income, adjusted to exclude inventory gain or loss. This
is done in table II by adding the "inventory valuation
adjustment" to corporate and noncorporate business
profits as estimated from "book" data reported by business. When negative, the inventory valuation adjustment
measures the inventory gain, and when positive, the
inventory loss, which arises from the fact that inventories
used up in production are not valued at current replacement costs. Its affinity to capital gains and losses, which
also are eliminated in calculating national income and
product, is readily evident.
The statistical methodology for estimating the inventory components of national income and product is explained in Part III of this report. The following numerical
examples may serve to set forth more precisely the accounting principles involved.
FIFO method
Suppose that a firm had beginning inventories of 1,000
units valued at $5 each, that it purchased during the accounting period 400 units valued at $3 each, and that it
used up, in production and sale, 300 units of inventories.
According to the first-in, first-out (FIFO) method of inventory valuation, which charges inventories to cost of
sales in the order of their acquisition, inventories used up
would be valued at $5 each, at a total of $1,500. The inventory change would be registered as minus $300, the difference between $1,200 of acquisition and the $1,500 used up.
The book value change of minus $300 is the algebraic
sum of a physical volume change, in current prices, of $300
(100 units at $3 each) and an inventory loss of $600, which
measures the difference between the book cost and the current replacement cost of inventories used up ($2 on 300
units). Since purchases of inventory goods are valued at
current prices, the departure from current valuation in the
measure of inventory change reflects entirely the manner
of valuing inventories used up.
For national output measurement it would be misleading
to register an inventory decline of $300 when the volume
of inventories had actually increased. Accordingly, on the
credit side of the business account, the change in business
inventories is entered at plus $300, equal to the physical
change of 100 valued at the current price of $3 each, in
conformance with the valuation basis used for the other
components of the product and income flow. Correspondingly, on the debit side an inventory valuation adjustment

SURVEY OF CURRENT BUSINESS
of $600 is added to business profits as based on the FIFO
method of inventory valuation. This adjustment corrects
profits for the difference between the book cost of goods
sold ($1,500) and their current replacement cost ($900).
Essential to note is that the adjustment is equivalent to the
excess of the physical inventory change in current prices
($300) over the book value inventory change (minus
$300). Needless to say, if current prices exceed book cost
prices an inventory gain instead of an inventory loss occurs, and the sign of the inventory valuation adjustment
is negative.
The above example is based upon the straight cost variant of the FIFO method of inventory accounting. But a
revaluation of the inventory change reported by business
is also necessary for other business accounting methods in
which the valuation of inventories used up departs from a
current replacement cost basis. Consideration of two of
these is pertinent: the "cost or market whichever is lower"
practice of valuing year-end inventories and the last-in,
first-out (LIFO) method of inventory accounting.
Cost-or-market method
Under the cost-or-market method, year-end inventories
are written down by businesses if market prices are below
cost prices. This practice generally necessitates a revaluation of book value change for national income purposes.
However, it should be recognized that the cost-or-market
procedure is not the prime cause leading to revaluation of
book value changes in the national income and product
accounts. It represents only a special case in which revaluation is necessary because of a departure from the current replacement cost basis of valuing inventories used up
in production.
For instance, if the cost-or-market method is used in the
example given, the ending value of inventories will be reported as $3,300 (1,100 units at $3 each, the lower market
price). The book value change of inventories will be minus
$1,700, and an inventory valuation adjustment of $2,000
will be needed to adjust the change in book values to national income and product definitions. However, even without exercise of the method an inventory valuation adjustment (of $600) is needed, as previously shown.

The LIFO method
'The LIFO method of inventory accounting yields results
most akin to national income practice. As a general proposition, it yields identical results when the physical volume of inventories increases, but divergent results when
the physical volume decreases. In the former case no revaluation of the book value change is necessary, but in the
latter an inventory valuation adjustment must be applied
to inventories charged on a LIFO basis.
. As long as the physical volume of inventories is increasln
&, inventories used up represent, according to the LIFO
convention of assuming that units acquired last are
charged out first, current acquisitions valued at current
Prices. There is no difference in this case between the
LIFO and national income methods of inventory valuation.
This can be seen by applying the LIFO method to the above
numerical example. Inventories used up are valued at $900,
because they are assumed to represent the 300 units most
recently acquired at their current price of $3 each. The
book value change therefore amounts to plus $300 (purchases of $1,200 minus $900 of inventories used up), which
ls
equal to the change as measured for national income
Purposes,
However, when the physical volume of inventories deceases "last-in" prices no longer represent current prices.



39

Inventories used up reflect past-period acquisitions valued
at past-period prices, which in general differ from current
prices. To illustrate this case numerically, it may be assumed that in the initial example 500 units rather than 300
units are used up, so that the physical volume of inventories decreases by 100 units. According to LIFO practice,
the inventory change would be minus $500. This represents
acquisitions of 400 units valued at $1,200, minus 400 units
used up valued at $1,200 (corresponding to the acquisitions) , and minus 100 units valued at; $500, reflecting the
cost price of the units included in the initial stock. According to the method adopted in this report, however, the inventory change would be valued at minus $300, measuring
the physical volume change at current prices, and an inventory valuation adjustment of $200 would be necessary.
This adjustment would account for the inventory loss
which arises because the 100 units of inventories used up
in excess of current acquisitions are valued at $5 each, $2
more than the current market price of $3.
The foregoing summary treatment of the problem of inventory valuation should not create the impression that
the subject is a settled one. On the contrary, there is a
great deal of discussion among accountants and national
income technicians both as to the broad principles and detail involved.
It should also be mentioned that many simplifying assumptions have been introduced into the summary in order
to bring out more clearly the basic nature of the problem.
In their absence, some of the generalizations made would
have to be qualified, although not changed in essence. In
particular, the assumption underlying the numerical examples, as well as some of the statements in the text, that
the prices of inventory goods change discontinuously between accounting periods but remain constant within
them, has permitted the neglect of some complicating factors which, although significant, are definitely of secondary
importance. This assumption should be noted specifically,
because the fact of continuous price change during the
year is quite important from the standpoint of the statistical calculations described in the section on Change in business inventories in Part III.

Imputations
As noted earlier, the measures of national output presented in this report cover not only output whose production and distribution give rise to explicit monetary transactions, but also certain types of income and product flows
which do not take monetary form. It has also been pointed
out that from a theoretical standpoint these imputations
represent modifications of the operational concept of final
output, and that they are made to correct for anomalies
and other disturbing omissions that would otherwise result. The imputations made are the result of concrete considerations and of the traditions of national output measurement. They do not and cannot represent a logically
clear-cut exhaustive list, but merely a pragmatic selection
among a wide variety of possible imputations.
The general procedure for allowing for nonmonetary
income and product flows in the national accounts is to
imagine that the flows in question take monetary form and
to reconstruct the accounts to reflect consistently these
flows. The business account is affected by four imputations : wages and salaries paid in kind, the rental value of
owner-occupied houses, food and fuel produced and consumed on farms, and nonmonetary income and product
flows arising in connection with financial intermediaries.
These will be discussed in turn.

40

1951 NATIONAL INCOME SUPPLEMENT

Wages and salaries paid in kind
An imputation is made for wages and salaries paid in
kind in the form of food and lodging in industries in which
this type of arrangement is of quantitative importance and
is regarded as involving a clear supplement to monetary
wages and salaries. Imputed items are valued at cost to the
employer. Needless to say, difficult and somewhat arbitrary decisions are involved in delimiting the area of this
imputation and in establishing the proper valuation.
In effect, the imputation takes the form of assuming
that the employer, instead of furnishing his employees
with free food and lodging, pays them corresponding
amounts of wages, and that the employees in turn use them
to buy the items previously purchased by the employer.
Wages and salaries (in income originating in business)
and sales to persons (in business product) are thus raised
by corresponding amounts. In terms of the more technical
implication of the procedure, intermediate purchases by
the employer are converted into factor costs (wages and
salaries) and final purchases (consumer expenditures).

Rental value of owner-occupied homes
The imputation for the rental value of owner-occupied
homes is made to provide comparable treatment between
rented and owner-occupied housing. It assumes that home
ownership is a business producing housing services which
are sold to the home-owner in his capacity as tenant. These
sales are estimated in terms of the sum for which the particular type of home could be rented, and the expenses of
the home owners are deducted to obtain imputed net rent.
The imputed gross total becomes a part of sales to persons,
or consumer expenditures, and imputed net rent becomes
a part of the rental income of persons.
It may be wondered how the balance of the accounts can
be maintained if for imputed rents a gross item is entered
on the credit side and a net item on the debit side. The
inconsistency is only apparent. Adjustments corresponding
to the expense items which constitute the difference between imputed gross and net rent are made simultaneously
in several components of the gross income and product
flow, and secure balance.
One of the expense items, depreciation on owner-occupied homes, is added to capital consumption allowances. In
the absence of imputation, it would not enter the purview
of the national accounts. Indirect business taxes are raised
by the amount of property taxes included in the expenses of
owner-occupants. Otherwise, these taxes would be classified as personal taxes (see the discussion of the personal
account below). Mortgage interest serves to raise the "net
interest" item in the business account. Without the imputation, it would be entered as interest paid by the personal sector. Finally, all other expenses, such as for supplies and materials necessary for the maintenance of
owner-occupied homes, are classified as intermediate business purchases charged to current account. Without the
imputation, they would be counted as final products, as
elements of business sales to persons.

Food and fuel produced and consumed on farms
The imputation for food and fuel produced and consumed on farms closely follows the scheme of the rental
imputation. In this instance the accounts are reconstructed
to conform to a situation in which the farmer sells the
food and fuel to himself. An imputation for the full value
of the food and fuel (at prices received by farmers for
this type of product) is made in business sales to persons,
and an imputed net profit on the production of this food



and fuel is included in the income of unincorporated farm
enterprises. The apparent inconsistency of a gross imputation on the product side and a net imputation on the
income side is resolved in a manner similar to that of the
rental imputation.

Commercial banks and investment

trusts

Imputed income and product flows arising in connection
with financial intermediaries involve some of the most
complex constructions of national income and product
measurement. Several distinct types of procedures are
involved, and will be discussed in turn.
The ordinary methods of measuring value added to total
output in terms of income and product flows break down
in the case of commercial banking. This is because an element of the income and product in this area does not take
monetary form. An imputation is introduced to make it
explicit and, as a consequence, a much more satisfactory
picture of value added emerges.
The situation is illustrated in exhibit 13 by means of an
income and product account for a commercial bank, drawn
up in conformity with the principles of the Consolidated
Business Income and Product Account. Only a few transactions essential to the problem are covered, in order to
simplify the presentation.
Exhibit 13.—Income and Product Account of a Commercial Bank,
Monetary Transactions Only
[Thousands of dollars]
Wages paid
_
Net interest paid
_
Interest paid on deposits
Less: interest received
ProBt..
_
_

50
—95
5
100
30

Service charge receipts
Less: current account purchases from
other
firms

Income originating

—15

Product originating

„

10
25
—15

On the credit side of this account, the value added to output by the commercial bank is calculated in terms of product flows by deducting from its sales, consisting of monetary service charges, its current account purchases from
other firms. (It will be remembered that this netting yields
the desired value of final production since sales and purchases of intermediate products cancel for the economy as
a whole). In terms of incomeflows,value added is obtained
on the debit side by summing the distributive shares, with
interest netted.
Since monetary service charges made by commercial
banks are low in relation to total costs incurred, income*
and product originating appears low—in the present example it is actually negative. It is evident that the conventional method fails to give a proper accounting of output originating in the commercial banking area. Some
income and product flows not taking monetary form must
occur, omission of which results in seriously incomplete
measurement.
The product flows in question are identified as the services rendered by banks without explicit charge to their
depositors, such as checking, bookkeeping, and investment
services in connection with the handling of deposits. In
lieu of monetary service charges, banks finance the cost
of these services by retaining part of the property income
earned by investing deposits instead of paying it out to the
depositors. This retained income is assumed to represent
the income flows not taking monetary form.
To obtain an adequate picture, the accounts are redrawn
as they would appear if this short-circuiting of income and
service flows had not occurred and, instead, commercial
banks had (1) paid out to depositors all property income
earned on the investment of their deposits and (2) charged
them fully for the cost of the services rendered to them.

SURVEY OF CURRENT BUSINESS
An item for imputed interest paid (equalling property income received minus interest paid on deposits) is entered
on the debit side of the accounts. On the credit side, an
entry is made for imputed service charges (equalling total
operating expenses of banks, including profits, less monetary service charges). It can be seen by reference to exhibit 13 that the two must always balance: imputed service
charges = wages paid (50) + current account purchases
(25) + profits (30) — monetary service charges (10) =
imputed interest paid = interest received (100) —interest
paid on deposits (5) = 95.
This imputation is added, in exhibit 14, to the data
shown in exhibit 13.
Exhibit 14.—Income and Product Account of a Commercial Bank,
Monetary and Imputed Transactions
[Thousands of dollars]
Wages paid
__
Net interest paid
_
Monetary interest paid on deposits
Imputed'interest paid on deposits.
Less: monetary interest received™
Profit
Income originating

50
0
5
95
100
30
80

Service charge receipts
105
Monetary
10
Imputed
— 95
Less: current account purchases from
other
firms
25
Product originating

80

The nonmonetary income and product flows having been
made explicit, a more adequate accounting of the value
added by commercial banks appears. Also, these banks are
revealed in their role of financial intermediaries. Interest
is seen not to originate in banking, but to be transferred
by banking from the industries in which it originates to
the depositors to whom it accrues. (A minor complication
is introduced if, in addition to receipts of interest income,
receipts of dividends by commercial banks are taken into
account. See Part III, section on Interest)
Next, the imputed banking flows must be traced further
through the economy to determine their ultimate effect on
the size and structure of national income and product. This
is done on the basis of the ownership of the deposits in
connection with which the imputed flows arise. To the extent that these deposits are owned by businesses, matching
debit and credit entries are made in their accounts—the
debit for imputed service charges paid and credit for imputed interest received. The balance of the accounts is not
disturbed; for businesses affected, purchases of intermediate products are increased by the amount of imputed
service charges and net interest paid is decreased by the
amount of imputed interest received.
Thus, to the extent that the deposits of commercial
banks are held by business owners, there is no change in
the size of national product or income. Imputed service
charges cancel as intermediate products in the consolidation of the business system, and so do the inter-industry
imputed interest flows. All that occurs is a redistribution
in the industrial origin of output, in the process of which
the share of banking is increased and that of other industries is reduced.
To the extent, however, that the ownership of bank dePosits is vested in persons, the results are different. Imputed service charges made to persons constitute a final
Product and appear as a component of sales to persons
u
nder personal consumption expenditures for "services
tendered without explicit charge by financial intermediates, other than life insurance." Imputed interest paid by
banks to persons serves to increase net interest by an identical amount. Both product and income originating are
thus raised to reflect nonmonetary income and product
received by persons from banking. (In this discussion, it
will be noted, the accounting for imputed flows between



41

banking and government has been neglected. For this detail, see the section on Interest, in Part III.)
The above description of the measurement of imputed
flows in banking is only a brief summary of a complex subject which is still the subject of lively discussion among
technicians in the field. The procedure has been criticized
in general as unduly complex and, more specifically, as
based on certain assumptions of doubtful validity. Particular exception has been taken to the assumption that
all banking services not explicitly charged for are rendered
to depositors and that the borrowers of bank loans are not
involved, as well as to the assumption that these services
are distributed in proportion to the ownership of the volume of deposits irrespective of turnover.
While these and other objections have some merit and
it is hoped that a simpler and more cogent solution may be
found to deal with the underlying problem of measuring
the value added to output by banking, it would appear that
the present procedure, all things considered, is the most
satisfactory devised so far. Whatever its particular limitations, it attempts to measure a real element of income and
product in the business economy and permits a sensible
solution to the problem of allocating income by industries.
An imputation essentially similar to that for banking is
made in connection with investment trust type of financial
institutions. The precise mechanism of this imputation
can be traced in the light of the above discussion of banking on the basis of the additional detail provided in the
section on Interest, in Part III.

Life insurance and mutual financial intermediaries other than life insurance
The treatment of life insurance involves the second
major type of imputation which is made in connection with
financial intermediaries. Imputations are introduced because the standard national income and product classifications break down owing to the combined saving and insurance functions performed by life insurance. It is not possible to classify the explicit transactions which occur between life insurance companies and their policy holders
into the conventional classifications of current receipts
versus capital transfers and of consumption and saving.
Accordingly, in the income and product accounts imputed
transactions are substituted for the explicit transactions.
Specifically, claims and premiums are disregarded. Next,
the property income of life insurance companies which is
withheld to the account of policy holders is treated as if
it were actually disbursed in the current period. This item
becomes imputed interest in the net interest component of
income. Finally, the companies are regarded as explicitly
charging policy holders for their services, as measured by
operating expenses. An imputation equal to these expenses
is entered in the business account under sales to persons.
It appears in personal consumption expenditures as "Expense of handling life insurance."
That a balance between the income and product accounts
is secured if life insurance is treated in this manner can be
seen most simply by realizing that, as far as the totals are
concerned, life insurance companies have in effect been
treated as individuals rather than businesses. Claims and
premiums have been cancelled as though they constituted
transfers among individuals; property incomereceived by
these companies has been converted via the interest' imputation into property income received by policy holders;
and operating expenses incurred by the companies have
been converted by means of the service charge imputation
into final purchases made by policy holders. The balance
of the Consolidated Business Income and Product Account

1951 NATIONAL INCOME SUPPLEMENT
Exhibit 15,—Illustration of Treatment of Mutual Life Insurance
[Thousands of dollars]

i!

M itual Lift Insurance
Credits

Debits

ess

D e a t h claim*
W*ges
Coat purchases

Premiums
Interest..^.

.,

200
400

300
800

Interest
Wages

Interest
Sales...-

800
COO*

-

800
1200

Sales
Sales
Sales (business
capital account)

Interest
Wages..

800
. . . 1200

400
'_ 1100

-

capital account)
1400

1400

Premiums
Purchases

400
1100

_ _.

300
1100

Death claims
Wages
Wages

1400
Purchases
Purchases

Interest

1700

100
200
1200
1500

_ 1100 Wages___
. 600* Wages

500
2000

2000

..

500
2000

Sales
Sales

Credits

Debits

Credits

Debits

2000

1100

700
WaRes
Cost purchases

~

Persons

Other Business

._ 200
- . 1200
800*
2200

•Imputed

thus reflects, in essence, the balancing accounts of thre
business system other than life insurance.
The effect of the treatment of life insurance on personal
saving may be anticipated at this stage. Since the property
income and operating expenses of life insurance are imputed to policy holders, and receipts and payments of premiums and death claims are disregarded, a measure of
personal saving results (in the personal income and expenditure account described later) which consolidates the
saving of life insurance companies with that of policy
holders.
An illustrative treatment involving mutual life insurance, shown in exhibit 15, may serve to make this summary more concrete.
The upper panel of the exhibit records the monetary
transactions which occur in a simple economy involving life
insurance companies, other businesses, and persons. The
lower panel reflects the transactions that would be recorded in the national income and product accounts. (Since
nonbusiness production does not occur in this example, a
distinction between business output and national output
need not be made.) The lower panel differs from the upper
panel by excluding death claims and premiums and by including imputed income and service transactions.
Gross national product (2200) is obtained from the lower
panel by adding sales (imputed) to persons by life insurance companies (600), sales to persons by other business
(1100), and business capital formation (500). National
income and personal income (also 2200) are obtained by
adding wages paid by life insurance (200), wages paid by
other business (1200), and (imputed) interest paid by life
insurance (800). Personal saving (500) is obtained by
deducting from personal income (2200) monetary and imputed personal consumption expenditures (1700). It can
be seen that personal saying reflects the consolidated saving of persons and life insurance, as shown by the consolidated change in their net asset positions (400 for life
insurance and 100 for persons, as indicated by the differences between the credit and debit totals in the upper
panel).
The treatment of stock life insurance companies is essentially similar to that of mutual life insurance except
that the operating expenses of life insurance companies are
measured to include the companies' profits, which are
correspondingly included in total income.
Further detail on the specific items entering the calculation of the property income flows (in the present example
only interest was allowed for), together with information
on somewhat similar imputations in connection with mu


tual financial intermediaries other than life insurance, is
. given in Part III in the section on Interest. This should be
read in the general framework provided above.

Government

enterprises

In addition to financial institutions, other types of business organizations require special treatment in the national
income and product accounts. Government enterprises deserve explicit comment, not because they are important
quantitatively in the United States economic structure,
but because they complicate the accounts in a rather obtrusive way.
The distinction between government enterprises and
general government can be understood readily even though
it cannot be drawn with theoretical precision. Government
enterprises are those agencies of government whose
operating costs are at least to a substantial extent covered
by the sale of goods and services, in contrast to the general
activities of government which are financed mainly by tax
revenues and debt creation. Government enterprises, in
other words, conduct operations essentially commercial in
character even though they perform them under the auspices of the State. The.Post Office and public power systems are typical examples of government enterprises. On
the other hand, State universities and public parks, where
the tees and admissions collected cover only a nominal part
0
* operating costs, are part of general government
activities.
Since a choice must be made, it is preferable to consolidate government enterprises with business rather than
with government. However, it seems desirable in handling
tnese entities to introduce certain departures from the
standard procedures adopted for ordinary business enterprises. (1) The profits of government enterprises are not
included as part of factor cost in income originating in
business, but instead are treated as a nonfactor charge
against the value of output (see "subsidies minus current
surplus of government enterprises" in table II). (2) The
capital formation of these enterprises (including both
nxed capital formation and inventory change) is classinea m government purchases rather than gross private
domestic investment. (3) The profits ("current surplus")
oi government enterprises are calculated without deduction either of net interest paid by them or of depreciation,
ineretore, depreciation charges of government enterprises are not included in capital consumption allowances;
ana net interest payments by government enterprises are
not counted as net interest payments by business. Since
tnese modifications of the standard treatment of business

SURVEY OF CURRENT BUSINESS
enterprises do not involve changes in the debit or credit
totals, it can be seen that the balance of the business account is not disturbed.
The effect of the treatment of government enterprises
on the government account (see table IV) may be anticipated at this stage by noting that net interest paid by
these enterprises is combined with that paid by general
government and that their current surplus is treated as a
receipt in the government account. These steps, in conjunction with (2) above, serve to consolidate the surplus
(or deficit) of general government with that of government enterprises. This is so because net interest paid plus
capital formation less current surplus of government enterprises measures the net excess of their expenditures
over their revenue.
Several considerations suggested the particular accounting for government enterprises adopted in this report.
With respect to the profits ("current surplus") of government enterprises, it was thought desirable to exclude them
from factor charges because, in a way too difficult to disentangle, they were recorded net of losses which in effect
reflected government subsidy operations conducted
through the medium of government enterprises, mainly
in World War II. The inclusion of government enterprise
losses due to subsidy operations would have offset the
corresponding subsidies in total income originating, and
would have run counter to the general procedure of treating government subsidies as part of total factor cost.
The decision not to count net interest paid by government enterprises as net interest paid by business (and,
correspondingly, to calculate the current surplus of government enterprises before deduction of net interest paid
by them) was closely related to the decision not to treat
their profits as part of factor cost. In general, a meaningful total of factor cost with respect to property factors can
be obtained only if profits and interest are combined, and
the inclusion of net interest paid alone might have been
misleading.
Next, government enterprise capital formation was combined with government purchases rather than with private
investment because the dividing line between capital purchases by government enterprises a n d those by general
government is quite arbitrary. For instance, the construction of post offices is recorded in the general budget of the
United States rather than in the accounts of the Post
Office. Pending an exhaustive classification of all government purchases of capital goods, it was thought preferable
to merge government enterprise capital formation with
government purchases.
Finally to be noted is that the government surplus or
deficit (consolidating both government enterprises and
general government) which is obtained by this general
procedure is the most useful definition of government surplus or deficit for many types of economic analysis.
The main aspect of the handling of government enterPrises is their treatment as business-type organizations
m order to avoid the classification of their current expenses
as final purchases. Beyond this aspect, however, the treatment of government enterprises is in essence not more
than a convenient means of disposing of a type of operation
that has not reached quantitative importance in the United
States total income and product picture. Were government
enterprise operations to assume greater importance in the
United States economy, it is entirely possible that some
Modification of their treatment in the national income
accounts would be called for.



13

The Personal Sector
The personal sector of the economy covers essentially
the consuming public. It consists chiefly of individuals in
their capacity as income receivers and consumers, but it
includes also nonprofit institutions, private trust funds,
and private pension and welfare funds.

Personal account
Unlike business transactions, which are summarized by
a profit and loss type of statement exhibiting the profit or
loss realized in the current period, personal transactions
are summarized by a statement of current receipts and
expenditures. This difference reflects, of course, the
fundamentally dissimilar nature of the two sectors of the
economy.
The personal account, shown in table III, represents a
consolidation of the accounts of all the persons who constitute the personal sector, just as the business account
presented in table II was derived by consolidating the accounts of all the firms included in the business sector.
The personal account shows, in general, the transactions
of persons with the other sectors of the economy. Since
nonprofit institutions, private trust funds, and private
pension and welfare funds are regarded as part of the personal sector, income receipts of these entities from other
sectors are included in personal receipts and their purchases from other sectors are included in personal
expenditures.
Conversely, since the account is consolidated, most
transactions between these entities and individuals, as well
as among individuals, are cancelled out in the process of
consolidation. This process of cancellation is not extended,
however, to the transactions among persons that are regarded as purchases of the services of factors of production
—for instance, wages paid to domestic servants and payments of wages and interest by nonprofit institutions. Instead, these transactions are reflected on both the receipt
and expenditure sides of the account, in order to preserve
a record of them which is needed in tracing the total flow
of production in the economy.

Classification of personal income
The classification of personal income on the right side
of the personal account in table III follows closely the
classification of the income items on the left side of the
business account in table II. In addition, however, to the
incomes originating in business, it also includes incomes
received from general government and from abroad, as
well as incomes derived from production within the personal sector.
The nature of the incomes derived by persons from
the business system has been covered in the discussion
of the business account. Separate entries for each of
the items disbursed by the business system can be found
in the personal account except for interest and dividend
payments, which are included in the interest and dividend entries but not shown separately, for lack of statistical information.
It will be noticed that only incomes currently received
by persons are included as receipts in the personal account. Thus, wage and salary receipts represent actual
receipts and differ from wage and salary accruals during
the same period by the excess of accruals over disbursements and by employee contributions for social insurance, which, along with similar employer contributions,

1951 NATIONAL INCOME SUPPLEMENT

44

Table III.—Personal Income and Expenditure Account, 1939
[Millions of dollars]
1
2

Wages and salary receipts:

Personal consumption expenditures:
Purchases of direct services:

8

Compensation of employees:
Wages and salaries paid
Supplements paid:
Employer contributions
surance
Other labor income
Interest paid

9

Income originating in and net and gross product of

3
4
5
G
7

_

2,150

11
12
13

11
17
801

2,979

Net purchases from business

64,003

Personal saving

Other labor income:
Business
Government
Households and institutions

431
87
17

Income of unincorporated enterprises and inventory valuation adjustment

1.._

3,465

Dividends

3,796

2,440

._ _

Rental income of persons

Personal interest income

5,417

Government transfer payments

' 2,512

2,701

Business transfer payments
14

PERSONAL OUTLAY AND SAVING

72,607

constitute receipts to government rather than to individuals. Similarly, only corporate profits distributed in
the form of dividends appear in the personal account.
For unincorporated enterprises, no useful distinction can
be made between distributed and undistributed income,
and the entire amount is transferred to the personal
account.
Income receipts from government consist of wages
and salaries, other labor income, interest, and transfer
payments. With the exception of interest payments, they
are listed separately in table III. Government interest
payments to persons are included in personal interest
income.
The definition of each of these income receipts is similar
to that of the corresponding receipts derived from business and does not require separate discussion. It should
be kept in mind, however, that although the formal definitions of the items are similar their actual content may be
very dissimilar owing to the different nature of government operations. For instance, wages and salaries received from government include military wages and salaries, a type of payment which is not made by the business
sector. Similarly, government transfer payments include
social security benefits, relief, and various payments to
former members of the military establishment, all of
which constitute payments that are unique to government operations and have no genuine counterpart in business.
Wage and salary receipts from abroad appear explicitly
as receipts of the personal sector. They consist of the
wages and salaries of American residents employed in the
United States by foreign governments and international
organizations. Personal interest and dividend receipts
from abroad are included with other personal interest
and dividend receipts under personal interest income and
dividends.
Personal income derived from households and institutions consists of income receipts of individuals for productive services rendered within the personal sector of the



11,282

484

Net purchases from abroad
Personal tax and nontax payments

36,250
7,343
2,150
2
596

for social in-

households and institutions._
10

Disbursements by:
Business
:
Government
Households and institutions
Eest of the world.,
Less: Employee contributions for social insurants

451

PERSONAL INCOME

72,607

economy. Incomes included under this heading are those
received for services rendered directly to households, such
as domestic service, and the incomes received by employees ' of, and suppliers of capital funds to, nonprofit
institutions. As has been noted, in order to maintain a
comprehensive record of total productive activity these
transactions are not cancelled in deriving the consolidated
personal account even though they occur within the personal sector.

Relation of national income and personal income
The bulk of personal income is derived from production,
and personal income is therefore used widely as an indicator of economic activity. However, it is not a measure
of the value of national output because it excludes certain incomes that accrue in production but are not distributed to persons and includes certain other income receipts that do not accrue in production. The relation between national income, which is a measure of output in
terms of factor income flows, and personal income is shown
in exhibit 16.
Exhibit 16*—Relation of National Income
and Personal Income, 1939
_ _ _ _ ^ _

[Millions of dollars]

National income

72,532

Less: Undistributed corporate profits. _
_
_
Corporate profits t a x Ihbilitv
" " _ "
Corporate inventory viluitioa Hjustmaritll..!
---Contributions for sodil insuring
" " " " "
Excess of wage accruals ovar disbursements! I
II."

1 T2C*>
1,462
—714
2,136
°

Plus: Net interest p-iH by Kov>rrvn mt __'___
Government transfer payments
__
~"
~
_
Business transfer p*y.u*nts_.__V_ _ _ . I " I I I _ . " " " " " I - I -

M05
2,512

Eq-als: Personal income

72,607

.

_. _

;

451

In this exhibit, personal income is derived by deducting from national income all incomes earned in current
production but not received by persons and by adding to
it the incomes received by persons but not earned in cur-

SURVEY OF CURRENT BUSINESS
rent production. The deductions consist of all elements
of the "corporate profits and inventory valuation adjustment" component of national income except dividends
(undistributed corporate profits, corporate profits tax
liability, and corporate inventory valuation adjustment)
and of the parts of employee compensation not distributed
to individuals (contributions for social insurance and the
excess of wage accruals over disbursements). The additions consist of transfer payments from government and
business and of net interest paid by government The
latter item represents the excess of the total interest
payments by government over its total interest receipts,
and must be added to national income because the net
interest component of national income falls short of the
interest receipts of persons by that amount. (For a detailed tracing of interest flows, reference is again made to
the Interest section of Part III).

Personal outlay and saving
The debit side of the personal account contains three
general categories: personal consumption expenditures,
personal tax and nontax payments, and personal saving.
Personal consumption expenditures consist chiefly of
net purchases from business, corresponding to the credit
entry for consolidated net sales to persons in the business
account. Also included are purchases made directly by
persons from abroad (mainly while travelling abroad, but
including also international remittances) and purchases
of direct factor services.
Purchases by persons of direct factor services measure
production originating in the personal account. They are
entered at their full cost, which consists of the compensation of employees and interest payments. As already
mentioned, much of this expense is matched by a receipt
entry in the personal account itself. However, employer
and employee contributions for social insurance appear
as a receipt in the government account, while the interest cost of production in the personal sector is composed
of payments to all sectors of the economy.
It will be noted that there is no entry for purchases of
goods and services from government. This is simply because all government agencies which are conceived as
selling their services for a market price are defined as
government enterprises and classified in the business sector, so that consumer payments to them, such as for
postage stamps, appear as purchases from business.
Payments by persons to general government, consisting
chiefly of direct personal taxes, are classified as personal
tax and nontax payments, the second general category
°n the left side of the personal account. This entry does
toot include contributions for social insurance. These are
toot actually received by persons and are excluded in the
computation of personal income. It may be noted, howler, that the total individual income tax, including the
Portion withheld at source, is treated as though initially
Received by the personal sector. In other words, personal
income is measured before deduction of this tax. The
^merent treatment of these two types of withholding is
somewhat arbitrary. Disposable personal income, of
c
°urse, is measured net of both of them.
The amount remaining out of personal income after the
Purchase of goods and services and payments to govemvin i S Personal saving. It comprises the saving of indil
anHfu isnacv Fnd i n & owners of unincorporated enterprises.
i
*
g of the organizations that are considered
of
the personal sector, namely private pension and



45

welfare funds, private trust funds, and nonprofit institutions serving individuals. It is the sum of the saving and
dissaving of these groups.
Seen from another aspect, personal saving measures
the net change in the asset position of persons as between
the beginning and end of the accounting period. Personal
saving is made up of the net increase in all the kinds of
assets in which recipients of personal income invest, offset by the net increase in all the kinds of liabilities which
they incur.
Included are not only the items commonly thought of in
connection with personal saving, such as changes in cash
and deposits, in security holdings, and in personal indebtedness, but also the net investment of noncorporate
business in realty, equipment, and inventories. Personal
saving also includes changes in the reserves of life insurance companies and mutual financial institutions, as explained above in the discussion of the treatment of these
entities in the national income and product accounts.
Assets are defined, of course, in the context of the conceptual framework underlying national income measurement. Capital gains and losses are not counted as changes
in asset position, and all consumer purchases of goods
except residences are classified as consumption rather
than as investment.

Imputations
As in the case of business output, the measurement of
output in the personal sector is not confined to monetary
transactions, but also takes into account imputed income
and product flows. The most important of the imputations is for the value of food provided free to employees
of households and nonprofit institutions. The imputation
involves an increase in the wages and salaries of employees, equal to the cost of the food to the employer, on
both the credit and debit sides of the personal account.
The reconstructed account depicts the situation which
would prevail if monetary wages were raised by the value
of the imputation and the corresponding food were purchased by the employees rather than by their employers.
An imputation is also made for the value of free lodging
furnished to clergymen, employees of nonprofit hospitals,
and certain quantitatively unimportant groups. None is
made in the case of domestic servants, because it is felt
that, as a general proposition, they do not regard the
lodging furnished them as an addition to income.

Nonprofit institutions
Nonprofit institutions include religious organizations,
social and athletic clubs, labor organizations, nonprofit
schools and hospitals, charitable and welfare organizations, and other nonprofit organizations furnishing services to individuals. It has already been pointed out that
they are consolidated with individuals in the personal
account. While the principle of consolidation is clear,
some fairly intricate manipulations of items are involved.
These may be illustrated by reference to exhibits 17 and
18, which are designed to show the treatment of the major
transactions involving nonprofit institutions. Certain
simplifications have been made to keep the example to
manageable proportions. Investment by nonprofit institutions (counted as part of private domestic investment)
has been excluded, as have government payments to nonprofit institutions (included in government transfer payments).

1951 NATIONAL INCOME SUPPLEMENT
Exhibit 17.—Illustration of Treatment of Nonprofit Institutions Serving Individuals
[Thousands of dollars]

Wane* U ) - l.r>
I m m - s t (2)._ . . . . . . . . .
:i
I n t e r e s t (»)
2

l'urchuscs (4)
Cash relief (5)

12
4

Gifts (0)
Gifts (7)
Dues (8)
Interest (9)

-

11
5
8
7

Gifts (6)
Dues (8)
Purchases (10)
Interest (11)
Wages (12)

.

11
8
40
1
0
(36

31

3(i

Exhibit 17 shows a set of interrelated transactions of
nonprofit institutions, individuals, and corporate business.
Exhibit 18 gives the Personal Income and Expenditure
Account corresponding to these transactions. In essence,
the latter account is obtained by consolidating the transactions of nonprofit institutions and individuals. In this
process, the transactions involving cash relief, gifts, and
dues cancel out. However, cancellation is not extended
to transactions between nonprofit institutions and individuals involving payments for factor services. The record
of these transactions is preserved in the comprehensive
accounting for national output.
Kthihil lit.—Personal Income and Expenditure Account Based
on Exhibit 17
[Thousands of dollars]
IVrsouiU consumption expenditures
Purchases of direct services
Coinpen.sution of employees
Wages and salaries paid
W a w s (I)

Wape and salary receipts
15

WUKCS (12)..
6
Interest paid
Interest (2)
.
3
o
Interest (3)
Interest (11)
1
Income originating in and net
andyrosa product of households;i
7
and institutions
Nut purchases from business
Purchases (4)
. . ]\>
40
Purchases (10)
iVrsonul suvinn.,
—
PERSONAL OUTLAY AXD
SI
SAVING

Wa"es (12)
Wanes (13)
Personal interest income
Interest (2)
Interest (9)
Husin^ss transfer payments
Gifts (7)

15
G
45
3
7
,)

—
PERSONAL INCOME

Debits

Credits

Debits

Credits

Debits

Corporations

Individuals

Nonprofit Institutions

81

Thus, employee compensation [wages (1)] and interest paid by nonprofit institutions to individuals [interest
(2) ] appear on both sides of the personal income and expenditure account and constitute components of "income
originating and net and gross product of households and
institutions/' which measures the value added to national
output by the personal sector. In addition, this measure
includes the compensation of household employees [wages
(12)] and interest paid to the business sector by nonprofit institutions [interest (3) ] and by households [interest (11)].
Private trust funds and private pension and welfare
funds are also consolidated with individuals in the personal
sector. In these cases, however, the procedure is more
straightforward since these entities do not produce.

Wages (1)___.
Wages (12)
Wages (13)
Interest (2)
Cash relief (5)

15
6
45
3
_.. 4

Wages (13)
Gifts (7)
Interest (9):

73

Credits
45
5
7
57

Interest (3)
Sales (4)
Sales (10).__
Interest (11)

.

2
IO
' 40
i
55

divided into significant social groups, such as farmers,
other businessmen, independent professional practitioners,
and wage earners, showing separately the incomes of
these groups and their disposition among consumption,
taxes, and saving. At the present stage, inadequacy of
statistical materials limits the development of comprehensive measures of this sort.
A second significant breakdown of the household portion^ of the personal account—now in preparation in the
National Income Division—would be by size of income.
The present breakdown of personal income receipts, as
shown in table III, does not shed much light on the income
distribution. In addition to their use in welfare studies,
size distributions of income, taxes, consumption, and saving would be useful in functional economic analysis.
The Government Sector
The government sector includes Federal and State and
local general governments and the social insurance funds
administered by them. These funds comprise those set
up under the Social Security and Railroad Retirement
programs, State health insurance funds, the retirement
funds established for government employees, and military life insurance funds. The distinction drawn between
general government and government enterprises, which
are included in the business sector, has already been described.
Government account

The transactions of government are summarized by a
consolidated statement of receipts and expenditures, as
presented in table IV. In many ways this statement resembles the conventional budgets of governmental bodies.
However, there are several differences.
In the first place, the account shown in table IV is consolidated. All levels of American government, the social
insurance funds administered by them, and the net expenditures of government enterprises are covered. (However, separate breakdowns for the Federal Government,
btate and local governments, and social insurance funds
are given in tables 8, 9, and 10 in Part V.)
Second, the account excludes receipts from the sale of,
and expenditures for the acquisition of, financial and
second-hand fixed assets. Third, the timing of receipts
Further breakdowns of personal account
and expenditures differs from that of conventional budget
statements, being synchronized with the timing of the
The personal account, like the business account, includes
corresponding expenditures and receipts in the other acsomewhat heterogeneous elements, and further breakcounts. Personal taxes are on a cash basis, other taxes
downs of it would be useful. Two, in particular, should
are on an accrual basis, and purchase entries reflect time
be mentioned.
of acquisition rather than of payment. Finally, the clasIndividuals might be distinguished from the various
sification of transactions differs from that of convention
types of quasi-individuals included in the personal acbudget statements, being
count; and, more important, individuals might be sub- output measurement and adapted to the needs of national
general economic analysis.



SURVEY OF CURRENT BUSINESS

Classification of receipts and expenditures

47

Employee compensation versus transfer payments
A distinction is made between two types of government
payments to individuals in their nonbusiness capacity—
employee compensation and transfer payments. The former is in return for current productive services rendered;
to the latter no such services correspond. This distinction
is a basic one, because it segregates flows which are taken
as measures of value added to national output from flows
which are not so regarded. Hence it is important to see
how it is made in practice.
Difficulties arise in the concrete interpretation of the
term "productive service." For instance, in the classification of work relief wages that were paid in the depression of the thirties, the question arose as to whether they
should be classified as labor returns or as transfers. A
more fundamental issue is raised by the national income
estimates of some foreign countries, in which military employee compensation has been excluded from factor income
and treated as a transfer on the basis of some more ultimate, philosophical notion of productiveness.
In the United States estimates, the criterion for classifying an item as employee compensation or as transfer
hinges on the current performance of work. No attempt
is made to probe into the issue of whether the work is
performed efficiently or whether, in some more ultimate
sense, it is "productive." The practical impossibility of
drawing distinctions of this type has been covered inferentially in the evaluation of the basic notions underlying
national output measurement.
But even on the basis of the simple current-work-performed criterion, a clear-cut distinction between wages
and salaries and transfer payments does not emerge in
all cases. For it is not always possible to say whether a
specific payment is made for the current work that is'
performed or for other reasons. Allowances for soldiers'
dependents presented a classification problem of this type.
It was decided to classify them as employee compensation
rather than transfer payments, although a case for the
opposite decision also could have been made. On the other
hand, terminal leave payments, bonuses, and other deferred payments (such as under the "G. I. Bill") to members of the armed forces of World War II were considered
transfers, as they were disbursed at a date far removed

Most of the transactions contained in the government
account have already been discussed in connection with
the business and personal accounts.
The labor cost items, which appeared on a receipt basis
in the personal account, are on an accrual-cost basis in
the government account. The difference consists of employers' and employees' contributions under retirement
systems for government employees. In table IV the employer contribution is treated as a simultaneous government expenditure and receipt. The employee contribution
appears as a deduction from wages and salaries in the personal account and as a receipt in the government account.
Transactions with abroad, not yet discussed, appear
explicitly under "net purchases from abroad" and are included also in "net interest paid." The former entry measures the excess of government purchases from foreigners
over government sales to them (cash gifts are treated
like purchase and sale transactions in this connection, but
loans are excluded). Net interest paid is defined as the
excess of total interest payments by government to all
sectors over total interest receipts from all sectors. Government enterprises are covered in both payments and
receipts.
Most of the salient features of the classification of government receipts and expenditures have come to attention
already, in connection with the construction of measures
of total national output. However, certain points may be
elaborated now that all government transactions have been
assembled.

The value of government output
Value added by government to national output, like value
added in all other nonbusiness sectors of the economy,
is measured by total factor cost incurred. In the case of
the government, factor cost is confined to the compensation of government employees. Interest payments are not
counted. Two issues should be considered as relevant to
this treatment: first, the distinction between employee
compensation and transfer payments; and, second, the
exclusion of monetary interest and the question of substituting an imputed interest series for it.

Table IV.—Consolidated Government Receipts and ttxpcmlilures Account, 1939
[Millions of dollars]
15 Personal tax and nontax receipts

1 Purchases of goods and services:
2
3
4
5
6
7
8
9
10
11
12

Purchases of direct services:

Compensation of employees:
7,343
Wages and salaries
Supplements:
199
Employer contributions for social in87
surance —
Other labor income
7,629
Income originating and net and gross product

Net purchases from business

fc

5,375

.

1,462

17 Indirect business 'tax and nontax accruals

«.), 365

18 Contributions for social insurance:
19
Employee contributions _
20
Employer contributions:
21
Business
22
Government
23
Households and institutions

596
1,330
199
11

24 Deficit ( + ) or surplus (—) on income and product transactions

_

1,867

2,512
-

1,205
Net interest paid
485
13
Subsidies minus current surplus of government enterprises- - - 17,270
14
GOVERNMENT EXPENDITURES
-- 


2,440

64

Net purchases from abroad
Transfer payments

•

• 16 Corporate profits tax accruals

I-

GOVERNMENT RECEIPTS AND DEFICIT

17,270

48

1951 NATIONAL INCOME SUPPLEMENT

from the time the military service was performed. Counting these payments as compensation for services would
have necessitated allocating them over past years on an
accrual basis—a course which seemed artificial and would
have involved continuous revisions of the national income
and product estimates for the war period.
Government interest
Government interest payments are not regarded as
measuring value added to output by government because
they are subject to fluctuations which in any common
sense notion cannot be regarded as representing corresponding changes in the value of current production. It
may be added that business interest can be included in a
measure of national output without such explicit consideration of its behavior. Any fluctuations in it not reflecting
productive activity are offset by opposite changes in business profits. Hence, the inclusion of business interest has
no distortive effect on the output measure and, in fact, is
necessary to secure the correct total.
Thus, value added by government takes account only
of the services of the labor factor whereas the valuation
of business output includes also returns to nonlabor factors. The question accordingly arises as to whether an
allowance should be made for the services of governmentowned property by the imputation of a rate of return to
it, somewhat analogous to the imputation of a return to
owner-occupied homes in the business sector of the
economy.
An imputation for government-owned property is not
made in the national income accounts for the United
States because the conceptual and statistical bases for
making a realistic and useful imputation are absent. The
analogy to the housing imputation does not hold. The
bulk of this imputation is anchored to realistic estimates
of the gross rental value of owner-occupied houses available from Census reports, based on comparisons of owneroccupied property with rental property of similar type.
In the case of the government no similar, market-based
information to establish the rental value of the vast bulk
of government structures and equipment is, or can be,
available. The rental value of the highway system or of
the Tennessee Valley Authority cannot be estimated by
reference to the rental value of property of similar type.
In the absence of a realistic market evaluation of the
rental value of government property, its net return would
have to be derived by estimating the total value of government real capital assets, segregating the part which
is deemed to be in productive use, and then applying to the
latter a rate of return to reflect the value added by the
property. Clearly, each of these steps would be highly
speculative, and a measure of imputed return useful in
realistic analysis would not be likely to result.

Decisions affecting valuation of business output
In the national product, output is valued at market
prices—inclusive of indirect business taxes and exclusive
of subsidies. The manner in which these two items are
defined therefore affects the total value of national product.
Indirect business taxes versus personal taxes
Indirect business taxes are taxes (other than social
insurance contributions) that are chargeable to current
cost by business enterprises; and personal taxes are taxes
paid by persons that are not so chargeable.



This distinction leaves the treatment of retail sales
and related taxes somewhat ambiguous, since in some
instances these taxes are included in the sales price and
charged to current expense, and in others excluded and
paid separately by the consumer. In the latter case it
would be possible to regard these taxes as personal taxes
and to list the corresponding purchases at values excluding them. In this report the procedure of treating all
these taxes as indirect business taxes forming a part of
market price has been adopted, because it is thought to
be the more meaningful from the standpoint of studying
market behavior.
Further emphasis on this type of study underlies a proposal to depart from the accounting distinction between
personal and indirect business taxes used in this report.
It has been suggested that for analysis of consumer behavior all taxes that are closely tied to consumer purchases should be treated as indirect business taxes and
included in personal consumption expenditures, regardless of whether they are chargeable to current cost by
business. For instance, automobile license and registration fees paid by personal consumers would, according to
this plan, be classified in personal consumption expenditures and indirect business taxes, rather than in personal
taxes as at present. The logic would be that payment of
these taxes is a determinant in the choice of consumers
as between automotive and other types of expenditures.
While this suggestion has some merit, it would raise difficult problems of classification. The influence of various
types of taxes on personal consumption is a matter of
degree and does not provide a clear-cut criterion of classification.
Subsidies versus purchases
Subsidies are monetary grants to business, and it is
usually easy to distinguish them from government purchases of goods and services. However, in certain instances a subsidy element may be included in the purchase price of an item in lieu of an explicit subsidy. A
clear-cut instance in which the subsidy element is recognized but not stated separately is Federal Government
payments for mail contracts. Payments of this type,
which are not important in the total, are regarded as
purchases, and no attempt is made to segregate the subsidy element.
Imputations
Imputations are made for wages and salaries paid in
kind to government employees. The most important of
these imputations is for food and standard clothing issued to members of the armed forces. It may be noted
that only standard, or personal, clothing is included, not
special clothing and equipment. Also, the rental value of
shelter provided is not allowed for. The principal line of
reasoning is that in many instances the provision of lodging to servicemen does not reduce their cash housing
expenditures and hence is not a clear addition to their
mcome.
In the recording of the imputations, the accounts are
reconstructed to correspond to a situation in which the
government paid out to its employees additional wages
equsj to the cost (to the government) of the food and
to
an
E f ™ » P ^ ^ e d and the employees themselves purchased these items from the business system. In the
government account (table IV), compensation of employees (and income and net and gross product original

SURVEY OF CURRENT BUSINESS
ing in government) is raised by the value of the imputation. But total government purchases of goods and
services are not changed because government purchases
from business are reduced by a corresponding amount.
In the business account (table II), there is a corresponding shift from sales to government to sales to persons.
Finally, in the National Income and Product Account
(table I), the imputation raises personal consumption
expenditures and gross national product, on the one
hand, and the compensation of employees, national income and the sum of charges against the value of national
product, on the other.
In view of the fact that an imputation is made for
wages and salaries received in kind, it may be wondered
why transfer payments, and also subsidies, are confined
to monetary transactions—why specific goods and services
given to individuals are not included in transfer payments,
and why those given to business are not counted in subsidies. The basic reason for this apparent inconsistency
is that, whereas in the case of wages and salaries a generally accepted procedure for imputation, partly pragmatic
and partly tradition-based, is available, this is not so
with respect to transfer payments and subsidies. The
principal difficulties in the way of establishing such a
procedure have been set forth in the discussion of the
basic notions underlying national output measurement.
By way of supplementary argument, it may be noted
that the introduction of transfer payments and subsidies
in kind would interfere with the function of the accounts
as a record of actual transactions. Of course, wage and
salary and other imputations that are made in the national accounts have a similar effect. In these instances,
however, it is felt that the resulting improvement in the
income and product components and totals outweighs the
disadvantages involved.
Two examples of the rather extreme complications of
the accounts that can arise from the introduction of imputations of transfer payments and subsidies may be
given.
Suppose, for instance, that services rendered by government employees in the administration of relief programs
were to be regarded as transfer payments in kind. In the
government account (table IV), transfer payments would
be increased and compensation of government employees
correspondingly reduced. In the personal account (table
III), transfer payments would be increased on the credit
side and employee compensation (and hence purchases
°f goods and services and income and net and gross product originating) on the debit side. In effect, the government employees rendering the services classified as transfer payments in kind would now be classified in the personal sector, as household employees. Finally, in the
National Income and Product Account (table I), personal
consumption expenditures would be raised, and government purchases lowered, by the amount of the imputed
transfer payments. It is apparent that these reclassifications would greatly reduce the value of the accounts as
records of the income and product flows that actually occur
among the major sectors of the economy.
Ol
\ assume that a subsidy in kind consisted of services
tendered by government employees. In this instance the
^classification would involve labelling as subsidies in the
government account payments actually made for wages,
jn the business account wages would have to be increased,
™ include wage payments actually made by the government, and offset by a corresponding increase in the deduction made for subsidies.



Social insurance funds
The consolidation of social insurance funds with the
accounts of general government is a straightforward procedure which need not be detailed. However, certain differences between the treatment of social insurance funds
and of privately-administered pension funds may be
pointed out. These stem from the fact that the social
insurance funds are consolidated with government while
private pension funds are consolidated with individuals
in the personal sector.
With respect to the measurement of employee compensation (and national income), the difference is merely one
of classification between shares—employer contributions
to government-administered funds are listed under "employer contributions for social insurance/' whereas employer contributions to private pension funds are included
in "other labor income." However, the effect of the difference in treatment on personal income and saving is more
substantive. Employer contributions and property income
received by privately-administered funds become elements
of personal income, and the saving of these funds part of
personal saving. Employee contributions into these funds,
as well as benefit payments made by them, are canceled
as constituting transfers within the personal sector. Employer and employee contributions and property income
received by social insurance funds, on the other hand, enter
government receipts; benefit payments made by them are
explicitly recognized (as transfer payments by the government) as a component of personal income; and the saving
of social insurance funds is a component of the government surplus rather than of personal saving.

Rest of the World Sector
The transactions of the rest of the world with the
United States are summarized in the rest-of-the-world
account presented in table V. The rest of the world covers
foreign countries, territories and possessions of the United
States, international organizations, and the United States
monetary gold stock. The gold stock is included in this
sector because net acquisitions of gold by the monetary
authorities from domestic sources are considered foreign
investment.
It may seem strange at first that the "rest of the world"
is a sector of the national economy, and, indeed, there
would be no need to consider it in the case of a closed
economy which had no dealings with foreign countries.
In the real world, however, trade and investment do cross
international boundaries. Consequently, to complete the
set of accounts it is necessary to include one which summarizes the transactions of foreigners with the three
domestic sectors of the economy.
The rest-of-the-world account is a receipt and expenditure account and, like the other accounts, consolidated.
It bears a close affinity to the balance-of-payment statement. It differs from this statement mainly in arrangement, with respect to netting and the classification scheme
applied to the transactions involved.
The debit side of this account shows the net purchases of
United States goods and services by the rest of the world.
It is divided among net purchases of direct factor services
and other purchases (net) from business, government,
and persons. Net purchases of direct factor services from
the United States by the rest of the world, as shown by
the net inflow of factor incomes to the United States,

1951 NATIONAL INCOME SUPPLEMENT

50

Table V.—Rest of the World Account, 1939
[Millions of dollars
12

2
3
4
5
6

Net purchases of direct services:
Wages and salaries
Interest
Dividends
Branch profits

7

Income originating and net and gross product

8

Net purchases from business

i)

Net purchases from government

10
11

Net purchases from persons

--

313
-

1,123
—

.

--

— 64
—484
888

measure United States national 5income and product originating in the rest of the world.
Because of the inclusion of gifts in net purchases from
United States persons and government, net purchases of
goods and services by the rest of the world cover all its
current transactions with the United States. The excess
of purchases over sales must be financed by a change in
the net international asset position (an increase of United
States claims on abroad or a decrease of foreign claims
on the United States). From the standpoint of the rest
of the world, this excess constitutes net foreign disinvestment in the United States, as shown on the credit side of
the account.

International gifts
Inclusion of cash gifts received by foreigners from the
United States in sales to United States persons and to the
United States Government, together with the corresponding inclusion of gifts made by foreigners in purchases
from the United States, secures a treatment of these transactions which is appropriate for the measurement of
national product. Net gifts made by United States persons and Government appear in personal consumption expenditures and government purchases but are offset in
the net foreign investment component of national product.
Needless to say the treatment of gifts as purchases is a
somewhat unsatisfactory short-cut. It was adopted in order
to simplify the structure of the accounts at a time when the
important role of gifts in international transactions was
not yet apparent. It has not been discarded because the
alternative, more elaborate treatment also has serious
shortcomings.
This alternative treatment consists of the establishment of a separate category of international transfers in
the income and product accounts to cover the gifts now
included in the purchases and sales of goods and services.
These international transfers would affect, in addition to
the rest-of-the-world account, the personal and government accounts (tables III and IV). The national income
and product account (table I) also would be affected. Per5 Wages paid to foreign residents employed abroad by the United States Government are counted as "purchases from abroad" in the government account
and are correspondingly netted against purchases frorn government in table V.
Alternatively, they could have been counted as wages in the government account
and netted against wages in table V. The latter procedure, which would increase
the value of income and product originating in the government sector of the economy
at the expense of the rest of the world sector, was rejected chiefly because it leads
to a less useful set of tables on payrolls, employment, and average earnings of
employees.



NET DISINVESTMENT IN THE
UNITED STATES

2
127
137
47

r

NET CURRENT PAYMENTS TO THE
UNITED STATES..

Net disinvestment in the United States.

13

Net purchases of goods and services:

sonal consumption expenditures and government purchases of goods and services would be reduced by the
amount of net gifts made, and the entry under net foreign
investment would be increased by a corresponding amount
(with an "appropriate change in the designation of the
term to indicate that it would no longer reflect net foreign
investment, but the balance of transactions in actual goods
and services).
The complication of the accounts which would be involved in the establishment of a separate category of
international transfer payments, while considerable, would
be warranted if it would throw into clear relief the large
international aid transactions involving the United States
Government. However, this would not be accomplished
for the reason that international aid, in addition to cash
grants, involves also loans and aid in kind. The three
forms of aid often are almost indistinguishable from one
another in their economic aspects.
There is no clear-cut procedure available for distinguishing between international aid rendered in kind and
government purchases for domestic purposes. For instance, in World War II it would have been rather unrealistic to distinguish between lend-lease, which presumably would have been classified as international aid
in kind, and other government purchases for war purposes.
Nor is there available an uncontroversial yardstick for
classifying loans into loans proper and those that in effect
represent international transfers. Since the relative magnitudes of the three media for extending international aid
of essentially similar nature have been subject to considerable shifts, it would not have been instructive to
establish a separate category for cash gifts alone, the
only type of aid that could have been distinguished objectively.
It may be noted that conceptually similar problems arise
with respect to the domestic operations of government.
Aid to individuals and business also involves monetary
grants, goods and services rendered in kind, and loans.
In the case of these domestic transactions, monetary aids
(m the form of transfer payments and subsidies) are recorded, but the two other types of aid are not recognized
as such. While from some standpoints this dividing ^e
is somewhat arbitrary, it is much more meaningful than
a corresponding line would be for international aid. &
the domestic sphere, shifts in the relative importance °*
the three media in extending aid of essentially suniiai
nature have not been present in a comparable degree.

SURVEY OF CURRENT BUSINESS

Treatment of gold
In essence, the treatment of gold production in national
income and national product is the same as that of any
other commodity. The classification of gold transactions,
however, is somewhat different and complicates the picture. As with any other commodity, the distributive
shares arising directly or indirectly in its production (together with nonfactor charges, such as indirect business
taxes and depreciation) are reflected on the debit side of
the national income and product account, and the value of
gold produced enters the credit side either as such or as
an ingredient of the value of some other final product.
It is the classification in the product flow that is less
transparent in the case of gold than of other commodities.
Domestic nonmonetary use of gold may be reflected in
any of the domestic components of national product—personal consumption, domestic investment including inventory change, and government purchases. To convert domestic nonmonetary use into a measure of total domestic
production, monetary use and exports must be added and
imports must be deducted.
These items—the change in the monetary gold stock
and net gold exports—which in combination measure net
domestic business sales of gold for export and monetary
purposes, are included in net purchases by the rest of the
world from United States business. In other words, the
monetary gold stock is set up as part of the rest of the
world and its transactions with United States business are
treated as foreign transactions. Thus, changes in the
monetary gold stock not offset by gold exports and imports come to be reflected in net foreign investment.
Silver is not regarded as an international monetary
asset. It is classified in the product flow exactly like any
other commodity.
Gross Saving and Investment Account
The entries in the sector current accounts presented so
far show the current transactions of each of the four
major economic groups, yielding in each case a residual
which represents a form of saving. A logical extension of

51

this system of sector current accounts would be the establishment of corresponding sector saving and investment
accounts showing the disposition of these savings in the
form of net financial and real investment.
Sector saving and investment accounts of this type
have not been constructed on a comprehensive scale (a
statement of this type for persons is presented in table
6, Part V) and cannot yet be made an integral part of
the national economic accounting system. A consolidated
saving and investment account for the Nation as a whole
is presented instead, in table VI.
In the process of consolidation the financial investments
involving transactions among the domestic segments of
the economy are cancelled, and all that remains are matching flows of saving and of domestic investment (fixed
capital formation and inventory change) and foreign investment. The consolidated capital account is obtained
from the four sector current accounts by assembling all
items in these accounts that so far have been entered only
once because they constitute transactions not with other
current accounts but with the capital accounts of the same
or other sectors.
The placing of the government deficit (or surplus) on
the left side of the account is arbitrary. It was dictated by
the consideration that in many types of economic analyses
the government deficit is treated as an "offset" to saving.
Needless to say, no basic issues are involved; the government deficit (or surplus) could be entered, with changed
sign, on the right side of the saving and investment account (and correspondingly on the left side of the government current account). This would accord better with
the affinity between government surplus and deficit and
other forms of domestic saving and dissaving.
The content of the gross saving and investment account
is determined by the basic concepts and classifications
underlying national income accounting. Only business
assets are included in fixed capital formation and inventory change. Consumer- and government-held tangible
assets are not included in capital formation. It should also
be recalled that fixed capital formation is presented gross
and that, therefore, capital consumption allowances appear as a component of (gross) saving.

Table VI.—Gross Saving and Investment Account, 1939
[Millions of dollars]
Business purchases. on capital account
' - 9,476
Changein business inventories
441
Net disinvestment in the United States by rest of world
888
Government deficit (+) or surplus ( —) on income and product
transactions
1,867
5

! GROSS INVESTMENT AND GOVERNMENT DEFICIT. 12,672




Excess of wage accruals over disbursements
Undistributed corporate profits (domestic)
Corporate inventory valuation adjustment
_
Statistical discrepancy
Capital consumption allowances by private business
Foreign branch profits (net)
Personal saving
GROSS P R I V A T E SAVING

_

JO
1,162
—714
1» 375
8,1(H
^_47
2,701
12,672

52

1951 NATIONAL INCOME SUPPLEMENT

DEFINITIONS OF CONCEPTS AND TERMS
The following definitions of the national income and
product aggregates and their components are intended
to give concise, accurate descriptions of the coverage of
the various series and, at the same time, to call attention
to the principal aspects of the series which are not readily
apparent from their titles. The definitions of the national
aggregates should be considered in conjunction with the
definitions of their components as the details of the latter
are not repeated in the former.

/. National Income and Product Aggregates
National Income is the aggregate earnings of labor and
property which arise from the current production of goods
and services by the Nation's economy. Thus, it measures
the total factor costs of the goods and services produced
by the economy. The Nation's economy in this context
refers to the labor and property supplied by residents of
the Nation. Earnings are recorded in the forms in which
they accrue to residents of the Nation, inclusive of taxes
on those earnings. As such, they consist of the compensation of employees, the profits of corporate and unincorporated enterprises, net interest, and the rental income
flowing to persons.
Gross National Product or Expenditure is the market
value of the output of goods and services produced by the
Nation's economy, before deduction of depreciation charges
and other allowances for business and institutional consumption of durable capital goods. Other business products used up by business in the accounting period are
excluded. The Nation's economy in this context refers to
the labor and property supplied by residents of the Nation.
Gross national product comprises the purchases of goods
and services by consumers and government, gross private
domestic investment, and net foreign investment.
Net National Product or Expenditure is the market
value of the net output of goods and services produced by
the Nation's economy. All business products used up by
business in the accounting period are excluded. The Nation's economy in this context refers to the labor and property supplied by residents of the Nation. Net national
product comprises the purchases of goods and services
by consumers and government, net private domestic investment, and net foreign investment.
Personal Income is the current income received by
persons from all sources, inclusive of transfers from government and business but exclusive of transfers among
persons. Not only individuals (including owners of unincorporated enterprises), but nonprofit institutions, private trust funds, and private pension and welfare funds
are classified as "persons." Personal income is measured
as the sum of wage and salary receipts, other labor income, proprietors' and rental income, interest and dividends, and transfer payments.
Disposable Income is the income remaining to persons
after deduction of personal tax and nontax payments to
general government.



IL Components of National Income and Product
Aggregates
A. National Income (as in table 1, Part V).
Compensation of Employees is the income accruing to
persons in an employee status as remuneration for their
work. From the employer's standpoint, it is the direct
cost of employing labor. It is the sum of ivages and salaries
and supplements to ivages and salaries.
Wages and Salaries consists of the monetary remuneration of employees commonly regarded as wages and salaries, inclusive of executives' compensation, commissions,
tips, and bonuses, and of payments in kind which represent income to the recipients.
Supplements to Wages and Salaries is the monetary
compensation of employees not commonly regarded as
wages and salaries. It consists of employer contributions
for social insurance, employer contributions to private
pension and welfare funds, compensation for injuries,
directors' fees, pay of the military reserve, and a few
other minor items of labor income.
Income of Unincorporated Enterprises measures the
monetary earnings and income in kind of sole proprietorships, partnerships, and producers' cooperatives f ronrtheir
current business operations—other than the supplementary income of individuals derived from renting property.
As with corporate profits, capital gains and losses are excluded and no deduction is made for depletion.
Inventory Valuation Adjustment measures the excess
of the value of the change in the volume of nonfarm
business inventories, valued at average prices during the
period, over the change in the book value of nonfarm inventories. This adjustment is required because corporate
profits and income of unincorporated enterprises are taken
inclusive of inventory profit or loss, as is customary in
business accounting, whereas only the value of the real
change in inventories is counted as current output in the
national product. No valuation adjustment is required
for farm inventories because farm income is measured
exclusive of inventory profits.
Rental Income of Persons consists of the monetary earnings of persons from the rental of real property, except
those of persons primarily engaged in the real estate business ; the imputed net rental returns to owner-occupants
of nonfarm dwellings; and the royalties received by persons from patents, copyrights, and rights to natural
resources.
Corporate Profits before Tax is the earnings of corporations organized for profit which accrue to residents of tne
Nation, measured before Federal and State profit taxes,

SURVEY OF CURRENT BUSINESS
without deduction of depletion charges and exclusive of
capital gains and losses. Profits accruing to residents are
measured by eliminating intercorporate dividends from
profits of domestic corporations and by adding the net
receipts of dividends and branch profits from abroad. In
other major respects, the definition of profits is in accordance with Federal income tax regulations.
Corporate Profits Tax Liability comprises Federal and
State taxes levied on corporate earnings. Disbursements
of tax refunds are deducted from tax liability in the year
in which the tax liability was incurred.
Net Interest measures total interest (monetary and
imputed, private and government) accruing to United
States persons and governments minus total interest paid
by United States governments. Government interest
(Federal and State and local) is deducted because it is not
considered income arising in current production. It is
necessary not only to exclude the portion of it paid directly
to persons and governments, but also to deduct the portion
of it paid to business, because the latter is reflected in the
incomes paid out or retained by the business system. The
imputed interest component of net interest is measured in
general as the excess of property income received by
financial intermediaries from funds entrusted to them by
persons over property income actually returned in monetary form by these intermediaries to persons. A portion
of imputed interest is numerically equal to the valueof
financial services received by persons without explicit
payment; the remainder represents property income withheld by life insurance companies and mutual financial
intermediaries on the account of persons.
B. Gross National Product (as in table 2, Part V).
Personal Consumption Expenditures consists of the
market value of purchases of goods and services by individuals and nonprofit institutions and the value of food,
clothing, housing, and financial services received by them
as income in kind. It includes the rental value of owneroccupied houses but does not include purchases of dwellings, which are classified as capital goods.
Gross Private Domestic Investment consists of acquisitions of newly produced capital goods by private business
and nonprofit institutions and of the value of the change
in the volume of inventories held by them. It covers all
private new dwellings, including those acquired by owneroccupants.
Net Foreign Investment is the net change in international assets and liabilities, including the monetary gold
stock, arising out of the current international flows of
goods and services, factor incomes, and cash gifts and
contributions. Thus it measures the excess of (1) domestic
output sold abroad over purchases of foreign output, (2)
production abroad credited to United States-owned resources over production at home credited to foreign-owned
resources, and (3) cash gifts and contributions received
from abroad over cash gifts and contributions to foreigners. The net transfer of cash gifts and contributions
offsets corresponding entries in personal consumption
expenditures and government purchases of goods and
services.



53

Government Purchases of Goods and Services measures
purchases of goods and services by government bodies, exclusive of acquisitions of land and used depreciable assets
and of current outlays of government enterprises. It consists of general government expenditures for compensation
of employees, purchases from business (net of sales by
government of consumption goods and materials), net government purchases from abroad and international contributions, and the gross investment of government enterprises.
Therefore, government purchases of goods and services
excludes transfer payments, government interest, and
subsidies, as well as loans and other financial transfers
outside the scope of income and product transactions.
C. Personal Income and Disposition of Income (as in
table 3, Part V).
Wage and Salary Receipts is equal to wages and salaries
less employee contributions for social insurance, except
that retroactive wages are counted when paid rather than
when earned.
Proprietors' and Rental Income is the sum of income of
unincorporated enterprises and inventory valuation adjustment and rental income of persons as given in the components of national income.
Personal Interest Income measures total interest (monetary and imputed, private and government) accruing to
United States persons. The imputed interest component of
personal interest income is the same as in national income.
Transfer Payments consists of monetary income receipts of individuals from government and business (other
than government interest) for which no services are rendered currently, of government payments and corporate
gifts to nonprofit institutions, and of individuals* bad debts
to business.
Personal Tax and Nontax Payments consists of the taxes
levied against individuals, their income, and their property
that are not deductible as expenses of business operations,
and of other general government revenues from individuals in their personal capacity. It includes payments for
such specific services as are provided within the framework of general government activity. It excludes, however, purchases from government enterprises. Tax refunds are deducted from payments as of the time of
refund.
Personal Consumption Expenditures is the same as in
gross national product.
Personal Saving is the excess of personal income over
personal consumption expenditures and personal tax and
nontax payments. It consists of the current saving of
individuals (including owners of unincorporated businesses) , nonprofit institutions, and private pension, welfare, and trust funds. Personal saying may be in such
forms as changes in cash and deposits, security holdings,
indebtedness, and reserves of life insurance companies

54

1951 NATIONAL INCOME SUPPLEMENT

and mutual savings institutions, the net investment of
unincorporated enterprises, and the acquisition of real
property net of depreciation.
D. Reconciliation Items Between National Income and
Gross National Product (as in table 4, Part V).
Depreciation Charges represents the charges made by
private business against receipts for the current consumption of durable capital goods and comparable allowances
for nonprofit institutions. It includes depreciation charges
against owner-occupied houses. Depreciation reported by
business is not adjusted for changes in the replacement
value of capital goods, except for farm enterprises.
Accidental Damage to Fixed Capital measures the value
of the physical losses by fire, natural events, and other
accidents to fixed capital of private business, not covered
by depreciation charges.
Capital Outlays Charged to Current Expense represents
new construction and purchases of new durable capital
goods included in gross private domestic investment that
are charged as current expense by business rather than
entered on capital account.
Indirect Business Tax and Nontax Liability consists of
tax liabilities incurred by businesses, except corporate
income taxes, and other general government revenues
from business. It includes all sales taxes. It includes pay-




ments for such specific services as are provided within the
framework of general government activity. It excludes,
however, purchases from government enterprises. Government receipts from the sale oi surplus property are not
included in this item. Tax liabilities are net of refunds.
Subsidies Minus Current Surplus
Enterprises:

oi Government

Subsidies are the monetary grants provided by government to private business.
Current surplus of government enterprises represents the excess of sales receipts over current operating
costs of government enterprises. In the calculation of the
current surplus, no deduction is made for charges to
depreciation or other reserves and interest is not counted
in either receipts or costs.
Subsidies and current surplus are shown as a single
item because of the difficulties involved in segregating
subsidies paid through Federal Government enterprises
from other expenditures of these enterprises.
Statistical Discrepancy is the excess of the value of the
estimated gross national product computed by the final
products method over its independently estimated value
computed by adding necessary conceptual adjustments to
the national income.

PART III

Sources and Methods of National Income
Estimation
INTRODUCTION
The statistical methodology underlying United States national
income estimates is of interest to two broad groups—to users of
the data and to producers of similar and related estimates. The
importance of the former group is obvious. The importance of
serving the latter group is easily appreciated if it is realized that
it includes workers in the entire field of economic statistics, not
only in this country but all over the world.
Users of national income statistics are concerned with sources
and methods mainly from the standpoint of their bearing on the
accuracy of the statistics. The interest of this group in methodological detail is limited because much of it is not germane to the
question of the reliability of the estimates. Producers of statistical
data, on the other hand, want to learn about sources and methods
in order to derive assistance in their related tasks. They are likely
to require knowledge in greater detail.
In practice, however this conflict of interests is not too serious.
For, as will become apparent,- the user of the data cannot form
a judgment of their reliability without a considerable acquaintance
with statistical methodology. In turn, the interest of the professional statistician in specific detail tends to be limited, because
much of it is not applicable to his situation. Hence, in writing
the statistical descriptions which follow, it seemed appropriate to
plan a compromise that would be helpful to general users of the
data as well as to technicians.
Salient Features of the Statistical Methodology

Stages of statistical measurement
Since national income and product are measures of total national output, it might appear that the most direct way to obtain
these measures would be to sum the values added to total output
by each of the industrial sectors of the economy. In terms of
product flows, these values would, in general, be measured as the
total product of the industry minus its purchases of intermediate
products from other industries. This difference equals the sum
of wages, interest, profits and other distributive shares accruing
in the industry plus certain additional charges against the value
of its production. Seen from this aspect, the summation of industrial
values added would yield a measure of output in terms of income
flows. If national output were calculated according to this plan, its
breakdowns by industry of origin would be the basic statistical
building blocks. In fact, however, the data on value added by each
industry are not available directly, and total output must be estimated by other procedures.
National income, which is a measure of total output in terms
of factor income flows, is estimated by summing estimates of the
various distributive shares. Data to estimate these shares are not
always available on an industrial basis, and only as the result
°f often complex supplementary calculations is an estimate of national income by industrial origin obtained.
National product, which is a measure of total output in terms
of
product flows, is obtained generally by adding component
estimates of the purchases of final products by major purchaser
groups. Since measurement is restricted to final product flows, the
mutually cancelling purchases and sales of intermediate products,
which would be necessary to determine the, industrial distribution
°f output, cannot be taken into account.
m This lack is not felt to be a significant gap in the statistics,
since the corresponding breakdown of national income serves most




needs for an industrial distribution of total output. (It may be
noted that an indirect measure of gross national product by industrial origin could be obtained by adding to the national income
originating in each industry other charges against gross national
product and deducting subsidies. However, most of these elements
of reconciliation have not been distributed on an industrial basis.)
Moreover, this lack of an industrial distribution of national
product is more than counterbalanced by the economic significance
of the breakdowns of the product flow by type of purchaser (and
also by type of product) which are yielded by the final product
approach. In fact, these breakdowns provide essential elements
for extending the scope of national income and product statistics
beyond the mere measurement of output totals into a comprehensive national economic accounting system providing a statistical
picture of the economy.
The components of national income and national product are the
core of this picture. The remaining statistical task consists of
deriving supplementary breakdowns and series necessary for a fully
articulated picture of the economy, mainly in terms of the interrelated transactions of its major constituent groups—businesses,
households and institutions, government, and foreign nations.

The reporting units
Only on a limited scale is reliable statistical information available from individual consumers, because of the general inferiority
of consumers' records and other difficulties involved in the collection of data from them. Hence, even over the broad areas in
which national income and product flows reflect transactions in
which individual consumers are involved, the statistical information for making the estimates is usually derived from the other
parties to the transactions—chiefly businesses and government.
These sources, in general, are decidedly preferable. The character
of the underlying records is superior; the number of reporting
units is smaller; and the reporting systems necessary for the
procurement of reliable information can be developed more readily.

Major reporting systems
The entries into the national income and product tables are
derived from a multiplicity of statistical sources ranging over
most of the essential phases of the Nation's economic life.
A large body of statistical data is collected by the Government,
mainly with the intent of providing information which is of general
interest to broad user groups. The various censuses—such as the
Census of Manufactures, the Census of Business, and the Census
of Agriculture—are prime examples in this category. Of equal
importance is the statistical information which becomes available
as the byproduct of the administrative functions of the Government. The wage and salary data provided in connection with the
old-age and survivors and unemployment insurance programs by
the Social Security Administration are an outstanding example.
Another is the information on the incomes of corporations and of
proprietorships and partnerships furnished as a byproduct of
Federal income tax administration by the Bureau of Internal
Revenue.
Government-produced statistics are the mainstay of national
income and product estimates, but they are supplemented by a
wide variety of information obtained from private sources, such
as trade associations, labor organizations, research organizations,

55

1951 NATIONAL INCOME SUPPLEMENT

56

private educational groups, and religious and welfare organizations.
By any comparative standard the available information for
estimating national income in the United States must be judged
abundant. Also, long experience in the reporting and collection of
economic data, the stringent requirements of Governmental administrative agencies, and emphasis on sound statistical techniques
make for a generally high degree of reliability.
The adequacy of the data is steadily improving. Outstanding
in this connection is the signal increase in the current reporting
of economic information which has occurred in recent years. This
development is closely connected with advances in the theory and
practice of sampling techniques. This flow of current information
has put the preliminary estimates of national income and product,
which are made pending the availability of final benchmark data,
on a much firmer basis. And, indeed, it has made it possible for
these estimates to be made with little time lag and in considerable
detail.

Estimating procedures
In spite of the abundance and general reliability of statistical
information, the task of the national income estimator is complicated because the basic data are not collected in the framework
of a coordinated statistical program designed to fill the needs
of national income measurement. Without significant exception,
the reported information is not in a form in which it can be entered directly into the national income and product accounts. It
must be processed further to fill gaps in coverage and to adjust
for differences in definition. This processing of the data involves
procedures that are often quite complex. Although the mathematical operations used are usually simple, involved estimation
may be necessary to combine and adjust a multiplicity of diverse
sources to produce series that have the coverage and definition
required by the national income estimates.

Reliability of the Estimates
It is clear from this summary discussion of the derivation of
national income estimates that they are subject to error. Hence
it is important to evaluate the degree of their reliability.
A comprehensive statement of the degree of accuracy of a given
estimate is usually thought to involve the specification of a frequency distribution of similar estimates around the universe value.
In the field of national income this ideal cannot be approximated.
The many source materials and procedures utilized are not of
such a nature as to permit calculations of the probable errors in
the various income and product series.
The replacement of present estimating methods by the sampling
approach would not be a solution. Serious difficulties in applying
sampling techniques would be encountered with income and product components for which knowledge about the size and characteristics of the universe was lacking, or whose composition was
heterogeneous or subject to rapid change.
Moreover, the sampling errors that could be calculated would
provide only partial approximations to the errors in the final
estimates. Faulty reporting, willful misstatement, and negligent
enumeration are all sources of error in reported data (and hence
in the estimates) which are outside the scope of sampling-error
measurement. Such sources of error might be checked upon and
allowed for; but in the sampling process, as well as in the varied
other methods now used in national income estimation, they generally are unknown and hardly ever can be quantified. In practice, they are likely to be much more important factors in the
reliability of the national income estimates than are sampling
errors.
Thus, the reliability of the national income and product estimates cannot be assessed with mathematical precision. Rather,
the main approach must be to make a detailed analysis of the
statistical sources and methods underlying them and to use this
as the basis for qualitative judgment. The general aim must be



to decide whether the reliability of the estimates is sufficiently
high to warrant the specific use intended, and, if this- does not
appear to be the case, whether the plan of investigation can be
simplified to take account of the limitations of the estimates.
This task is admittedly difficult. It is complicated by the fact
that throughout the period since 1929 relatively few series o
f
estimates are derived from the same sources and methods, and
hence have the same range of error in all parts of the period.
Many series are a time-period admixture of sources and methods
of widely varying type and quality.
Given this situation, it often will not be fruitful or possible to
judge the reliability of the estimates in an over-all sense. The
investigator not only will have to take account of general features
of the series involved, but often will have to distinguish between
benchmark and other-period estimates and make such determinations as whether annual levels or year-to-year changes are principally relevant and whether components are being used in isolation or in relation to other components. Having determined what
aspects of reliability are relevant in a particular instance, he can
proceed to a study of the national income data with these aspects
in mind and obtain optimum results.

Factors affecting reliability
Consideration of four major factors should prove helpful in
forming a judgment about the reliability of estimates of the various components of the income and product flow.
In the first place, one must consider whether the economic units
(such as businesses, governmental agencies, or individuals) are
reporting on an item which is represented by straightforward
transactions of simple definition, or on an item which requires
complex calculations on their part or is somewhat vague in definition. In practice, the former case is likely to be associated with
the occurrence of monetary transactions.
The second factor to be considered is the quality of the records
kept by the economic units whose transactions are being measured.
Lack of adequate records leads to less reliable reporting or to an
absence of reported data. In either case, the reliability of the
resulting estimates is impaired.
The third factor which should be given weight is the reporting
system—its character and the quantity of data it produces. The
obvious distinction here, as to the former, is between complete
census-type coverage and sampling. However, this distinction in
itself does not throw much light on the problem of reliabilityWhile, other things being equal, complete enumerations are more
reliable than samples—and, for that matter, large samples are
more reliable than small ones—the ceteris paribus qualification to
this instance deprives the statement of much of its practical significance.
So much depends on the quality of the censuses and of the
samples—including the skill and training of enumerators—that
only a detailed investigation of all the relevant characteristics
can yield well-founded conclusions regarding reliability. Needless to say, such investigations are difficult undertakings and often
may not prove conclusive. In particular, recent advances in sampling techniques have considerably narrowed the area over which
a flat claim of superiority for the results of census-type reporting
can be made.
With respect to the quantity of information yielded by a reporting system, it is first to be observed that large and frequent quantity does not necessarily, of course, make for reliable estimatesBut smallness of quantity, even of high quality, results in <*ata
gaps impairing the adequacy of an income or product series.
The final point to be considered is to what extent the items tha
enter the income and product accounts differ from those that are
actually reported. Such differences almost always imply that estimating procedures have been introduced. This means an impair"
ment of reliability of the final figures which can be evaluate^
only by an examination of the procedures. In general, a long f^
involved estimating chain can be taken as a sign of statistic*

SURVEY OF CURRENT BUSINESS
weakness, although this rule must be qualified in the light of the
adequacy of the supplementary data introduced and of the cogency
of the procedures adopted. Simplicity of procedure, however, cannot be taken as an evidence of absence of statistical weakness.
It may only mean that reliable data for making necessary adjustments are not available, and that summary, arbitrary assumptions have been used instead.

Application of factors to broad income and product
components
It may prove of interest and value to test some of the major
components of national income and product against these four
criteria of reliability. For brevity this is done in a very general
way, and with frequent resort to personal judgments of the type
which have sometimes proved erroneous in the past.
Considering first the components of national income, there can
be no doubt that wages and salaries rank highest in reliability.
This conclusion is based on the relative simplicity of the concept,
the comprehensiveness and high quality of the record-keeping and
of. the reporting system (both to a large extent byproducts of
the Social Security system), and the fact that the adjustments
to the reported totals that are necessary to bring them into eonformance with the requirements of the income and product accounts
are small and well-founded statistically. In this instance the statement seems warranted that the departure of the annual estimates
for the past decade from their true value is probably very small.
Any marked lowering in the quality of the 1929-39 estimates is
precluded by the fact that periodic industrial-census results and
the sample wage indexes compiled by the Bureau of Labor Statistics are available to extrapolate the Social Security based
series.
The estimates of rental income of persons are on the other
end of the reliability scale. In this instance, a profit-type income
is involved, the definition of which to the reporting unit must
always be complex and somewhat vague. Both record-keeping and
reporting systems are fragmentary and poor, and the estimating
procedures which are necessary to convert reported data into
national income entries are unusually complex and tenuous.
Estimates of the other income shares range between these two
extremes on the scale of reliability. Supplements to wages and
salaries follow wages and salaries closely. Large parts of them
are as well-founded as the wage and salary data, for reasons that
are essentially similar. Supplements rank somewhat lower because
their "other labor income" component includes certain items which
are statistically less well-founded, especially for recent years.
On the lower end of the scale the "income of unincorporated
enterprises and inventory valuation adjustment" may be considered as superior to rental income. The problems of calculating
entrepreneurial income confronting the reporting units are similar to those involved in the calculation of rents—both constitute
a
type of profit income. Records and reporting systems are, however, somewhat more satisfactory than in the case of rental income; and the estimating procedures that are applied to the reported data are somewhat more direct and incorporate better
information. It should be noted, however, that the entrepreneurial
income estimates are subject to very significant shortcomings when
compared with the other income shares.
Broad generalizations of this type, it is recognized, are not
a
Pt to be of much concrete help for any particular use of the
e
ntrepreneurial income data. For one thing, the estimations of
farm and nonfarm incomes, although handicapped by certain
common limitations, are fundamentally dissimilar. There is no
Parallel in the nonfarm segment to the Department of Agriculture's
systematic long-period study of farm income and development of
sporting sources. And the estimation of farm income has no
counterpart to the necessary heavy reliance that is placed upon
income-tax return information in deriving the net income of nonar
m unincorporated enterprises. Moreover, the data and procedures used to estimate farm income since 1929 are characterized



57

by substantial uniformity over the period, whereas those underlying the nonfarm total vary widely in different subperiods.
Corporate profits before tax are a series whose probable deviation from true universe values must be adjudged smaller than
that of any of the other distributive shares except employee compensation. The definition of profits is not simple, and measurement at the level of the individual business firm involves complicated computations that can be performed with varying accounting criteria. Yet the-quality of corporate records is surely good,
and the reporting system developed over a period of many years
by the Bureau of Internal Revenue doubtless has gone far towards
standardization of reporting. This system has produced comprehensive annual data not requiring unduly large estimating adjustments before inclusion in the national income tables.
In judging the corporate profit series, two limiting aspects
should not be overlooked. First, the estimates for recent years
are not based on Bureau of Internal Revenue tabulations, in which
there is a 2-year lag, and are less firmly grounded. Secondly, the
addition of the "inventory valuation adjustment" to corporate
profits before tax appreciably reduces the statistical reliability
of the profit series. This adjustment—designed to put inventories
charged to cost of sales on a uniform and current pricing basis,
differing from the pricing practices followed in business accounting—is introduced because it is thought to constitute a significant
improvement in the economic meaningfulness of the statistics.
But the adjustment is based on information that is slender and
procedures that are complex and subject to error.
The remaining income share, net interest, is based in part on
corporate sources of data (obtained mainly from the Bureau of
Internal Revenue), but its reliability is weakened by the inadequacy of information on interest flows originating in certain major
noncorporate areas, and by the general lack of reliable data for
the latest years.
Government purchases of goods and services are highest on the
scale of reliability among the components of gross national product. Were it not for certain problems involving the timing of
purchases which are important when the level of Government
expenditures is changing sharply, the data for the Federal Government would parallel the quality of the wage and salary estimates, using the criteria of definitional clarity, quality of recordkeeping and reporting, quantity of available information, and the
statistical foundation of the estimating adjustments. However, the
problem of timing, together with the fact that the series on State
and local government purchases is less well-founded than the Federal series, reduces the reliability of the combined government purchases series below that of wages and salaries.
The estimates of change in business inventories probably rank
lowest on the product scale. The measurement of inventories presents substantial problems of cost allocation and pricing to reporting units, and for important segments of the noncorporate economy
records are not adequate and reporting is unsatisfactory, especially
for recent years. More important, however, is the fact that the
change in business inventories represents the difference between
large and volatile annual totals, and hence is subject to significant
percentage errors. Also the reported inventory data require substantial estimating adjustment. Involved in the measurement of
nonfarm inventory change is the inventory valuation adjustment,
the inadequacy of which was noted above in the comments on
corporate profits.
Estimates of producers' purchases of durable equipment and of
personal consumption expenditures for commodities—both based
largely on producers' records—follow government purchases in
reliability on the product side. The definitional problems confronting
the ultimate reporting units do not loom too large; record-keeping
and reporting are relatively adequate; estimating procedures applied to the reported basic data are fairly complex and reduce
reliability, particularly in the case of consumer commodities, but
on balance, the two series must be rated rather high. These generalizations, it is important to add, refer to the methodology adopted

58

1951 NATIONAL INCOME SUPPLEMENT

for years for which benchmark data are available. For recent period
estimates, the evaluation would be less favorable.
The series on personal consumption expenditures for services is
based largely, but by no means exclusively, on producers' sales
records. The concept of sales is simple, and comprehensive, censustype reporting systems yield generally reliable data for items comprising the bulk of the total. The estimation problem is simplified
by the absence of intermediary enterprises between the producer
and consumer and by the comparatively small extent to which reported sales must be adjusted for the elimination of sales to nonconsumers. But reliability is significantly lowered by the fact that
many of the comprehensive sources on which heavy reliance is
placed become available only rather infrequently. Of lesser effect
is the inadequacy of materials for many of the 125 items comprising the services total.
The field of private construction is an extremely difficult one for
statistical estimation. The concept of "value of work performed"
used in the new private construction series is not a simple one on
which to report, and consequently little of the reported information
is obtained on this basis. Neither enumeration nor sampling is well
suited for establishing universe levels, and complex statistical
methods are necessary to adjust for the coverage gaps and timing
deficiencies of data secured through varied reporting systems.
The estimates of public construction are much more firmly based,
mainly because of the comprehensiveness and superiority of Federal
agency records. However, these estimates are not an independent
component of gross national product, but are used only in obtaining
a breakdown of total government purchases.
Estimates of individual series entering into the computation of
net foreign investment are based on a great deal of solid statistical
information. But this component of gross national product is derived as the difference of large minuends and subtrahends. Consequently, substantial percentage errors are likely, especially in
years when the absolute magnitude of the component is small.
Personal income is more reliable than national income. The major
items included in personal income but not in national income (government transfer payments and government interest) are reliable.
The exclusions that are made either do not affect reliability (such
as the accurate deduction of social insurance contributions from
employee compensation) or else actually increase it (such as the
deduction of the corporate inventory valuation adjustment and all
other components of corporate profits except dividends).
With respect to the disposition of personal income, the major
point relates to saving. This item is the difference between large
totals, and is therefore subject to large percentage errors. Supplementary information that should be considered in interpreting the
reliability of this component of the accounts is discussed in the section of the methodological descriptions dealing with personal
saving.
Although a study of the methodology underlying the national income and product estimates is the main basis for an evaluation of
reliability, there are two other types of evidence whose examination throws light on the subject. The first is the record of the
"statistical discrepancy;" the second is the record of the revisions
that are made of the estimates as originally published. These two
will be discussed in turn.

Significance of the statistical discrepancy
The "statistical discrepancy" measures the excess of the gross
national product as estimated by summing its component product
flows over the gross national product as estimated by summing
components of the national income and all other charges against
the total value of gross national product. It arises because of errors
in the component estimates, and hence is relevant to the problem of
reliability.
In the national income and product account the statistical discrepancy is entered on the debit side, as an item reconciling national income with charges against national product. This manner



of entering the statistical discrepancy is purely a matter of convenience. It permits the two most widely used aggregates—national
income and gross national product—to be broken down into component items which do not include the "statistical discrepancy." It
does not signify that the national income and the gross national
product have been correctly estimated, and that the error has been
made in the estimation of one or more of the items reconciling the
two. Quite to the contrary, it is likely that the aggregates are
affected whenever a statistical discrepancy appears.
The statistical discrepancy appears also in the business income
and product account, and similar comments apply to the form in
which the entry is made there. It may be noted that in the accounts
as shown the item always reflects discrepancies between the estimates of business income and production. This is so because business income and production are obtained statistically by making
consistent deductions for nonbusiness income and production from
the two sides of the national income and product account. Hence,
the results of all estimating inconsistencies, whatever their origin,
are shifted into the business account.
The adjustment for statistical discrepancies appears also in the
gross saving and investment account. Again the manner in which
it is entered (on the credit side, as a component of saving) is
arbitrary. A statistical discrepancy signifies an error either in total
saving and/or total investment.
The statistical discrepancy is a measure of the difference in error
between the two estimates of the total gross national product.
While its presence is conclusive evidence that errors have been committed, a zero discrepancy does not constitute proof to the contrary.
Strictly speaking, the discrepancy measures lack of consistency,
and it does not register absolute errors which compensate in the
accounts. To the extent, however, that the sources and methods of
estimating the components of the credit and debit sides of the
national income and product account are independent—in the sense
that errors committed in estimating components on the one side do
not involve corresponding errors on the other—it is reasonable to
give some weight to the statistical discrepancy in evaluating the
reliability of the totals. In these circumstances, greater confidence
can be attached to the value of the national income and product
totals if the size of the discrepancy is small than if it is large.

Degree of independence of income and product estimates
It is important, therefore, to consider to what extent the two
sides of the income and product account are in fact independent
as to statistical sources and methods. Quantification is not possible,
but certain relevant considerations can be presented. These are of
a summary nature and should be supplemented by the detail contained in the following statistical notes.
It is not possible to classify the estimates of the various components of the income and product flow into two neat groups, consisting of those that are based on independent sources and methods,
on the one hand, and of those lacking such independence, on the
other. In fact, the estimates range over a wide scale.
Largely due to the utilization of social security data, the estimates of employee compensation are the outstanding example of a
close approximation to statistical independence on the income side
of the accounts. Even this statement has to be qualified, because
certain components of these estimates are entered identically on the
product side (for instance, the sizable item for domestic service).
A second example of a high degree of statistical independence is
provided by the estimates of government purchases, on the product
side of the accounts. The degree of independence is probably somewhat smaller in this instance, because estimates of government
employee compensation, in the national income, are based up°n
records and reporting systems related to those upon which the
estimates of government purchases are made. However, in spite o
this qualification, the degree of independence is very large.
While, on the other end of the scale, there is considerable interdependence of statistical methodologies, no major component of tn

SURVEY OF CURRENT BUSINESS
income or product flow can be said to lack independence completely.
However, the opportunity for consistent error is also wide. In particular, there is substantial interdependence between the business
income components of the national income and the estimates of
several of the components of the product flow. This is so because
inventory and sales data are used in a related fashion.
The inventory valuation adjustment is perhaps the most clearcut example of such a relationship. It is made in the form of
identical entries on the income and product sides, consisting of an
adjustment to the income of unincorporated enterprises and corporate profits, on the one hand, and to the change in the book value
of inventories, on the other, in the measurement of the change in
nonfarm business inventories.
Moreover, there is close interrelation between the estimates of
unincorporated enterprise income and corporate profits and the
change in the book value of inventories. For benchmark-year estimates, errors in corporate inventories result in% identical errors in
corporate profits, since both estimates are based on balancing corporate accounts submitted to the Bureau of Internal Revenue. For
noncorporate business inventories, the offset is complete in the case
of farming, and it tends to hold for other unincorporated business to
the increasing extent that the estimates are based upon balanced
accounting data similar to those used for corporations.
Instances in which related sales or gross receipt series underlie
the estimates of both business profits and product flows are analytically similar, although in statistical practice effective interdependence is usually reduced. Clear-cut examples are afforded by
the rent and professional service estimates. Errors in gross dwelling
rents and in the estimates of gross receipts of professional practitioners from consumers affect both personal consumption expenditures for services and the corresponding business incomes, although
not necessarily to the same extent. The same type of relationship
can be found in other areas of business income, unincorporated as
well as corporate, although it may be attenuated by the particular
statistical procedures adopted, or harder to trace because of a less
explicit coordination of them.
In the examples of interdependence hitherto given, all reference
has been to instances in which for accounting reasons errors in the
estimates of the product components must lead to offsetting errors
in the income components. It may be noted that complete interdependence is not involved. Independent errors are still possible, for
instance, when in deriving business profits current expenses are
wrongly reported or estimated.
So far no reference has been made to compensating errors which
are a matter of statistical probability rather than accounting necessity. For instance, when wage and sales data are taken from identical sources, lack of complete "coverage of the basic reports may
lead to similar errors in both items. However, this need not be the
case. Both in census-type reports and in sample-based estimates,
the error in the one component may differ from that of the other.
Prior to the introduction of the social security data, the United
States estimates were susceptible to this type of common error to
an important extent. Large segments of the estimates of wages and
salaries and of the product flow were derived from identical, industrial census, sources. Since the utilization of social security*
data, there do not appear to be any important areas of the income
and product flows in which this type of error is significant.
The statistical discrepancy measures the net residual of error
which remains after the best possible estimates of the various
components of the income and product flow have been made. If initial estimates of the components lead to a large statistical discrepancy or to erratic movements in it, they are reexamined and an
effort is made to trace the source of the discrepancy and to eliminate it as far as possible. This reexamination of the initial estimates consists mainly of a critical comparison of the methodology
°f the component estimates for error and inconsistency. This is an
essential step of the estimating procedure which cannot be taken
* y the individual estimators responsible for the Dreparation of the
>



59

component series, but must be reserved until initial estimates of all
the components have been prepared. While significant improvements can sometimes be made in this manner, a residual discrepancy will remain.
The suggestion has been made that this residual discrepancy
should be eliminated, either by the exercise of further judgmental
decisions of the type used in reducing it from its initial size, or
by the application of more formal mathematical procedures that
tend in the direction of greater objectivity. Superficially, complete
elimination of the statistical discrepancy would be desirable, from
the standpoint of convenience to the users of the data. Basically,
however, it would be harmful. A statistical discrepancy of substantial size or irregular movement reflects troublesome errors in the
estimates. If this is the situation, the users of the data should be
aware of it so that they can exercise due caution in the application
of the estimates in economic analysis.

Characteristics of the revisions
Recent-year estimates of national income and product are based
on incomplete data and are revised as additional information becomes available. A few of the components do not undergo significant revisions after the publication of the initial estimates, but this
is not the usual case. Fairly widespread revisions can be expected
in the estimates for the two most recent years because of the lag
in the availability of Bureau of Internal Revenue income tax return
data, which serve as benchmarks for many of the component estimates. Revisions extending further back reflect the incorporation
of census information which is obtained at intervals which can
range up to 10 years. In certain, much less frequent, instances,
improved sources and/or methods may become available which call
for revisions over an even longer number of years.
Thus, it is important to keep in mind that recent-year estimates
are less reliable than those for earlier years; that the estimates
for the last 2 years are particularly subject to revision on a broad ,
scale; and that the degree of finality of the estimates for all years I
should also be judged by reference to the time-table of the basic
census enumerations. At the present juncture, for instance, recent
census results, such as those of the Census of Manufactures for
1947, the Census of Business for 1948, and the Census of Population and Housing for 1950 have not yet been systematically incorporated into the estimates. As these censuses had not been taken
since before World War II, many component estimates for the last
decade represent extrapolations and may be changed by introducing
new benchmarks and revised interpolations and extrapolations.
Some inferences as to reliability can be drawn from the record
of the revisions which initial estimates of the income and product
flows underwent in subsequent years. Frequent and large revisions •
in the estimates are a positive evidence of lack of reliability. However, absence of sizable statistical revisions can be taken as positive
evidence of reliability only if the more recent estimates incorporate
additional information which is known to be more reliable. In this
case meaningful judgments as to the relative reliability of recentyear estimates as compared with later benchmark estimates can be
made. But it is not possible to go further than this. Absence of
revisions in estimates of several significant components of the income and product flow reflects only a lack of data accretion subsequent to the publication of the initial estimates, rather than constituting a positive sign of reliability.
With reference to the national income and product aggregates,
it may be said that since their publication on a new basis in July
1947, the revisions in the initial estimates have been very moderate—generally less than 1 percent. The national product estimates
for the year 1946 and the national income estimates for the year
1947 provide exceptions to this statement. In the former case,
the initial estimate was SV2 percent below the one now used; in
the latter case, the initial estimate was 2 percent higher.
Revisions of the annual changes initially shown by the totals
' were much larger, of course, in these years. The worst record was

60

1951 NATIONAL INCOME SUPPLEMENT

with respect to the decrease from 1945 to 1946. In this instance, the
initial estimate was cut by more than one-half, from $9.4 billion
to $4.1 billion for the gross national product and from $4.6 billion to $2.4 billion for the national income.
In further qualification of these comparisons, it should be recalled
that the estimates do not yet incorporate the results of the basic
censuses taken in recent years. Hence they show the reliability of
initial, estimates as compared with interim revisions which differ
from them mainly because of the incorporation of Bureau of Internal Revenue data. A comparison of the initial as well as interim
revisions with estimates incorporating the census results (and hence
not likely to be subject to further significant changes) is not yet
possible.
The percentage revisions in the national income and product
totals are much smaller than those in some of their components,
as will be noted specifically in the notes on methodology. To a substantial extent, this is due to the effect of offsetting errors. According to past experience, such errors may be counted upon to increase
the reliability of the estimates as their finest components are added
to obtain broader subtotals.
The national income and product series are published in considerably greater detail than is warranted by the statistical reliability of some of the ultimate components. While it would be hazardous to attach precise significance to the level and movement of
these components, offsetting errors make it feasible to recombine
them into reliable subtotals differing from the published ones and
better adapted to specific types of economic analysis. It is in order
to facilitate judicious recombinations of this type that some of the
detail (in particular recent-year detail on the industrial origin of
some of the income shares and on the product breakdown of some
of the consumer commodity and service flows) is published, and
one should be aware that the use that can be made of these series
in isolation is very limited.

Allowing for statistical error
The foregoing survey suggests no easy way of providing the
users of national income data with measures of statistical reliability. Relevant quantitative measures are not available; and, owing to
the basic nature of the data, the prospect of their ever being constructed on a comprehensive scale appears quite limited. A study
of the statistical methodology underlying the national income estimates, supplemented by analysis of the statistical discrepancy and
of the revisions, will remain the major avenue for obtaining an
evaluation of their reliability. If best use is to be made of national
income statistics, their reliability will have to be evaluated concretely on the basis of this evidence, from the standpoint of the
specific economic problem at hand.
While the task of evaluating statistical reliability confronting
the user of national income data is difficult, it should also prove
rewarding. Analysis of methodology and of relevant supplementary
evidence will forestall many misuses of the data. It will lead to
more effective utilization of the data by channelling them into uses
warranted by their nature and degree of accuracy. It will serve to
make the informed user wary of many seemingly significant conclusions that are drawn from small changes in the data which are
obviously well within their margin of error. Also, for any analysis
an awareness of hitherto unknown limitations of particular national
income series may demonstrate the advisability of marshalling all
other relevant information, within and outside the scope of national
income. Clearly, if the evidence is supportive and consistent, greater
confidence can be attached to the indicated conclusions than if the
evidence is contradictory.
Finally to be noted is that the suggested approach to evaluation
of reliability is methodic, even though presently permitting quantitative definiteness in only few instances. Large strides may be
anticipated from the integration into it of the results of further
work and experience. For it must be recalled that official national
income work in the United States spans less than two decades,



and that the new and expanded series were established only in
1947. The scope for analysis of methodology will be substantially
expanded over time with the continued improvement of source ma^
terials, the opportunity for testing past sources and the procedures
applied to them, and a broadened basis for analyzing the record of
revisions. The statistical notes and related material presented in
'this report represent only a start in the indicated direction.

Aim and Plan of Statistical Descriptions
The following sections in this Part deal with the sources and
methods used in estimating the income and product flows. Insofar
as feasible, the sections are written according to a uniform plan.
An introductory part first discusses the general nature and reliability of the series. Next follows a discussion of methodology,
covering both base-year, or "benchmark*' year, estimates and their
extrapolations, whenever such a distinction is relevant. This discussion is intended largely as an evaluative review but also contains
considerable descriptive material, with the dual objective of giving
information about the principal methods used and affording an
independent basis for judgment about reliability. Concluding remarks are made on the characteristics of revisions in instances in
which a separate discussion of this subject appeared pertinent.
Only the annual estimates are covered by the sections on sources
and methods. No reference is made to the.monthly or quarterly
series, or to the summary annual data derived from them which
are published each February in the Annual Review Number of the
Survey of Current Business.
In general, more emphasis is placed on recent-period estimates
than on those for the period, say, 1929-39; and the discussion
is aimed principally at covering the totals *of the various components, rather than their industry or commodity breakdowns per se.
Nevertheless, a considerable amount of information on these breakdowns is introduced, as it often is relevant to an evaluation of the
broader categories and also is of substantial interest to users of
the estimates.
The various income and product components selected for discussion cover all of those listed in the first four tables in the statistical
section (Part V) of this report. These are the summary tables on
national income by distributive shares, gross national product or
expenditure, personal income and its disposition, and the relation
of gross national product, national income, and personal income. At
the end of this introduction is provided a summary of the stubs of
these four tables, cross-referenced against the numbers of the
various sections on sources and methods.
In the following descriptions of sources and methods numerous
"exhibits", or supporting tables of data, are presented. Most of
these exhibits refer to 1947. This year was chosen because the 1950
estimates (and the revised figures for 1948 and 1949) were not
completed until after the text had been written and sent to press.
Although geared directly to the first four tables, the following
sections on methodology furnish partial or complete coverage of
nearly all of the other 35 tables of annual estimates. Many of these
tables relate to income flows by industry. As already indicated, the
discussions of the various distributive shares give considerable attention to their industry breakdowns; but national income by industrial origin, which is obtained statistically by aggregating these
individual-share breakdowns, is not separately discussed. It is convenient at this point, therefore, to give consideration to an important summary aspect of the industry data—the basis of industrial
classification underlying them.

Industrial classification of national income
The industrial distribution of national income is based primarily
upon a classification of establishments rather than of compames'
or firms. Use of the word "primarily" connotes a statistical exception (noted below), not one of definition.
The establishment is the preferred unit since it yields an indu trial classification much closer to an activity basis than does

SURVEY OF CURRENT BUSINESS

61

Industrial Classification for the National Income
Industrial content in terms of the
Industrial division or industry

!

Agriculture, forestry and fisheries
Farms
Agriculturalandsimilarserviceestablishments.
~
Forestry
Fisheries
^

Standard Industrial Classification
1942 edition
01 to 09 i
01 to06_
07 *

Social Security Bureau of InAdministration ternal Revenue
Classification Classification 3
1942 edition
1942 edition
01 to 09,

96 to 98.4
98.
98.*

08.
09.

96.
97.

10 to 14_
10.
11
12
13

11
12
13

16andl7

15tol7_.

Manufacturing

19 to 39

19 to 39..

20.
2122.
23.

22.
23.

Industrial division or industry

Finance, insurance, and real estate;—
Continued
Insurance carriers
Insurance agents and combination
offices.
Real estate.
_

10 to 14.
10.
11.
12.
13.

Contract construction

Industrial content in terms of the
2

ng________
Metal mining
Anthracite mining
__—
Bituminous and other soft coal mining.
Crude petroleum and natural gas
production.
Nonmetallic mining and quarrying. _.

Food and kindred products
Tobacco manufactures
I
'.
Textile-mill products
Apparel and other finished" fabric
products.
Lumber and timber basic products..
Furniture and finished lumber products.
Paper and allied products
Printing, publishing, and allied industries.
Chemicals and allied products
I roducts of petroleum and coal
Rubber products. _
Leather and leather products
Stone, clay, and glass products
Iron and steel and their products,
including ordnance,
rvonferrous metals and their products.
Machinery (except electrical)
Electrical machinery
Transportation equipment except
automobiles.
Automobiles and automobile equipment.
Miscellaneous manufacturing industries.
Wholesale and retail trade
_
Wholesale trade
autoni
Retail trade and automobile services.
Finance, insurance, and real estat
Banking
Security and commodity" brokers",
dealers and exchanges,
finance, n . e . c

14

24.
25

Transportation
Railroads
Local railways and bus lines
Highway passenger transportation,
n. e.c.
14.
Highway freight transportation and
warehousing.
95.
Water transportation
Air transportation (common, carriers).
17, 19-21» 23Pipe-line transportation
37, and 39Services allied to transportation
41.
17 and 19.
20.
Communications and public utilities
21.
Telephone, telegraph, and related
23.
services.
Radio broadcasting and television
26.
Utilities: electric and gas
27.
Local utilities and public services,
n . e . c.
28.
Services
29.

30.
_.
31
_.
32
19 and 33_.

28.
29.
30
31
32_._
19 and 33_.

30.
31.
25.
24.
32.
33 and 34.

34

35

35.

28_

_.

35_
30.
37.

37.

37.
36.
40.

38.

38.

39.

39,

39.

Hotels and other lodging places
Personal services
Private households
Commercial and trade schools and
employment agencies.
Business services, n. e. c
Miscellaneous repair services and
hand trades.
Motion pictures
Amusement and recreation, except
motion pictures.
Medical and other health services
Legal services
Engineering and other professional
services, n . e . c
Educational services, n . e . c

40 to 61 and 88. 50 to 59 and 75 50,51,54 to 65,
67 and 72.
Religious organizations
.-_~_.
Nonprofit membership organizations,
50 and 51._-__ 50 and 51.
40to47
54 to 65, 67
n. e.c.
48 to 61 and 53 to5 59, and
and 72.
75.
88.
2
62 to 70 (exc. 60 to 67 (exc. 79 to 85, 88, Government and government enterprises .
Federal—general government 16
90, 91 (exc.
654).
707).
17
Federal—government enterprises _.
915), and 93.
State and local—general govern79.
60
.
G2_._
ment. 13
84.
61.
60.
State and local—government enter80 to 83, and
prises.19
63,64,05, and 62 and 67
85.
07.
Rest of the world M_

Standard Industrial Classification
1942 edition

68
69 •

Social Security Bureau of InAdministration ternal Revenue
Classification CkisM lioat ion *
19 !2 edition
1912 edition

63.
64 and 66

9O.«

70 (exc. 707).. 65 (exc. 054).

91 (exc. 915)
and 93.

72 to 8 0 . . .
72.
73and741
742, 743, and
749.
75and79

40to45..
40
41
431, 433, and
439.
42.

44 and 45.
441 and 442.
443.7
444 and 445."
440.

70 (exc. 706)..
771
78.
744,706,772,
773 and 80.

44
432
434
45

449.»
447.>o
448.
451. l l

81 to 83.
81 (exc. 813).

46 to 49, 73G__
46

46,47.
401,402,409.

813
821,822
823, 83 *

730
48
49

403.
471,472.
473, 479.*

84 to 96 (exc.
88), 707.

654, 70 to 90
(exc. 75,
736).
70 (exc. 7042).
72
90.
74

69 to 71, 73 to
76, 915.
69. '2
70.

73 (exc.730),
807 and 054
76

71 and 915."

84 (exc. 8442).
85
86.
874, 953 and
954.
87 (exc. 874),
942 and 707,
89

(13)

Part of 76.1*

73.
74.

92.
93.
941 and 949...

80 (exc. 807).
81
831 and 839 _.

Part of 76.
Part of 76.
Part of 76.

Part of 76.
95 (oxc. 953 82
and 951).
(13)
906.
90 (exc. 960) SO, 833 and (ii)
7042.
and 8412.
97

94 and 95

(ii)

13
Not in Bureau of Internal Revenue Instructions for Coding (Corporate) Industrial
Activity.

!* In National Income Division classification, includes private employment agencies.

™ mat oi me ^National Income Division are so pervasive that it is not teasiDie to present a
comparison here. General adoption of these codas by data-gathering agencies will present continuation of the industrial classification scheme used in this report.
2
establishments operated by government agencies or corporations are classified in
ti ^
catin ° y e r n m e n t and government enterprises industrial division, regardless of their classifi**uon m the three codes with which comparison is made.
3
ie B
«reau of Internal Revenue "not allocable" groups (BIR 16, 43, 450, 470, CS, 78,
fi7 J }
°'» J9 and 00) are not indicated in the table.
T
e Nation
"I* ^
a l Income Division classification includes irrigation system operation in
ocal
utilities and public services, n. e. c."
fi
Industry 52 is divided between wholesale trade and retail trade.

n

, - . ^,ea.i activities wr

ess of the establishment.
7
* National Income Division classification, includes also local bus lines.
&
' \ Rational Income Division classification, excludes local bus lines and toll roads, highway bridges, terminals, etc.
*, In .^ational Income Division classification, excludes services incidental to water transportation.

s, etc.; services incidental to
lce a n
= d airports and flying fields,
n/ * n ^ a t i o n a l Income Division classification, excludes organization hotels and lodging
°uses (on membership basis).




1S
In National Income Division classification, excludes private employment agencies and
includes accounting, auditing and bookkeeping services.

i* Includes all Federal Government agencies and operations, except those included in the
industry, "Federal-government enterprises".
17

The following list enumerates all Federal entcprises: Agricultural Marketing Act

Disaster Loan Corporation, Electric Home and Farm Authority, Emergency Crop and
Feed Loan Program, Export-Import Bank, Federal Crop Insurance Corporation, Federal
Deposit Insurance Corporation, Federal Farm Mortgage Corporation, Federal Home Loan
Banks, Federal Housing Administration, Federal Intermediate Credit Banks, Federal
Land Banks, Federal National Mortgage Association, Federal Prison Industries, Inc.,
Federal Savings and Loan Insurance Corporation, Home Owners Loan Corporation, Inland
Waterways Corporation, Maritime Administration (operating activities), Metals Reserve
Company, Navy Ship Stores and Ship's Service Stores, Panama Canal Zone, Panama
Railroad Company, Petroleum Reserves Corporation, Post .Office, Production Credit
Corporations, Public Housing Administration^ Reconstruction Finance Corporation,

risk insurance activities).
18
Includes all State and local government agencies and operations except those included
in the industry, "State and local—government enterprises".

'» Includes State workmen's compensation funds and undertakings classified as enterprises by the Bureau of the Census, such as alcoholic beverage monopolies; water, electric,
gas, and transit systems; housing authorities; and other large commercial activities involving
significant amounts and operated and accounted for as enterprises.
;o
Includes foreign countries, United States territories and possessions and international
organizations.

62

1951 NATIONAL INCOME SUPPLEMENT

use of the company. It also largely prevents discontinuities due to
mergers or other changes in the structure of ownership.
Industrial classification by establishments, for example, places
in bituminous coal mining a soft coal mine owned by a corporation engaged primarily in the production of iron and steel products,
whereas classification by companies places it in the iron and steel
industry. The establishment classification, nevertheless, is quite
different from an activity or product classification since many establishments produce secondary products which fall within industries other than those in which their major products are classified.
Force-account construction is an important special type of secondary product.
The establishment basis is used for the industrial classification
of wages and salaries, supplements to wages and salaries, income
of unincorporated enterprises and inventory valuation adjustment,
and interest paid by noncorporate enterprises. But, because of
statistical necessity, the company basis of industrial classification
is used for corporate profits, the corporate inventory valuation
adjustment, and interest paid and received by corporations.
The data for these items are all calculated from tabulations of
corporation income tax returns filed with the Bureau of Internal
Revenue. During the years from 1934 to 1941 such returns were
filed by every corporation, with certain exceptions, and separately
classified by industry. From 1929 through 1933, and again in 1942
and subsequent years, affiliated corporations were permitted to file
consolidated returns. More precisely, then, from 1934 to 1941 the
unit of classification for corporate profits and corporate interest is
the individual corporation; from 1929 to 1933 and from 1942 on
it is a corporate unit consisting of either a single corporation or of
affiliated corporations.
Because the bulk of total income originating is comprised of
distributive shares which are classified by establishments, and because of the probable tendency for subsidiary activities of corporations operating in more than one industry to be offsettingr it is
unlikely that the industrial distribution of the total national income
is seriously distorted by the use of a company, rather than an
establishment, classification for corporate profits and corporate interest. This is a serious limitation, however, on the comparability
of the distributive share estimates for some industrial groups, and
one which should be considered carefully by those who use the data
for particular industries.
For the technical users of the estimates of national income and
the various distributive shares by industry, the accompanying table
provides a comparison of the industrial classification underlying
these estimates with the classifications presented in the 1942 edition of the Standard Industrial Classification Code, the 1942 edition
of the Social Security Administration classification, and the 1942
edition of the Bureau of Internal Revenue Classification Code. Differences between the National Income Division code and the 1942
Standard Industrial Classification Code (published by the Division
of Statistical Standards of the Bureau of the Budget and recommended for use by all agencies classifying data industrially) were
dictated, for the most part, by statistical necessity.
In 1945, a revised edition of the Standard Industrial Classification Code for manufacturing industries was released by the Division of Statistical Standards, and in 1949 a revision of the same
code for nonmanufacturing industries was issued. The changes in
the manufacturing code were extensive, so that the new code differs
markedly from that followed by the National Income Division.
The new codes have not been adopted by the National Income
Division because not until very recently have statistical data classified on the new basis become generally available. The wage and
employment data for manufacturing collected under the operations
of the State unemployment insurance programs were classified
according to the new code beginning with 1947. This has necessitated a difficult conversion to the old code basis. A similar problem
arose this spring (1951) with the 1948 corporate tabulations for
manufacturing provided by the Bureau of Internal Revenue.



GUIDE TO SECTIONS ON METHODOLOGY
Income and product components
NATIONAL INCOME BY DISTRIBUTIVE SHARES
Compensation of employees:
Wages and salaries
Supplements to wages and salaries
:
Income of unincorporated enterprises and inventory valuation adjustment:
Income of unincorporated enterprises
'
Inventory valuation adjustment
Rental income of persons
Corporate profits and inventory valuation adjustment:
Corporate profits before tax
Inventory valuation adj ustment
,
Net interest
GROSS NATIONAL PRODUCT OR EXPENDITURE
Personal consumption expenditures:
Durable and nondurable commodities
Services
Gross private domestic investment:
New construction
Producers' durable equipment
Change in business.inventories:
Nonfarm
Farm
Net foreign investment
Government purchases of goods and services
PERSONAL INCOME AND DISPOSITION OF INCOME
Wage and salary receipts
Other labor income
__
Proprietors' and rental income:
Income of unincorporated enterprises and inventory
valuation adjustment:
Income of unincorporated enterprises
Inventory valuation adjustment
Rental income of persons
Dividends
Personal interest income
Transfer payments
Less:
Personal tax and nontax payments
Equals: Disposable personal income _
Less:
Personal consumption expenditures:
Durable and nondurable commodities
Services
.
Equals: Personal saving
RELATION OF GROSS NATIONAL PRODUCT,
NATIONAL INCOME, AND PERSONAL INCOME
Gross national product_Less:
Capital consumption allowances
Equals: Net national product
-Plus:
Subsidies minus current surplus of government
enterprises
Less:
4
Indirect business tax and nontax liability
Business transfer payments
Statistical discrepancy
1 Equals: National income
Less:
Undistributed corporate profits
Corporate profits tax liability
Corporate inventory valuation adjustment. .
Contributions for social insurance:
Employer contributions
Employee contributions
Excess of wage accruals over disbursements.
Plus:
Net interest paid by government
--Transfer payments
Equals: Personal income

Section
Number

SURVEY OF CURRENT BUSINESS
1.—WAGES AND SALARIES
The annual estimates of total wages and salaries for the last
decade are extremely reliable. Over 90 percent of the total consists
of reported payroll information taken from accounting records of
business and government. The lag between preliminary and final
estimates is short, and the largest revision that has been required
in recent years by the accession of later data has been 1 percent
of the total.
From the standpoint of sources and methods, the estimates may
be divided into those covered by the social security systems and
those not covered. The former include virtually the whole of industrial and commercial employment. They account for almost 80 percent of total wages and salaries and almost 95 percent of privateindustry wages and salaries.
The area of the economy not completely covered by social
security, and therefore estimated independently, consists of government, agriculture, private households, and a few quantitatively
minor industries. The following tabulation shows a breakdown of
wages and salaries into the segments estimated from different
sources.
Exhibit 1;—\Vages and Salaries, 1947
Millions
of dollars

Industries covered by social security programs
Industries not covered:
Federal Government
State and local governments
FarmsPrivate households
Nonprofit hospitals
Religious organizations
Jjducational services (part)
Nonprofit organizations, n.e.c. (part)
Federal Reserve Banks
Forestry (part)
Rest of the world.
Tips (in all industries)
Total wages and salaries

_

Percent

97,199

Item

79.6

9,803
7,436
2,837
2,210
783
359
595
135

8.0
6.1
2.3
1.8
.6
.3

52

36
17
597

122 ,059

.5
.1
.04

.03
.01
.5

100.0

Industries Covered by Social Security Programs
Total payrolls
The reporting system that has been developed under the Social
Security and Railroad Retirement Acts approaches the ideal as a
source for income estimates. It has the advantages of comprehensive coverage, regularity of reporting, and of being largely "selfpolicing", in that the wages reported by employers—upon which
the size of benefits partly depends—can be verified by the employee.
Because the reports from every firm list the employees and their
wages individually, unlike other enumerative surveys, the possibility of omissions and accounting errors is minimal. Reported figures account for practically the entire total of wages and salaries
in covered industries; only about 1 percent of the total must be
filled in by estimation.
In industries covered by the Old-Age and Survivors' Insurance
Program (OASI), each employer with one or more employees files
a
quarterly list of his employees and the taxable earnings paid to
e
ach employee—through 1950, the first $3,000 earned during the
calendar year (thereafter, the first $3,600). Taxable payrolls are
compiled from these lists for each calendar quarter and an estimate
added for delinquent employers. The four-quarter sum of these
totals represents about four-fifths of the total wages of these firms.
Nearly all of nontaxable earnings in employment covered by the
^ASI program is reported under the State unemployment insurance
/TT
I) programs. The State agencies obtain from employers covered
their programs regular quarterly reports on both total and
section covers also, at the end, "wage and salary receipts", which is a
nent of personal income.



63

taxable payrolls and summarize these reports for the Bureau of
Employment Security of the Department of Labor. Taxable earnings under the OASI program and nontaxable earnings reported to
the State unemployment insurance agencies together represent in
most years more than 09 percent of total wages and salaries in
industries covered by the Social Security Act.
The two sources are not quite complete because some of the UI programs exempt firms with few employees (ranging at present from
1 to 7, according to the individual State laws) and firms in business
intermittently or for short periods. As such firms are covered by the
OASI program, only their nontaxable wages must be estimated.
This is done by a method developed in the Social Security Administration. The taxable payroll of firms not covered by the State
laws is multiplied by a ratio of nontaxable to taxable earnings.
The first of these factors, the taxable payroll, is obtained by subtracting taxable wages paid under the UI programs from taxable
wages under the OASI program. The second factor, the ratio, is
approximated from UI data and then adjusted, by use of a 1943
OASI study, to apply to firms not under the UI program.
The over-all wage and salary estimates for industries covered
by the Social Security Act are thus built up as the sum of (1) taxable earnings reported under OASI, (2) nontaxable earnings reported under UI, and (3) estimates, based on social security data,
of nontaxable earnings in these industries not reported under UI.
Total wages paid under the Railroad Retirement Act are ascertained in much the same way. Wages taxable under this program
—the first $3,600 for each employee—are reported quarterly to the
Railroad Retirement Board, which processes and tabulates these
data. The Board has an accurate basis for raising taxable wages
to the total, by multiplying them by the ratio of total wages reported by employers to the Interstate Commerce Commission to
the taxable wages of the same employers, which account for about
95 percent of taxable compensation.
All of the figures necessary for computation of the "covered"
wage and salary total are available 6 months after the period in
which the wages were earned. Thus in June of each year data are
available for the previous year. The figures are subject to revisions
of two types: (1) Correction of errors in reported data and (2) substitution of actual data from delinquent reports for the earlier
estimates of delinquent wages. In the past, revisions of either type
have been negligible.
The relation of the reported to the estimated elements of wages
and salaries for covered industries is shown in Exhibit 2* This
covers the 1947 estimates prepared for publication in July 1950.
The estimated portion was less than 1 percent of the total. In the
first estimates for 1947, published in July 1948, the estimated portion was higher—4.7 percent—because of the necessary higher
allowance for delinquent wages.
Exhibit 2.—Derivation of "Wage and Salary Total for Covered
Industries, 1947
[Millions of dollars]
Total

Item
Industries under Social Security Act:
Taxable wages
Nontaxable wages
Minor adjustments

Reported by
employers

78,011 77,037 (OASI)
14,077 13,614 (UI)
4

Industries under Railroad Retirement Act:
Taxable wages
Nontaxable wages

4,744
303

Total wages and salaries, covered industries 97,199

4,744
96 ,295

Estimated

>463
»4

363
904

t Estimated delinquency as of May 1950.
* Nontaxable wages paid by employers not covered under State laws.
* Net adjustment to eliminate covered portion of farming, which is treated separately
by the National Income Division, and to complete the coverage of agricultural services.

Industrial distribution of payrolls
The method used to derive an all-industry total of wages and
salaries cannot be followed satisfactorily for the separate indus-

64

1951 NATIONAL INCOME SUPPLEMENT

tries, chiefly because old-age and survivors insurance data have not
until recently been collected or tabulated on an establishment basis.
As noted in the Introduction to this Part, this is preferred to the
company basis of classification.
The preparation of an industry breakdown of the covered payroll
total relies heavily on the Bureau of Employment Security's reports
summarizing wages and salaries under the UI programs, in which
the establishment basis of classification is used. This source and the
Interstate Commerce Commission's Statistics of Railways reports
together provide accurate, employer-reported data by industries for
about 95 percent of total covered payrolls.
The missing part consists of the payroll of firms (1) covered
by the OASI program but not by the State laws and (2) covered
by the Railroad Retirement Act but not reporting to the Interstate
Commerce Commission. The latter element, quantitatively very
small and affecting only a few industries, is estimated from data
furnished by the Railroad Retirement Board. A satisfactory basis
for estimating the former is furnished by special tabulations of oldage and survivors' insurance data showing by industries the taxable
payroll of the small firms not covered by the State laws. These are
available for the third quarter of 1940 and 1943 and the first
quarter of each year beginning with 1945.
For nearly all covered industries, the process of obtaining provisional estimates (before adjustment to the controlling total) involves simply the addition of these OASI and Railroad Retirement
Board data to the comprehensive data reported under the UI programs and by the Interstate Commerce Commission. This general
method was departed from only in those few instances where more
reliable data were available from other sources or where the portion of employment in firms not covered by the unemployment
insurance data was so large as to suggest use of another procedure.
The industries thus receiving special treatment include "agricultural services," "forestry," "fisheries," "banking" (prior to 1943),
"water transportation" (prior to 1947), "personal services" (prior
to 1947), "medical and other health services," and "legal services."
The data utilized in making estimates for these industries were
obtained from the population and industry censuses, the Maritime
Commission, Governmental banking regulatory bodies, and special
surveys of the professions (described in the section on Income of
unincorporated enterprises) conducted by the National Income Division.
The summation of direct industry estimates from these general
and special sources yields a payroll aggregate falling short of the
independent controlling total in most years by only a fraction of
1 percent. A large part of this discrepancy can be traced to exclusions from the industry estimates of data unclassified by industry
in both the unemployment insurance and special tabulations of
OASI small-firm data, as well as to the omission of nontaxable
wages from the latter. In 1947, when the summation of direct industry estimates fell short of the ?97.2 billion aggregate by $1 billion, $0.6 billion was due to the factors listed above. Adjustment
to the controlling total is accomplished by allocating the amount of
the discrepancy among the industries in proportion to the estimates
of wages not covered by the State unemployment insurance programs.
For the years 1929-38, before social security data were available,
wages and salaries for the "covered" segment of the economy were
derived from diverse sources, the most important being the periodic
censuses of industry and business. These provided coverage of
manufacturing, retail trade, wholesale trade, most of the "covered"
services, mining, construction, insurance, communications and public utilities, and parts of banking, highway transportation, and
services allied to transportation. Reliable, comprehensive data were
available from Federal reports also for banking, railroads, pipeline
transportation, and air transportation. For the industry groups for
which censuses furnished one or more benchmarks, the general
procedure for estimating the intercensal years was through interpolation or extrapolation by sample data on payrolls and employ


ment collected by the Bureau of Labor Statistics. The series prepared for individual industries for the years 1929-39 were used to
extrapolate the 1939 estimates derived from social security data.

Industries Not Covered by the Social Security Programs
Federal Government
Civilian payrolls of the Federal Government—executive, legislative, and judicial—are reported monthly to the Civil Service Commission and the Department of Labor from records of the individual
agencies. The data become available with about a 2-month lag;
subsequent revisions due to late reporting are negligible. Payrolls
of employees stationed abroad who are citizens of the continental
United States—a small item—are estimated by the National Income
Division and added to the reported payroll for the continental
United States.
Prior to September 1933, monthly payroll data for the civil executive service were not available. The Bureau of Labor Statistics
derived the 1929-33 annual estimates largely on the basis of
Budget of the United States Government figures and detailed employment data collected by the Civil Service Commission.
Federal Government civilian payrolls have been divided between
general government and government enterprises on the basis of
these sources, supplemented on occasion by direct reports from certain of the individual agencies such as the Post Office Department,
the largest of the enterprises. Little estimation has been necessary.
Military wages are estimated as the sum of cash pay and allowances and of pay in kind. Information on cash wages is secured
separately on a fiscal-year basis from the five armed services.
These accounting (budgetary) records must be adjusted in some
instances to eliminate nonwage items. The adjustments likewise are
based on detailed .data furnished by the services. The data are generally adequate for the purpose, even though not developed for it.
The fiscal-year figures are then converted to a calendar-year basis
by means of monthly estimates supplied by the armed services to
the Bureau of Labor Statistics. Prior to 1934, when monthly payroll
estimates were not available, this conversion was made by monthly
distributions of personnel.
Pay in kind includes the cost value of food consumed by the
armed forces and standard issues of personal clothing. This is estimated by the various services from their cost records, since no
suitable accounting data for the two items are available. The procedure involves multiplication of the number of personnel receiving
the food or clothing by the estimated cost per person.
Necessary revisions of the calendar-year estimates of military
wages are usually small but on occasion have been as large as
5 percent.
Wages and salaries in Federal work relief projects, covering the
period 1933-43, are compilations of the Social Security Administration from records of the various agencies which administered the
projects.

State and local government
Estimates of public education payrolls—classified in general government—have been based since 1946 on data from the Office of
Education and the Bureau of the Census. The Biennial Surveys of
Education of the Office of Education provide detailed data on payrolls, and estimates derived from the Census data are used for
interpolation and extrapolation. The Census Bureau collected data
for the school years 1945-46 and 1948-49 from samples representing about 80 percent of total estimated payroll. They were raised
to the total on the basis of 1940 population, on the assumption that
payroll per capita was the same in unsampled as in sampled units
of similar size.
The school-year data were converted to calendar years by use of
studies of the National Education Association on the period ana
frequency of teachers' salary payments. The 1946 and 1949 calendaryear totals were interpolated by sample data (covering about

SURVEY OF CURRENT BUSINESS
percent of the total) collected by the Census Bureau for one month
of each quarter year to yield estimates for 1947 and 1948. These
regularly available monthly data also furnish the basis for extrapolation into the current period. For the years 1940-45, public
education payrolls were estimated largely from detailed data of the
Office of Education.
Total nonschool payrolls (except work relief)—general government and government enterprises combined—have been estimated
for 1 month in each quarter from a mail sample of governmental
units. The sample data, covering about 85 percent of the estimated
total, are expanded to the total in the same way the 1946 and 1949
public education samples were. The months not sampled are obtained by the National Income Division by straight-line interpolation.
The Census Bureau generally has provided separate data for
one month in the year on government enterprise payrolls. These
are interpolated for intervening months by total nonschool payrolls. Subtracting enterprise payroll from total nonschool payroll
yields the general government portion of the latter.
The annual estimates of public education and of nonschool
(except work relief) payrolls for the period 1929-39 are those prepared by the State, County, and Municipal Survey, conducted
by the Department of Labor with Work Projects Administration
funds and published by the Department in Employment and Pay
Rolls in State and Local Governments, 1929-39, This survey collected data from all States and a comprehensive sample of local
governmental units. Separate data were provided for general government and government enterprises.
State and local government payrolls include also a small
amount of income in kind, representing the value of food and
lodging received by government hospital employees and of food
received by State prison employees. This has been estimated from
data contained in two Census Bureau publications: Patients in
Mental Institutions and Prisoners in State and Federal Prisons
and Reformatories.
State and local work relief wages, covering the period 1929-42,
were derived largely from reports of the Federal Emergency
Relief Administration, supplemented by compilations of the Bureau of Labor Statistics and Social Security Administration. For
lack of complete data, the estimates for 1929-32 (totaling only $50
million for the period) are subject to sizable error.

65

the domestic service component of the Consumers' Price Index
of the Bureau of Labor Statistics, while employment duta are
obtained from the Monthly Report on the Labor Force, Bureau of
the Census. The first comprehensive check on the estimates thus
derived will be provided by tabulations from the 1950 Population
Census.
The estimates prior to 1939 also were obtained as the product
of employment and wage rates. It was necessary to base the
movement of employment on indirect data (employment in industrial and commercial pursuits), and the resulting series was adjusted
to an estimate of the number of domestic servants derived from 1930
Census of Population data. The 1939 estimate of average cash pay
was extrapolated to 1929 by an index of average earnings of
domestics prepared by the National Bureau of Economic Research
from data collected from employment agencies by the National
Income Division and the National Bureau.
The value of board furnished domestic service employees is
based on a standard budget for 1935-36 derived from the National
Resources Planning Board study on Family Expenditures in the
United Statest 1935-36, moved by changes in food prices, and
multiplied by the proportion of employees receiving board, as
estimated from a survey of employment agencies made by the
National Income Division in 1936.

Nonprofit hospitals

Farms
Farm wages, including both cash payments and the cost of
board, lodging, and other perquisites furnished to hired workers,
are estimated by the Bureau of Agricultural Economics. The cash
part, comprising more than four-fifths of the total, is taken as
reported in the Census of Agriculture. The Census figures are
extended to other years by sample data on employment obtained
Monthly and wage rates quarterly from a mail questionnaire of
between 15,000 and 20,000 farmers.
When the results of the 1945 Census of Agriculture became
available, it was necessary to correct the 1944 estimates of cash
w
ages derived from the sample by only 5 percent. Much larger
corrections had been required to adjust to the censuses covering
1929 and 1939.
The basic data for estimating wages in kind were obtained
from two early census enumerations and several sample surveys.
Sample data on employment, wage rates, and the prices of
Perquisite items are used for extrapolation.

It has not been possible to prepare direct estimates of nonprofit hospital payrolls. Instead, these are derived by subtracting
the payroll of proprietary hospitals, as obtained from social
security records, from independent estimates for all privately controlled hospitals. The following description relates to the latter.
Virtually complete data on the cash payroll of privately controlled hospitals have been collected annually by the American
Hospital Association since 1944. Only slight estimation is required
to secure the aggregate, of which nonprofit hospitals account for
about four-fifths. The value of maintenance furnished employees
is added by the National Income Division. The value of maintenance per employee receiving maintenance was derived from
the 1935 Census of Hospitals and has been extrapolated to 1944
and later years by an index constructed by weighting the Consumers' Price Index by one and the food component of this index
by four. The proportion of employees receiving maintenance was
estimated from the 1935 Census, and, in the absence of later
information, this proportion has been held constant. Maintenance
accounts for about one-fifth of total wages and salaries.
Prior to 1944 the only comprehensive payroll data were those
provided by the 1935 Census of Hospitals. The 1935 Census total
(cash and maintenance) was extended back to 1929 mainly by
data collected in a special survey of hospitals made by the National Income Division in 1935.
Estimates through 1941. were prepared by extrapolating the
1935 payroll by estimates constructed from such information as
the number of hospital beds and the average salary per bed, per
capita expenditures for hospital in-patient service, and the average
daily census of patients. Unemployment insurance data (covering
largely proprietary hospitals) were used to interpolate between
the 1941 and the 1944 payroll estimates.
Since the hospital estimates for the period 1936-43 are based
on diverse and partial sources, it may be noted that the original
estimate for 1944 differed by only 2 percent from the final estimate subsequently derived from the basic data provided by the
American Hospital Association, adjusted to include maintenance.

Private households

Religious organizations

Data on employment and average earnings collected from individual employees in the labor force enumerations of the 1940
Census of Population and Housing furnished the basis for estimating the cash pay of domestic servants in 1939. This base-year
estimate has been projected to later years by an index of wage
r
ates multiplied by employment. The wage rates are taken from

The basic estimate of cash payrolls was derived from the 1936
Census of Religious Bodies, the reported totals being raised to
allow for churches not reporting. This figure has been extrapolated
by multiplying estimated annual employment by an index of
average salaries calculated from data supplied the National Income Division by various denominations. The employment estimates




66

1951 NATIONAL INCOME SUPPLEMENT

laws is small. The social security regulations state that tips are
have been derived from data obtained from the following sources:
the 1930 and 1940 Censuses of Population; the Official Catholic considered wages only if the employee renders to the employer
an accounting of the tips. To the extent that tips are covered,
Directory; a special survey of Catholic dioceses made by the Nahowever, they offset any exclusions of income in kind, which is
tional Income Division, covering 1929-35; and correspondence
treated as being completely reported in the social security payroll
with other denominations.
data.
The rental value of parsonages was assumed to be 10 percent
Tips were estimated at $0.6 billion in 1947, and are included
of their value, as reported in the 192G and 1936 Censuses of Rein the payroll estimates for retail eating and drinking places, railligious Bodies. The rent component of the Bureau of Labor Staroads, taxicabs, hotels, and personal services.
tistics' Consumers' Price Index has been used for interpolation
Tips in eating and drinking places were estimated for 1939
and extrapolation. The value of board received by Catholic clergyfrom wage studies in restaurant occupations made by State labor
men—the other item of pay in kind—was estimated for 1934 from
departments of Illinois, New York, Ohio, and Rhode Island. The
data collected in the special survey by the National Income Divi1939 estimate has been extrapolated to other years by the Office
sion. The extrapolation to other years has been made by the
of Business Economics series on sales of eating and drinking
product of number of clergymen and the food component of the
places.
Consumers' Price Index.
The estimates for the railroads (except dining and buffet cars)
Educational services (part)
were prepared on the basis of a survey for 1929 and 1933 conducted by the Brotherhood of Sleeping Car Porters for the NaEstimates of wages and salaries for private educational services
tional Income Division, and extrapolated to other years by the
not covered by the social security laws are prepared separately
number of berth and seat passengers in sleeping and parlor cars
for parochial schools, other elementary and secondary schools,
(reported annually in Statistics of Railways) and estimated
higher education, and a miscellaneous category of institutions and
changes in the percent of passengers tipping and the average tip.
agencies. The general procedure is one of piecing together inforTips in dining and buffet cars are estimated at 12 percent of dining
mation on employment and average earnings. The Office of Educaand buffet car sales (reported annually in Statistics of Railways).
tion has been the principal source of data, including not only the
Tips in the taxicab industry are calculated at 15 percent of
Biennial Survey of Education and other published reports, but also
operating revenues, on the basis of several studies of the industry
numerous special tabulations. Other sources include the National
in the mid-thirties.
Catholic Welfare Conference, the National Education Association,
The studies for New York and Illinois used in estimating tips
State unemployment insurance tabulations, and a special survey of
in eating and drinking places also provided the basis of the estiCatholic dioceses made by the National Income Division coveringmates of tips to hotel food service employees in 1939. The 1939
the period 1929-35.
estimate has been extrapolated to other years by the index of hotel
Nonprofit organizations, n. e. c. (part)
receipts from meals and beverages compiled by Horwath and Horwath, specialists in hotel accounting.
Estimates of payrolls for other nonprofit organizations not
Tips in personal services are estimated at 5 percent of the recovered by social security are based on the 1935 Census of Nonceipts of barber shops, beauty parlors, and baths and masseurs.
profit Organizations, Office Buildings, and Miscellaneous. Payrolls
in welfare and relief organizations have been extrapolated by domestic consumption expenditures of private social welfare and
Wage and Salary Receipts
relief agencies, except that the National Red Cross payroll has
"Wage and salary receipts," a component of personal income,
been obtained directly since 1940. The very small amount of payis equal to wages and salaries plus the excess of wage disburseroll for other nonprofit organizations exempt from social security
ments over wage accruals less employee contributions for social
is extrapolated separately by payrolls in "covered" organizations.
insurance.
Because of retroactive wage and salary payments, it is necesFederal Reserve Banks
sary to adjust wages and salaries from an accrual basis to a payWages and salaries are obtained from the annual reports of the
ment basis for inclusion in the personal income estimates. The
Board of Governors of the Federal Reserve System.
adjusted series is termed "wage and salary disbursements". The
Forestry (part)
adjustment item, the excess of wage disbursements over wage accruals, reflects the difference in timing, as between receipt and
Only a small part of forestry is covered by social security
earning, of retroactive wages.
laws. This is deducted from estimates of total forestry payrolls
The following example indicates the procedure of moving from
to obtain the noncovered portion.
wages and salaries to wage and salary disbursements. In 1946 a
Base-period estimates of forestry payrolls are derived from Cenretroactive wage payment of $30 million was made by the Western
sus of Manufactures data for gum turpentine and gum rosin proUnion Telegraph Co., under order of the National War Labor
ducers. These account for nearly all of the industry. Logging, it
Board. The award applied to work performed in the years 1943,
may be noted, is classified in manufacturing, rather than forestry.
1944, and 1945, in the amounts of $2, $14, $14 million, respectively.
Extrapolation to other years has been based mainly on a total
Wages and salaries, which reflect earnings on an accrual basis,
labor cost series, computed from Department of Agriculture data.
in this specific case are $2 million in 1943, $14 million in both
This is derived by multiplying the physical volume of production
1944 and 1945, and 0 in 1946. The adjustment item, the excess
of turpentine and rosin from gum by estimates of labor cost per
of wage disbursements over accruals is $—2 million in 1943, $—I4
unit of naval stores.
million in 1944 and 1945, and $30 million in 1946. Consequently
Employment in other forestry—only about 10,000—is estimated
wage and salary disbursements are 0 in each year 1943-45, and ?30
from Census of Population data and multiplied by the average
million in 1946.
wages of turpentine and rosin workers.
The adjustment of wages and salaries to wage and salary disRest of the world
bursements is not intended to correct discrepancies between the
This series is described in the section on Net foreign investment.
two arising from all retroactive wage payments, but only for the
more significant of these actions. While in the case of the Western
Tips
Union award noted above, it was possible to secure direct informaTips are treated in the category "not covered" since it is betion on these payments, more often such information has to be
lieved that the extent of actual coverage under the social security
approximated from news accounts or other less formal sources.



SURVEY OF CURRENT BUSINESS
Employee contributions for social insurance
Employee contributions are obtained from the same sources described in the notes to employer contributions for social insurance
in the section on Supplements to wages and salaries. Employees
contribute to all the programs described in that section except railroad unemployment insurance and several of the smaller Federal
Government retirement programs.

2.—SUPPLEMENTS TO WAGES AND SALARIES
In terms of the character of basic data, supplements to wages
and salaries can be discussed most conveniently under two subheadings. Employer contributions for social insurance comprises
items for which highly reliable data are obtained, with virtually
no time lag, almost exclusively from the accounting records of
the agencies administering the programs. This major component
accounted for three-fifths of total supplements in 1947. Estimates
of Other labor income are less reliable. They are based to a lesser
extent on comprehensive accounting data, and these become available with a lag of two to three years. Considerable estimation
is involved for the most recent years.
The substantially final estimate of employer contributions for
social insurance for 1947 made in July 1950 differed by only one
percent from the original estimate for that year made in 1948.
The comparable adjustment for other labor income amounted to
8 percent. Also to be noted is that in July 1950 a rough estimate
was added to other labor income for employer contributions for
group insurance. This item previously had been neglected for
lack of data.

Employer Contributions for Social Insurance
Private industries
Regular contribution reports filed by employers with the administering agencies or with the United States Treasury are the
source of data on contributions made by employers under the
old-age and survivors insurance program, the State unemployment insurance and cash sickness compensation programs, the
railroad retirement and unemployment insurance programs, and
the Federal unemployment tax. The reported contributions data
are lagged (usually one-quarter year) to time them with the
accrual of the wages and salaries on which they were levied,
rather than with the receipts of the Government funds.
Like covered payrolls, discussed in the notes on Wages and
salaries, these contributions data are a byproduct of operations
under the social security laws. They are subject to revision only
to the extent that wage reports are in error and that estimates
toade for delinquent reports are corrected on the basis of actual
data. Revisions from these causes have been negligible.
The industry distributions of employer contributions under
these several programs either are available from tabulations of
employer reports or can be estimated from taxable wage data,
S1
nce taxes are levied at a uniform percentage rate.
Data by industry on employer contributions under the State
unemployment insurance programs have been obtained for years
S1
nce 1940 from the Bureau of Employment Security of the
Department of Labor. They are summations of employer reports.
For the years 1936-39, when reported data were not available on
aj
i industry basis, estimates were prepared by extrapolating the
j940 industry figures back to 1936 on the basis of the National
Income Division's estimates of wages and salaries, and then adjusting the results proportionately to the all-industry total for
each year.



67

The industrial breakdown of employer contributions for old-age
and survivors insurance for years since 1941 has been obtained
by multiplying the contribution rate by reported taxable wages
under the State unemployment insurance programs plus estimated
taxable wages of firms covered by old-age and survivors insurance
but not covered by the State programs chiefly because of the
varying size-of-firm exclusion provisions of the latter.2 The oldage and survivors insurance data for small firms have been
estimated from periodic special tabulations by the Bureau of
Employment Security of the Department of Labor. In the absence of taxable payroll data by industry prior to 1941, the estimates' in each industry for that year were extrapolated to the
1937-40 period by total wages and salaries in the industry, with
appropriate adjustment to the annual all-industry aggregate.
The industry distribution of employer contributions for oldage and survivors insurance has been used to allocate the Federal
unemployment tax.
The ail-industry totals for employer contributions under the
railroad retirement and unemployment insurance programs have
been allocated among the few industries in which there is coverage on the basis of total payrolls, as derived in preparing
the estimates of wages and salaries.
Cash sickness contributions, confined to a few States, have
been distributed by industry in the same proportion as unemployment insurance contributions in those particular States.

Government
Payments made by the Federal Government to its civilian
employee retirement systems are obtained on a fiscal year basis
from records of the Treasury Department or of the agencies
responsible for the administration of the systems. Calendar year
estimates are prepared by averaging the data for adjoining fiscal
years. The data on contributions to the Government and National
Service Life Insurance Funds are compiled monthly from reports
of the Veterans' Administration.
The separation of contributions to the numerous (and quantitatively minor) funds other than the civil service fund as between
general government and government enterprises poses no problem, since the functions of agencies with separate funds are clearly
defined. But since the Federal Government makes one lump-sum
payment each year to the civil service retirement fund, it is
necessary to make a statistical allocation of the data for this fund
between general government and government enterprises.
For years other than 1941-45, this allocation has been accomplished on the basis of Treasury data on employee contributions
to the retirement fund classified by individual Federal agencies.
To obtain estimates for the 1941-45 period, the 1940 estimate
of the Government's contribution for enterprise employees was
extrapolated by the relative change in government-enterprise employee contributions (adjusted for the July 1, 1942, rate change),
and the Government's contribution for general government employees was obtained as a residual.
This procedure was adopted because, while employee contributions were swelled by the expansion of payrolls, the Government's
contribution was not increased proportionately. Most of the war
service employees, concentrated in general governmental agencies,
were expected to withdraw from the Federal service before attaining eligibility for retirement benefits, taking refunds of their
contributions instead of adding to the long-run liabilities of thefund for benefit payments.
Estimates of contributions by State and local governments to
retirement systems for their employees have been furnished by
the Social Security Administration for years since 1936. Base
2
The available tabulations of total taxable payrolls under the old-age and'
survivors insurance program were not used in obtaining an industry distribution
because in the past they were based in large part on a classification of firms, rather
than establishments, and therefore were not comparable to the estimates of wages;
and salaries.

1951 NATIONAL INCOME SUPPLEMENT

68

year data for these estimates were developed through a joint
study by the Social Security Administration and the Bureau of
the Census. Employer contributions for the fiscal year 1940-41
were estimated on the basis of questionnaires on the operations
of retirement systems sent to all large State and local governmental units and to a sample of the smaller units. This base year
estimate has been extended to other years by the Social Security
Administration from data compiled by the Census Bureau in its
annual financial statistics series and in special reports, and from
published annual reports for some of the larger retirement systems. The fiscal year data have been adjusted to a calendar
year basis by averaging successive fiscal years. The estimates
for 1929-35—definitely of lesser reliability—were prepared by
extrapolating the 193G figure provided by the Social Security Administration by contributions data obtained from a sample questionnaire survey of State and local government units conducted by
the National Income Division.
State and local government employer contributions have been
allocated between general government and government enterprises
in proportion to the breakdown of employee contributions for 1939
estimated from data furnished by the Census Bureau. The enterprise portion is small, the 1939 estimate amounting to only
$3 million.

Compensation Commission. Payments in telephone, telegraph, and
related services were estimated by raising the amounts of accident disability benefits and death benefits reported annually by the
American Telephone & Telegraph Co. by the ratio of total payroll
in the entire industry to the payroll of that company. The industry
components of mining were estimated from tabulations of data
reported by the accident compensation commissions in the principal
mining States.
For all other industries, total payments in 37 States for the
period 1929-38 as a whole were tabulated from the report on
Workmen's Compensation Experience Compiled in 191*1 of the
National Council on Compensation Insurance.3 To these figures
were added data for three additional States compiled from State
reports. The 10-year aggregates for each industry were then distributed by years in proportion to employment, and the resulting
estimates for each year were adjusted proportionately to the totals
for all industries not independently estimated.
In the preparation of estimates by industry for years since 1939,
the Division's employment series has been used to extrapolate estimated 1938 payments in each industry except railroads, Federal
Government, and maritime employment (which have continued to
be estimated separately by the procedures indicated^ above). The
results have then been adjusted to the all-industry aggregate less
data for the separately estimated industries.

Other Labor Income
Compensation for injuries
Estimates of benefits paid to workers (and their dependents or
survivors) insured under State and Federal accident compensation
laws, either on a compulsory or voluntary basis, have been prepared annually since 1939 by the Social Security Administration.
These estimates are based on data for private insurance companies
from the Spectator Company's annual Insurance Yearbook, for
State insurance funds from reports of the funds, and for selfinsurers from information furnished by the State accident compensation commissions. Reports of the United States Employees'
Compensation Commission also are utilized. Data from these
sources become available with about a year's lag, and a preliminary
estimate is made by the Social Security Administration from
direct information for a few States and industrial injury data
compiled by the Department of Labor. The estimates for years
prior to 1939 were prepared by the National Income Division
by methods paralleling those followed by the Social Security
Administration in later years, but greater use was made of data
from the State commissions.
The Division also estimates the relatively small amounts of
court-awarded benefits received by injured railroad and maritime
workers, since these are not covered by the compilations of the
Social Security Administration. The estimates for railroad workers
are based on Interstate Commerce Commission data on payments
by railroads for injuries to persons (employees and passengers)
and on the numbers of employees and passengers killed or injured,
as published annually in Statistics of Railivays. The estimates
for maritime workers were derived for 1938 from data contained
in the Labor Department Bulletin (No. 869) on Workmen's Compensation and the Protection of Seamen, and extrapolated to other
years by maritime employment.
The industrial breakdown of the 1929-38 totals of workmen's
compensation for injuries was prepared in several parts. Estimates
were first made separately for the following industries: Federal
Government; railroads; maritime employment in water transportation; telephone, telegraph, and related services; all of the
mining industries except crude petroleum and. natural gas; and
stevedoring, a component of services allied to transportation.
The, sources of the data for railroads and maritime employment have been noted above. Data for the Federal Government and
for stevedoring were obtained from the United States Employees'



Employer contributions to private pension and welfare
funds
Contributions in this category relate to the following types of
private programs: (1) Pensions, (2) health and welfare programs,
and (3) group insurance protection.
(1) The series on employer contributions to private pension
plans covers transactions under several different financial arrangements, including contributions to self-administered plans (involving separate funds administered by employers either directly
or through a bank or other agent), the purchase of group annuities under plans administered by life insurance companies
(where usually there is no separate pension fund with segregated
assets), direct payments by employers without the establishment
of a fund (of minor magnitude), and contributions to employees'
profit-sharing trusts.
The totals for the pericd 1929-38 were built up as the sum
of several estimated parts.4 Data for railroads were obtained annually from Statistics of Railways. Estimates for higher education were derived from contributions data furnished by the Teachers' Insurance and Annuity Association. Data on employer contributions by churches, the Young Men's Christian Association,
and the Young Women's Christian Association were obtained
annually for the period 1933-38 from the Church Pension Conference Report and extrapolated back to 1929 by church pension
payments. The estimates for all other industries (in the aggregate)
were derived for the years 1932-38 from direct and collateral
information contained in the study by Murray Latimer on Trends
in Industrial Pensions. For the period 1929-31, with data lacking,
they were made on the assumption that contributions dropped
annually from 1929 to 1932 by one-half of the average annual drop
from 1932 to 1934.
Totals for the period 1939-47 were derived as the sum of
estimates for employer contributions for pensions by religious
organizations and institutions of higher education (both obtained
by payroll extrapolations of the 1938 estimates), Federal Reserve
banks, and employer contributions in all other industries combined.
The latter category was available for 1945-47 (as of July 1950) in
TheDUmeaandi]l*?nrn-thiS B°S^ f ° rn a n «*™»ely detailed industrial classification.
Divwin clawiflSlln l Vr Sh S l l e^ u t a e d c o n v e t t i n * them to the National Income
« Cw5rS5l?in? 3 p o *o t d . h l h l n s compilation e n separate data for each yearof
pIana
in t h u S t ^
*P-r ?*? r
- e v i d «y of inconsequential amount
in tnis period, were not included in the 1929-38 estimates for lack of data.

SURVEY OF CURRENT BUSINESS
tiie Bureau of Internal Revenue Statistics of Income publications,
the reported data on corporate contributions requiring only minor
adjustments for inclusion in the series. It was estimated for the
years 1943 and 1944 from special tabulations of pension plans submitted to the Bureau of Internal Revenue for approval for incometax deduction purposes under the Revenue Act of 1942. The tabulations were not designed primarily for statistical purposes, and the
data on number of plans in operation and average annual contribution per plan derived from them were not sufficiently accurate in
time-period reference to yield more than rough orders of magnitude
for these 2 years.
Estimates for 1941 and 1942 were obtained by proportional interpolation between the 1937 and 1943 values, using the number of
plans in operation as an interpolating index. Information on the
number of plans in operation was obtained from the Latimer study
for 1937 and from the Bureau of Internal Revenue for 1941, 1942,
and 1943. Employer contributions in 1939 and 1940 represent
straight-line interpolation between the 1938 and 1941 estimates.
The Bureau of Internal Revenue corporate data reported in
Statistics of Income-—'accounting for nearly all of the employer
contributions total—do not become available until the third year
after the period to which they refer. In the interim, the current
estimates are prepared very largely by extrapolation on the basis
of payrolls and of pension plan information in the Bureau of
Labor Statistics' monthly Current Wage Developments, which reports coverage and contributions data relating to the more important new plans and revisions of plans already in effect. These
extrapolations are limited in scope—they cannot, for example, take
account of changes in contributions relating to the funding of past
service liability and other actuarial requirements—and the current
estimates are subject to sizable revision.
Direct information on the industry distribution of employer contributions to private pension funds is confined mainly to the comprehensive Bureau of Internal Revenue corporate tabulations for
1945-47 and to available data permitting the preparation of separate estimates for several industries. These include religious organizations; educational services, n. e. c. (taken as equal to higher
education); Federal Reserve banks; railroads; telephone, telegraph,
and related services (compiled from annual reports of the major
companies); and iron and steel and their products (based mainly
on data tabulated from annual reports of four principal companies).
. In addition, a Bureau of Internal Revenue tabulation of employer
contributions by industry covering the 5,116 plans approved through
December 31, 1944 was used as the basis of a distribution (apart
from the separately estimated industries) for 1944. For all other
years of the period since 1929, the 1944 and 1947 estimates have
been extrapolated, industry by industry, by wages and salaries,
with the resulting distribution adjusted proportionately to the allindustry aggregate exclusive of the separately estimated group of
industries.
(2) Contributions by employers under health and welfare programs have been derived by assembling data for the larger plans
known to be in existence and preparing estimates for the remaining smaller plans.
Listings of existing plans, together with statements of their
coverage and provisions, have been obtained mainly from publications of the Bureau of Labor Statistics, especially B. L. S. Bulletin 841 and the September 1946 Supplement to this Bulletin, Bulletin 900, and the monthly reports on Current Wage Developments.
Studies by the Social Security Administration and the August
J946 Supplement to the periodical Labor and Nation also have
be
en utilized.
Data on employer contributions to the principal plans have been
obtained for the most part directly from the administering organization. Thus, data have been secured from the Amalgamated
Clothing Workers of America, the International Ladies Garment
Workers Union, the Solid Fuels Administration of the Department



69

of the Interior (covering the United Mine Workers fund), and the
American Telephone & Telegraph Co.
For the smaller plans, estimates have been prepared by multiplying the number of employees covered by a plan (usually as reported in the general sources cited above, or obtained directly from
the union involved) by average earnings of employees in the industry
to obtain estimated wages of covered workers. These have been multiplied by estimated contribution rates (the modal rate given in the
above sources) to obtain the estimated amount of employer contributions.
The method ot' estimation, it will be noted, furnished the industrial distribution of employer contributions to health and welfare
plans.
(3) Employer contributions for group insurance are rough, interim estimates prepared as yet only for the years since lt)46.
Their basis is a study for the year 1948 made by the Social Security Administration, which utilized reports by life insurance associations, the United States Chamber of Commerce surveys of accident and health insurance, Blue Cross and Blue Shield reports, and
other sources. The 1948 estimates were prepared for five categories
of group insurance, and each has been extrapolated by the National
Income Division by data on total premium receipts of the organizations furnishing the particular type of insurance coverage. The
sum of these estimates has then been rounded to the nearest $100
million for incorporation into the published estimates. The totals
have been distributed by industry according to the relative distribution of employer contributions to private pension funds, after
eliminating from the pension distribution the data for industries,
such as coal mining and telephone and telegraph, which are known
to have well established welfare funds (included in (2) above)
providing group insurance benefits.

Other components
The remaining components of other labor income include pay of
military reservists, Government payments to enemy prisoners of
war, merchant marine war-risk life and injury claims, directors'
fees, jury and witness fees, compensation of prison inmates, and
marriage fees to justices of the peace. These items in 1947
amounted to only 9 percent of other labor income. Over the entire
period of the estimates only three—military reserve pay, payments
to enemy prisoners of war (covering the period 1943-46), and directors' fees—have attained any appreciable magnitude. The other
items have always been negligible in amount.
Data on the pay of military reservists have been obtained from
the armed services or from the annual Budget of the United States
Government on a fiscal year basis, and averaged to obtain calendar
year estimates. This type of supplement has increased sharply in
the postwar period.
Fiscal-year data on total Federal payments to enemy prisoners
of war were obtained from the Department of Defense. These were
converted to a calendar year basis by use of data from that Department on the number of prisoners of war in the United States as an
interpolating index. The estimated amounts paid to prisoners of war
working for civilian contractors were deducted from the total, since
such payments are included under wages and salaries, chiefly in
farming.
The estimates of directors' fees are crude. They are prepared
in two parts. For the finance, insurance, and real estate industry,
which accounts for about half of the total, the estimates are made
by multiplying the ratio of directors* fees to compensation of officers in Federal Reserve member banks by the total compensation
of corporate officers reported by the Bureau of Internal Revenue
in Statistics of Income. For other industries, a similar procedure
is followed, but direct information on the ratio of directors* fees
to compensation of officers was limited to the years 1929 and 1932.
Within each of these two broad groups—finance, insurance, and
real estate and all other industries—directors' fees are distributed
by industry in proportion to compensation of corporate officers as
reported by the Bureau of Internal Revenue.

1951 NATIONAL INCOME SUPPLEMENT

70

3.—INCOME OF UNINCORPORATED
ENTERPRISES
Apart from farm income, which has been studied systematically
by the Department of Agriculture for many years, no comprehensive body of data covering any appreciable time interval exists
for the income of unincorporated enterprises. Estimation in this
field has generally required the laborious piecing together and
adjustment of various types of data from numerous sources, some
only inferentially connected with noncorporate business income. In
the light of the experience gained in estimation and the changing
nature of source materials, the National Income Division has periodically reviewed, and materially revised, its estimating procedures in an effort to develop more refined estimates. No such review, however, has as yet produced really satisfactory results, for
refinement of estimating techniques, unfortunately, is not an adequate substitute for reliable source materials.
The statistical approach and" methods adopted in national income
and product estimation are primarily a function of the character
of available data. The force of this general proposition is clearly
illustrated by the estimates of the income of unincorporated enterprises. Three broad segments of the estimates may be differentiated
with respect to source materials and methods used: Income of professional practitioners, business income (the nonfarm total except
for professional service income), and farm income. (See Exhibit 3.)
Exhibit 3.—Income of Unincorporated Enterprises, 1947
Millions
of dollars

Industry
Farms

_

-

_

15,589

42.2

3,615

9.8

_

2,101
1,022
301
191

5.7
2.8
.8
.5

-

17 ,708

48.0

_

8,725
2,265
1,844
1,005

23.6
6.1
5.0
4.4

1,400
949
471
232,

3.8
2.G
1.3

Professional services
Medical and other health services
Lrpnl services._,_.-...
«_.
.
Engineering and other professional services, n. e. c
Accountants
Business
Hetuil trade and automobile services
Contract construction.
_..
Services (except professional service)._
Wholesale trade

_

Manufacturing
Finance, insurance, and real estate
Transportation.
Mining
._
__.
Agricultural and similar service establishments, Forestry, and
Fisheries
Communications and public utilities
Total

Percent

199
18

.5
.1

36,912

100.0

(1) Estimates of the net income of professional practitioners
amounting to 10 percent of the noncorporate total in 1947—are
prepared very largely by multiplying the number of persons engaged in independent practice in each profession by their average
net income. This method, adopted at an early stage of the official
national income work, takes advantage of the basic data on the
number of practitioners from enumerations by the decennial Censuses of Population (and of the records of professional associations
and other sources permitting a satisfactory extension of the
census data to other years). The dearth of requisite information on
income, however, led the National Income Division to undertake the
collection of data on the average net income of independent practitioners in the various professions. Questionnaire surveys, first
made in 1983 to cover the years 1929-32, have been conducted
at periodic intervals. The results of the three postwar surveys
were published in the August 1949 Survey of Current Business for
lawyers, the January 1950 Survey for dentists, and the July 1951
Survey for physicians.
(2) Information for estimating the "business" segment of the




income of unincorporated enterprises—nearly one-half of the total
in 1947—has been generally fragmentary. Comprehensive data are
lacking except for 1945 and 1947, for which years the Bureau of
Internal Revenue provided tabulations of the incomes of sole proprietorships and partnerships filing income tax returns. The pro*
portion of the total number of firms filing was very large because
of comparatively low income exemptions and the high levels of
business activity.
For industries comprising this segment, the net income of unincorporated enterprises has been estimated either by multiplying
gross receipts by a profit ratio or by multiplying the number of
proprietors by an estimate of their average net income. The first
method has been employed in nearly all the larger industries, the
second generally for industries in which satisfactory noncorporate
receipts data were lacking. For both methods the years 1939, 1945,
and 1947 represent benchmarks, developed almost entirely from
Bureau of Internal Revenue and, for 1939, Census materials.
Comprehensive data on receipts of sole proprietorships and partnerships were reported for 1939 in most of the industrial censuses
and for 1945 and 1947 in the tabulations of income tax returns.
Some of the censuses required some allowance for undercoverage,
and the Bureau of Internal Revenue data had to be adjusted for
enterprises not filing returns and for differences in industrial classification from that used by the National Income Division. For all
3 years, Bureau of Internal Revenue tabulations for sole proprietorships and partnerships filing returns were utilized in the estimation
of profit ratios. It was necessary to adjust the data to represent
the universe through estimation of the profit ratios of firms not
included in the tabulations. Because of the difference in tax return
coverage, this adjustment was quite important for the 1939 estimates but comparatively minor for the 1945 and 1947 estimates.
Receipts of proprietorships and partnerships were also reported
in a few of the 1929 censuses, but for all years other than 1929,
1939, 1945, and 1947 receipts almost always have had to be estimated indirectly, generally by interpolation and extrapolation by
available data on total receipts (corporate and noncorporate combined) or corporate receipts. The accuracy with which this could be
done has varied widely among industries.
Similarly, the base-year profit ratios for 1939, 1945, and 1947
have had to be extended to other years largely on the basis of indirect methods. Bureau of Internal Revenue tabulations for sole
proprietorships and partnerships for 1936 and for sole proprietorships for 1941 and 1943 were helpful in this connection, but the
reported data required difficult adjustment for differences in scope
and other aspects of incomparability. For interpolation and extrapolation, extensive use has been made of ratios of corporate profits
before tax to sales.5 These can be computed annually from Bureau
of Internal Revenue tabulations except for the two most recent
years, when sample data must be utilized.
While the source materials for estimating the income of unincorporated nonfarm businesses have been generally unsatisfactory, a
material change in this situation is in process. This stems mainly
from the broadened coverage of the Federal income tax and the plan
of the Bureau of Internal Revenue to mine the comprehensive source
of statistical data afforded by the returns. As noted, the Bureau already has provided detailed industry tabulations for 1945 and 1947,
and it will follow through with similar tabulations for later years
as frequently as possible.
The reliability of any income estimates for noncorporate business
is conditioned by the fact that this group characteristically includes a large number of relatively small enterprises, which follow
a diversity of accounting practices and frequently maintain only
rudimentary records. But now that the income tax and the exi
data^nrt c o r n o ? ^ ! n m tp a o ryt a ^ t o improve comparability with the noncorporate
.
both h a v e C n S r ^ ° e r 0 interestt s or compensation of corporate officers, o*
For retlil trade - *° T ? ? * p r o f i h^ve calculation of corporate profit ratios,
rolls h a a b p p n* ' i gla im e d later, another variant, involving the use of pay
L
> i f a n e d later, another variant, involving
iuua ( naa oeen employed to nnlrnlQ+Q +!,„ corporate _* - A ratio.
*_ profit x.*employed to calculate the

SURVEY OF CURRENT BUSINESS

71

panded social security system are covering a very high percentage
fessional associations, mailing lists of the Fisher-Stevens Service,
of business proprietors, it can be anticipated that record-keeping . Inc. (a mail-service company), and, for 1929, the report of the
and accuracy of reporting will improve with the passage of time.
Committee on the Costs of Medical Care. This Committee's report
Not only will the individual firm require systematic records for
also furnished an estimate of the total number of physicians in
these purposes, but the growing audit program of the Bureau of
independent practice in 1929.
Internal Revenue will tend both directly and indirectly to promote
For intei*polation and extrapolation, the American Medical Distandardization and accuracy of reporting.
rectory of the American Medical Association has provided data for
The reference to this audit program points up a deficiency of
most years since 1929 on the total number of physicians (including
the Bureau of Internal Revenue noncorporate data for use in prethose not in practice), and for some years on the number engaged
paring aggregate income measures. The data used represent comin private practice. The American Dental Association has furnished
pilations from unaudited tax returns. The Bureau has not yet proinformation on the number of dentists for years since 1941, with
vided systematic audit studies, as it has in the case of corporations,
estimates for 1929 and 1931-39 being obtained by straight-line
from which it would be possible to adjust statistically for underinterpolation and extrapolation of the 1930 and 1940 census-based
statement of income with some assurance of reliability. No formal
figures. Straight-line interpolation and extrapolation has also been
adjustment of the data, therefore, has been made. Consideration
necessary to fill gaps in the data for the other medical professions.
of the unaudited nature of the returns has influenced the estimatThis is not, however, a source of any appreciable error in the
ing procedure, however, in certain instances, as brought out in the
medical services total, as these professions form only a small part
description below.
of it.
For the number of lawyers, interpolations have been based mainly
(3) The Department of Agriculture furnishes the estimates of
on data obtained from the Martindale-Hubbcll Law directory and
farm proprietors1 income included in the national income. The estifrom compilations of the number of attorneys listed in a selected
mation of farm income is a principal part of the over-all statistical
group of city directories.
services rendered by the Bureau of Agricultural Economics. From
In the estimates for physicians, dentists, lawyers, and veterinarthe quinquennial Census of Agriculture, the Department's Crop
ians, adjustments have been made for the changing number of proand Livestock Reporting services, field surveys, and many other
fessional practitioners in the armed forces after 1940, on the basis
sources, the Bureau has developed both income and balance sheet
of data obtained from the Procurement and Assignment Service of
statistics for the agricultural industry.
the National Roster of Scientific and Specialized Personnel and
The aggregate net income of farmers is derived as the difference
from the Department of Defense.
between gross income (calculated in detail by type of product)
(2) Most of the income surveys yielding the data on average
and production expenditures (estimated separately for about 40
net income used in the estimates for the medical and legal services
different types of expense). Such a complete development of income
industries have been conducted by the National Income Division,
data by means of a synthetic income and expense statement is
usually in cooperation with the professional association in the field.
unique with agriculture.
In most cases, separate computations of average entrepreneurial
The following description of methodology is divided into the three
income were made for nonsalaried practitioners (those deriving
areas noted in the foregoing introductory remarks: Professional
all their net income from independent practice) and for part-salservices, business, and farm.
aried practitioners (those deriving income both from independent
practice and from salaried work).
Income of Independent Professional Practitioners
All of the periodic questionnaire surveys have relied upon a voluntary response to mailed questionnaires. The respondents were
The professional services cover the following industry groups for
not identified. Questionnaires were mailed either to all persons in
which estimates are published in table 16 of Part V of this report:
the profession or to a representative sample of the profession. InMedical and other health services, legal services, accountants (information was requested in each case for a series of years. Usable
cluded in business services, n. e. c), and engineering and other
replies have been received, on the average, from about 15 percent
professional services, n. e. c. For the medical group, aggreof the mailing, apart from the 1950 survey of physicians, for which
gate net income is the sum of series for physicians and surgeons,
the percentage was as high as 45. Because of larger-sized samples,
dentists, osteopathic physicians, chiropractors, chiropodists, privatethe sampling error in the later surveys (covering the period since
duty trained nurses, veterinarians, and miscellaneous curative and
1937)—aside from the question of possible bias in the response—is
healing professions. For the engineering and "other" group, income
probably smaller than in the earlier surveys. This consideration is
is estimated separately for engineering and architectural service
especially important with respect to the legal profession, in which
and for other professional services, n. e. c.
the dispersion of income, and consequently the sampling error, is
Of these various professions, by far the.largest are physicians
larger than in the curative professions.
and surgeons, lawyers, and dentists. These three groups accounted
The generally low rate of response to most of the questionnaire
for four-fifths of professional service income in 1947.
surveys raises doubt concerning the representativeness of the sample data on average income. Various tests, however, point to the
Medical and legal services
probability of no marked bias on this score. It has been possible
in many cases to check the representativeness of the sample with
for the medical and legal service industries the income of prorespect to known characteristics of the profession sampled, such as
prietors measures the earnings of all professional practitioners
fr
State of practice, size of city, and age of practitioner. In addition,
om independent practice. It is derived by multiplying (1) the
study of average incomes in the various professions by age classes,
number of professional persons in independent practice (full or
years-in-practice classes, city-size classes, and regions—and, in
Part time) by (2) average net income figures determined from
cases where the sample was large enough, by cross-classifications
questionnaire surveys of the professions.
of these characteristics—has been reassuring. The income patterns
(1) For either or both of the years 1930 and 1940, data from
revealed were both uniform and plausible.
«ie decennial Census of Population permitted the derivation of the
Further substantiating evidence is afforded by the result of the
total number of self-employed persons for the three major groups
specific check on response bias made in the 1950 physicians' income
"^Physicians, dentists, and lawyers—and also for veterinarians and
survey. As explained in the report in the July 1951 Survey of CurMiscellaneous curative and healing professions. For the other med1Ca
rent BttsinesSy the first and second follow-ups of the first response
* and health service groups, the universe numbers of persons
modified its findings only slightly and indicated the absence of
d in independent practice have been estimated in a generappreciable bias. Mainly because the initial response rate was so
satisfactory manner from such sources as reports of the pro


1951 NATIONAL INCOME SUPPLEMENT

72

high, however, this result is not conclusively applicable to the
earlier surveys.
The only other source with which average incomes derived from
the questionnaire surveys can be checked—aside from questionnaires by private agencies—is the tabulations of income tax returns. Comparisons for the three major independent professions
show the questionnaire averages to be appreciably higher. This
has been viewed as a favorable indication of their validity. The
tax data may be assumed to be too low because of the incentive
to understate income for tax purposes, and the magnitude of the difference between the two sets of data did not appear unreasonable..
The questionnaire surveys for physicians, dentists, and lawyers
have provided average income data for almost all years of the
period since 1929. However, the results of the physicians' income
survey made in 1950, covering the years 1945-49, have not yet been
incorporated fully into the estimates published in this report.
For these three professions, average income estimates for years
not covered by National Income Division surveys have been made
in various ways. These include interpolations by the results of
questionnaire surveys by other agencies (for physicians, by Medical
Economics magazine; and for dentists, by the American Dental
Association), by reference to the movement of income in one of
the other two professions, or by using disposable personal income
to interpolate gross receipts and industry (professional) payroll
data to interpolate expenses. A recent-period procedure by the
Division has been to make short surveys (based on a mailing of
only 3,000-5,000 questionnaires) in order to obtain interim information for extrapolation purposes. A report on two such surveys, for lawyers and dentists, was given in the July 1950 Survey
of Current Business.
For the remaining group of smaller medical professions, surveys
by the National Income Division provided average income data for
most years of the earlier period. Later estimates represent extrapolations from survey benchmarks for the year 1941 in the case of
private-duty nurses and veterinarians, and for 1937 for osteopaths,
chiropractors, and chiropodists. Because of evidence of some past
period correspondence, the average net income of physicians has
been generally used as an extrapolating series for these groups.
Little direct information has been available on average incomes in
the miscellaneous curative and healing professions.

Other professional services
Estimates of the two remaining professional groups—engineering and other professional services, n. e. c. and accountants—are of
dubious validity because of the lack of directly relevant information for most years.
With respect to the former, the component series on engineering
and architectural service has been derived from combinations of
numerous sources, including income-tax return data, a survey of
consulting engineers by the National Income Division covering the
1929-32 period, and an index of the value of all engineering construction contracts awarded as reported by Engineering Ncios
Record. The other component, other professional services, n.e.c,
has been estimated from tax return data and use of the total net
income in medical and legal services as an interpolating and extrapolating series.
The net income of independently employed accountants was obtained for 1929-36 by multiplying their estimated number by average income data collected in National Income Division surveys.
The total net income of accountants after 1936 was estimated
from the linear regression, based on 1929-36 data, between the
net income of accountants and that of lawyers in independent practice.

tioners—represents the summation of separate estimates for about
65 industry subgroups. Many of these, however, are quite small.
Three important industries—retail trade, wholesale trade, and construction—largely determine the accuracy of the business total.
They accounted for 70 percent of it in 1947.
The following discussion of this segment is divided into the
several time-periods characterized by general similarity of source
materials and procedural problems.

Benchmark estimates, 1939
The principal method of preparing the base-year estimates for
1939 consisted of multiplying, separately for sole proprietorships
and partnerships, total receipts reported in the various industrial
censuses by profit ratios derived from Bureau of Internal Revenue
tabulations of data from the business schedule of individual income tax returns and the mandatory informational returns filed
by partnerships. The tabulations, published in Statistics of Income—Part 1 and Supplement were based on a complete count for
partnerships and for sole proprietorships (in general) with income
of $5,000 or more, and on sampling for smaller proprietorships.
The sole proprietorship tabulations gave for each industry the
receipts and net income of firms classified by gross receipts classes.
The definition of net income in the Bureau of Internal Revenue
tabulations was very similar to that used in national income measurement. Only a few adjustments had to be made, on the basis of
reported data, to secure uniformity. These included the addition
of depletion charges for proprietorships and partnerships and the
elimination of capital gains and losses and property income re.ceived from partnership receipts, which were reported inclusive of
these items.
Noncorporate receipts totals were available from the 1939 Censuses of Retail Trade, Contract Construction, Service Establishments, Manufactures, and Mineral Industries. The data reported
for retail trade, construction, and mining were adjusted upward to
allow for exclusion of concerns which, although in operation during
1939, had gone out of business before enumerators' visits in early
1940, or for some other reason were not enumerated. These adjustments, which allowed also for any differences in industrial classification, were made by comparing the industrial census data on
the number of employees or proprietors with similar data from
the social security records or the decennial Census of Population
and Housing.6
Adjustment of the Bureau of Internal Revenue data to take account of the many small firms not filing tax returns in 1939 was
necessary before they could be used to derive profit ratios to apply
against the industrial census receipts figures. The principal complication in deriving aggregate profit ratios by industry stemmed
from the strong negative correlation between the profit ratio and
the size of firm as measured by receipts. Because of this correlation, profit ratios computed from data for firms filing returns were
almost always too low to be applicable to the entire noncorporate
sector of an industry. The general procedure, therefore, was (1) t°
deduct receipts reported to the Bureau of Internal Revenue from
the census-based receipts figures, and then (2) to multiply the
resulting estimate of receipts of firms not filing tax returns by the
profit ratio calculated for one of the smallest Bureau of Internal
Revenue receipts-size classes. The sum of estimated net income for
the firms not filing income tax returns and the net income actually
reported on the returns constituted the aggregate net income estimate.
6
In the case of. contract construction, the adjustment was broader in scope
than for the other industries. Labor-force data in the 1940 population census

Income of Business Enterprises
The aggregate net income of noncorporate "business" enterprises—the nonfarm total other than professional service practi


construction in 1939.

SURVEY OF CURRENT BUSINESS
One important variant of this procedure was developed. It was
found that for sole proprietorships in the nonprofessional components of the service industry the ratio of payroll plus net income
to receipts tended to be constant throughout the reported receiptssize distribution. Thus, the tendency of the profit ratio to decline
as the size of firm increased was just offset by the tendency for
the ratio of payroll to receipts to rise. Where payroll data by size
of firm could be obtained from the industrial censuses, as in services and contract construction, the use of this relationship permitted the estimation of small-firm profit ratios from data for
larger firms. This was helpful, since the data for proprietorships
with receipts under $5,000 reported in Statistics of Income for
1939 often were fragmentary or appeared to be biased.
In the case of the large retail trade industry, the income estimates were derived separately for 19 types of stores through the
combined use of Census Bureau and Bureau of Internal Revenue
data. The estimated value at wholesale prices of withdrawals in
kind from stock by proprietors was added. Although required by
law to do so, it was assumed that proprietors do not include in
net income reported on their income tax returns the value of stock
withdrawn for their own use.
For a few industries in which adequate data on gross receipts
or profit ratios could not be obtained, the net income estimates
were prepared as the product of the number of proprietors, taken
from the population or industrial censuses, and average income per
proprietor, derived by adjusting tax return data for incomplete
coverage or from industrial census data on the reported withdrawals of proprietors. Wholesale trade was the most important industry in which this method was applied. Agricultural services, forestry,fisheries,and some of the transportation and nonprofessional
service industries were estimated according to the same formula.
The foregoing brief account of the two principal methods used to
derive 1939 net income estimates in the "business" area is an oversimplification. The matching of Census and Bureau of Internal
Revenue receipts tabulations by size classes and the preparation of _
adjusted profit ratios and of average income per proprietor were
generally difficult processes subject to appreciable error. Emphasis
on the judgmentaUfactor was necessarily considerable. Moreover,
variations of, or departures from, the two general methods frequently were necessary in particular industries.
The nature of the bias which may be introduced into the 1939
estimates by failure to file mandatory tax returns or by falsification of income tax returns may be briefly explored.
In the most important cases, in which an independently derived
estimate of noncorporate receipts was used as a control in estimating net income, the effect of tax evasion upon the estimates depends
u
Pon the nature of the evasion. Nonreporting of receipts on income
tax returns, or understating them without understating the
profit ratio, would tend to cause the estimates to be too high, because the unreported receipts would tend to be assigned to a lowersized receipts class with a higher profit ratio. Evasion by overstatement of expenses would lead to an understatement of the income
estimates by understating the profit ratios used or implied in them.
!n instances in which average income per proprietor was derived directly from the tax data, any type of evasion would tend
to make the estimates too low. To offset this, the average income
of
Proprietors not filing tax returns was estimated rather liberally.
Taking into account these considerations and the specific correction in retail trade for withdrawals from stock, it seems highly
Probable, on balance, that the 1939 estimates in the business area
a
*e conservative.

Benchmark estimates, 1945 and 1947
The tabulations from tax returns provided by the Bureau of Insrnal Revenue for 1945 and 1947 represented such high coverage
of all proprietors in the business segment as to constitute, after
certain necessary adjustments, benchmark materials. The final estimate of aggregate net income in this segment for 1947 exceeded




73

by one-fourth the amount reported by the Bureau of Internal Revenue in its industry tabulations. For 1939, the final estimate was
twice as high as the amount reported on tax returns.
For both 1945 and 1947, the Bureau tabulations showed receipts,
expense, and net income information by industry and separately for
sole proprietorships (from the business schedule of the individual
income tax returns) and for partnerships (from the mandatory
informational returns). The information for sole proprietors in
1945 and partnerships in 1945 and 1947 was classified by receipts
size-class of firm. The tabulations were based on complete coverage
of the larger sized enterprises and on estimates developed through
scientific sampling for the smaller enterprises.
The Internal Revenue tabulations, it was evident, differed in
some respects as to industrial classification from that used in the
national income estimates. Also, the tabulations were incomplete to
the extent of not covering firms which did not file tax returns. Adjustments for both of these deficiencies were accomplished through
comparison of the universe number of proprietors in each industry,
as estimated by the National Income Division, with that reported
by the Bureau of Internal Revenue.
The estimates of number of proprietors in 1945 and 1947—part
of the Division's annual series, published in table 27 of Part V
of this report—were prepared by extrapolating base-year estimates
for 1939 (derived from the industrial and population censuses)
by an index of the number of noncorporate firms, adjusted for
differences in the estimated number of active partners per partnership on the basis of Bureau of Internal Revenue compilations for
the three years. The index of noncorporate firms was constructed,
industry by industry, by subtracting the number of active corporations in each year from the quarterly average number of operating firms estimated by the Office of Business Economics as part of
its business population series. The sources and methods underlying
this series were described in an article in the June 1949 Survey
of Current Busiiiess.
In most industries, the National Income Division estimate of
number of proprietors in 1945 and 1947 somewhat exceeded the
number reporting to the Bureau of Internal Revenue for income tax
purposes, and average receipts and profit ratios for one of the
smallest receipts classes were assigned the nonreporting proprietors to derive their net income. This was added to the amount reported in the tax returns data to secure the estimate of total net
income.
In some industries, however, the Division's estimate of number
of proprietors was less than that compiled from income tax returns. The differences were regarded as a matter of industrial
classification.7 In wholesale trade, for example, the excess of proprietors filing income tax returns was adjudged to belong in the
Division's retail trade classification. The average income per proprietor in retail trade was assigned to this group of proprietors,
and their total income was added to the amount reported on income tax returns to account for part of the income in retail trade
not reported to the Bureau of Internal Revenue. In manufacturing,
where the Bureau of Internal Revenue total number of proprietors
greatly exceeded the National Income Division estimate, the receipts and net income of proprietors in the under $10,000 or under
$15,000 receipts classes (varying among the 20 industries) were
shifted from manufacturing to miscellaneous repair services and
hand trades.
In general, then, noncorporate net income (and receipts) in the
business industries in 1945 and 1947 was derived through adjustment of the tax return data by using number of proprietors as a
measuring rod. This involved substantial acceptance of the reported
tax data.
7
Statistical differences were present here too, as well as in cases where the
National Income Division estimate exceeded the number reported by the Bureau
of Internal Revenue. The Division estimates were subject to estimating errors,
and the Bureau data to sampling errors. In most industries, a high proportion
of proprietors was in the receipts classes sampled. (For net income, however, the
proportion of the total sampled was much smaller.)

74

1951 NATIONAL INCOME SUPPLEMENT

Retail trade
In the important retail trade sector, however, this general procedure was not followed. Receipts were estimated in the usual manner for 1045, by adjusting Bureau of Internal Revenue data for
undercoverage, but the ratio of net income to receipts was estimated independently, and not based on the tax data. This estimate
was made by extrapolating to 1945 the 1 K 9 ratio of payroll plus
13
profits (inclusive of stocks withdrawn for own use) to receipts by
similar data for retail corporations. Application of the resulting
1945 ratio to noncorporate retail sales and the deduction of estimated
noncorporate retail payroll yielded the figure on total net income
used for 1945. This was appreciably higher than the one which would
have resulted from the usual procedure of adjusting the tax return
data. To derive the 1947 estimate of net income in retail trade, the
1945 profit ratio was extended to 1947 by the relative movement of
the tax return data and multiplied by receipts obtained through the
usual adjustment of the tax data.
The above method of estimating the ratio of net income to receipts for 1945 was an application of the relationship, noted above,
developed from 1939 Census Bureau and Bureau of Internal Revenue materials for sole proprietorships in the nonprofessional service industries—that throughout the receipts-size distribution the
ratio of payroll plus profits to receipts tended to be constant. This
relationship, reflecting the varying proportion of labor performed
by paid employees as against proprietors and their families, was
assumed to be valid with respect to corporate and noncorporate
retail trade in a temporal application. In retail proprietors' income
there is a large and comparatively stable element of labor return
corresponding to retail corporations' payroll. Analysis for 1939, it
may be noted, indicated that the difference in profit ratios between
incorporated and unincorporated enterprises in retail trade was
accounted for very largely by differences in the relative importance
of payroll expense.
When this presumedly valid, alternative method yielded a somewhat higher profit ratio for 1945 than that indicated by the tax
returns data, the ratio was accepted as reasonable. Its actual use
in this large industry was influenced by the consideration that the
Bureau of Internal Revenue compilations were unaudited and doubtless biased in the direction of understatement.
The 1947 profit ratio was obtained by extrapolation of the 1945
estimated ratio by the tax return data (adjusted as described above)
because this afforded a seemingly valid use of these comprehensive
noncorporate data. The data indicated a marked decline in the
profit ratio from 1945 to 1947. Any rejection of this evidence would
have involved the rather sweeping assumption that the degree of
tax evasion in noncorporate retail trade in 1947 was much greater
than in 1945. The authenticity of the decline in the retail trade
profit ratio was corroborated by the fact that similar declines
characterized unincorporated enterprises in most industries, as well
as the smaller-sized group of corporations in these industries.

Interpolations, 1940-44 and 1946
For other years of the period 1939-47, estimates of net income
of unincorporated enterprises in the business segment were prepared by interpolation of the 1939, 1945, and 1947 benchmark estimates. Two factors made the process difficult and impaired the
accuracy of the estimates.
First was the necessity of making sizable adjustments for noncomparability of coverage of the data on sole proprietorships reported for several years of the period by the Bureau of Internal
Revenue. Secondly, the heavy reliance upon corporate data to estimate the movement of noncorporate sales and profit ratios—unfortunate in itself—was complicated by a shift of some firms, because
of the tax advantages to be gained, from the corporate to noncorporate form of organization in the war period, and by an opposite shift in the early postwar years after the removal of the
corporate excess profits tax.



(1) To adjust the reported sole proprietorship data for 1939,
1941, 1943, and 1945 so as to obtain comparable receipts and profit
ratios, the usual procedure was to (a) extrapolate receipts reported in the year of greatest coverage to other years by an index
intended to measure the movement of receipts of all sole proprietorships, to obtain (by subtraction) estimates of the receipts not reported in the years of lesser coverage; (b) multiply the nonreported receipts by a small-firm profit ratio and add the result
to reported profits; and (c) compute the ratio of adjusted profits
in (b) to receipts in (a). Use of the reported data directly, without this type of adjustment, would have imparted a strong upward
bias to the profit ratios (particularly for 1941 and 1943). The
expansion of Bureau of Internal Revenue coverage was such as
to bring in a rising proportion of small proprietorships, which, as
has been indicated, have very high profit ratios relative to the
large proprietorships.
(2) Most of our limited knowledge about the magnitude and
nature of the shift in legal form of organization is confined to its
postwar phase.8 It is evident that it was minor as to number of
firms involved, but appreciable as to its effects on total sales and
net income. The shift was largely between the corporate and partnership forms, and it was concentrated mainly in manufacturing,
retail trade, wholesale trade, and contract construction. For these
industries—in which the relative movements of corporate sales
from 1939 to 1945 and from 1945 to 1947 differed markedly from
those of noncorporate sales—several special procedures, as described below, were followed to improve the use of the corporate
data for interpolation.
Receipts times profit-ratio method
The series used to interpolate net income of unincorporated enterprises in "business" industries between 1939 and 1945 generally
were prepared as the product of receipts and profit ratios, with
separate interpolations for sole proprietorships and partnerships.
Receipts and profit ratios of sole proprietorships were usually
obtained for 1941 and 1943 by adjusting to full coverage (as explained above) the data reported on unpublished tax-return tabulations. Mainly corporate data were then used for making the interpolations for 1940, 1942, and 1944. Partnership receipts and profit
ratios were interpolated between 1939 and 1945 either by data for
corporations or by the sole proprietorship series.
The 1940-44 retail trade estimates represented a special application of the sales times profit ratio method. Sales were derived
by interpolating the 1939 and 1945 benchmarks by a series obtained by deducting corporate sales (as reported annually in the
Bureau of Internal Revenue's Statistics of Income) from total
retail sales as estimated by the Office of Business Economics (described briefly in the section on Personal consumption expenditures
for commodities). Total net income was then computed by (1) extrapolating to 1945 the 1939 ratio of noncorporate payroll plus net
income to sales by a similar ratio compiled annually from corporate
data, (2) multiplying the resulting ratios by the estimates of noncorporate sales, and (3) deducting noncorporate payroll. The required estimates of corporate and noncorporate payrolls were made
in the following manner: (1) Payroll figures for 1939 were derived
from the legal-form tabulations of the Census of Business and
extrapolated by the corporate and noncorporate sales series, and
(2) the resulting provisional payroll estimates were adjusted proportionately to the National Income Division's series on wages and
salaries in retail trade.
pecial B u r e a u of

1947 with

Internal Revenue

* e an<* Survivors Insurance on t
«°*»n!zatlon (believed to comprise mainly
aggregate and corporate data for
tebulations
of

COmD aris
o™ of
T1 1
1 R

ViJ

^

-corporate

SURVEY OF CURRENT BUSINESS
In principle, this procedure of estimating noncorporate retail
sales accounted for sales shifts due to corporations' changing their
legal form of organization. The measure, however, doubtless was
somewhat blurred by errors of estimation in the residual sales
figures. In this connection, it may be noted that little could be done
to correct for whatever inconsistency was introduced into the corporate sales data by the change from the unconsolidated basis of
filing through 1941 to permissive consolidated reporting beginning
with 1942.
In most of the 20 major types of manufacturing and in contract construction, where the legal-form shift caused the relative
movements of partnership and corporate receipts to diverge from
1939 to 1945, figures derived by multiplying the estimated number
of partnerships by average receipts per corporation were used to
interpolate the receipts of partnerships. The number of partnerships was estimated by (1) extrapolating census-based figures on the
number of noncorporate enterprises for 1939 by the total number of
operating firms (Office of Business Economics series) less the number of active corporations, and (2) subtracting from this noncorporate series the estimated number of sole proprietorships, obtained
by extrapolation from 1939 by the total number of operating firms.
For industries not believed to be affected materially by industrial
classification differences, the estimates were sometimes modified on
the basis of comparison with the number of partnership enterprises
reported for 1945 by the Bureau of Internal Revenue.
This procedure was based on the consideration that most of the
corporations that changed their legal form of organization became
partnerships. It greatly improved the "closeness of fit" of the
interpolating series for partnership receipts and provided an indirect and partially satisfactory measure of the timing of the
shift.
Proprietors times average-income method
The number of proprietors times average-income method also
^as used in preparing estimates for the years 1940-44. The number of proprietors was estimated by extrapolating the 1939 totals
by a series on total operating firms minus the number of active
corporations, with a straight-line adjustment for the difference
jn active partners per partnership in 1939 and 1945. Average net
income per proprietor generally was derived for 1941 and 1943
through interpolation by estimates for sole proprietorships obtained by adjusting Bureau of Internal Revenue data to a comParable-coverage basis for the years 1939, 1941, 1943, and 1945,
ln tlle
manner outlined above. The interpolation of average income
Per proprietor for 1940, 1942, and 1944 usually utilized data for
related industries—retail trade in the case of the large wholesale
trade group.
Special features of 1946 interpolation
iqa g e n e r a l * t n e same sources and methods used in making the
U4Q-44 interpolations of net income in the business area were
employed for interpolation between the 1945 and 1947 benchmark
es
timates.
. ^ n e special problem, however, was encountered. In nearly all
"Kiustries, ratios of profits to sales derived from data for corporations in the aggregate were found to be wholly unsuitable for
jjtarpolation of the noncorporate ratios. Noncorporate profit ratios
declined markedly in most industries from 1945 to 1947, whereas the
corporate ratios tended to be stable. Upon analysis, however, it was
^°und that this divergence reflected size-of-firm, not legal-form,
jtterences. Industry-by-industry compilations of ratios of profits
[hus comPensation of officers to sales for corporations in the two or
ree
smallest asset-size classes showed the same pattern of decline
8
exhibited by the noncorporate ratios, and were used for interpola°n in m o s t industries, including retail trade (by individual lines of
aae). The small-firm corporate data, it may be of interest to note,
I n®ral]y showed stability from 1945 to 1946, with all of the 1945-47
ec
lme occurring in 1947.
e fa
ilure
 of profit ratios based on aggregate corporate data


75

to reflect at all adequately the movement of noncorporate ratios in
the early postwar period is disconcerting. Even if this period is
regarded as atypical, fresh doubt is cast on the validity of the
extensive use made of aggregate corporate data to extend baseyear noncorporate profit ratios. As tabulations from tax returns
for sole proprietorships and partnerships become available for
years beyond 1947, this will become a subject of further analysis.
The basis for comparing the movements of corporate and noncorporate profit ratios, industry by industry, will be broadened,
and some generalization may be possible.
With use being made of profit ratios for the small-sized corporations to interpolate between 1945 and 1JM7 in most industries,
the receipts interpolations also were generally based on tabulations of the two or three smallest asset-size classes of corporations. To take account of the effects of the legal-form shift, the
interpolating receipts series for partnerships in manufacturing
(each of 20 industries) and in contract construction were derived
by multiplying average receipts per corporation in these smallest
asset classes by the number of partnerships. This latter was estimated in the same fashion as in the prior period, with an additional check and basis for correction afforded by the special Bureau
of Internal Revenue tabulations of corporations changing their
legal form of ownership in 194G.
The receipts data used for interpolation in retail trade were derived by individual lines of trade by deducting corporate receipts
(Bureau of Internal, Revenue compilations) from aggregate receipts (estimated by the Office of Business Economics).

Extrapolations, 1929-38
There is comparatively little information for the 1929-38 period
relating directly to the net income of unincorporated enterprises
in the business area. Noncorporate receipts data were compiled
for 1929 in the Censuses of Retail Trade and Manufactures. Useful data on number of proprietors were provided by the Census
of Wholesale Trade in 1929, 1933, 1935, and 1939. A compilation
of 1936 income tax returns for sole proprietorships and partnerships was made available by the Bureau of Internal Revenue, but
this could not be used in many industries either because of large
sampling errors in the tabulations or because they could not be
satisfactorily adjusted to obtain comparability with 1939.°
With such paucity of direct data, the estimating methods for
the period 1929-38 necessarily relied to a very large extent on
indirect measures. The preparation of estimates for a substantial
number of individual industries provided a basis for utilizing
available detailed information and for taking account of shifts
in the importance of industrial components within the business
total. The methods used in a few of the larger industries may be
summarized briefly.
Net income of unincorporated enterprises in retail trade was
extrapolated from 1929 to 1939 by the same method utilized for
the 1940-45 period (sales times the ratio of payroll plus profit to
sales). Sales were extended by a series representing (1) Census
values for 1929 and 1939; (2) estimates derived for 1933 and 1935
by preparing legal-form breakdowns of Census aggregates for
those years by interpolating between such reported breakdowns for
1929 and 1939 by weighted indexes of chain store sales and independent store sales; and (3) interpolations for all other years on
the basis of the Office of Business Economics estimates of total
retail sales. For extrapolation of the 1939 noncorporate ratio of
profits plus payroll to sales by corresponding data for corporations, the payrolls of corporations and of unincorporated enterprises were estimated by methods analogous to those followed in
obtaining sales. The profits data for corporations were available
annually from the Statistics of Income reports of the Bureau of
Internal Revenue.
9
Unlike later tabulations, where sampling was used only for the smaller-sized
firms, the 1936 tabulation was based on a 20 percent nonstratified sample of al]
returns.

76

1951 NATIONAL INCOME SUPPLEMENT

The income of proprietors in wholesale trade for the years
1929-38 was estimated as the product of number of proprietors
and average net income per proprietor. The 1939 estimate of number of proprietors was extrapolated to 1929 by a series comprising
Census of Wholesale Trade data for 1929, 1933, 1935, and 1939
and straight-line interpolations for the other years. Average net
income per proprietor was derived for 193G by adjusting the Bureau of Internal Revenue tabulations for incomplete coverage, and
for all other years of the period through interpolation and extrapolation by the average net income estimates for retail trade.
The income of noncorporate enterprises in contract construction
was derived for the 1929-38 period by multiplying estimates of
receipts by the ratio of net income to receipts. Receipts of corporations, obtained from Statistics of Income, were deducted from the
estimated total value of contract work to obtain a series on noncorporate receipts that was used to extrapolate the 1939 estimate.
Value of work performed was estimated for 1939, by four major
types of construction, from the Census of Construction. The 1939
values for these four types were extrapolated to earlier years by
components of the construction activity series (see notes on New
construction), which covers force-account as well as contract construction, and summatcd to obtain total value of work performed.
The 1939 noncorporate profit ratio in contract construction was
extrapolated to 1929 by the absolute changes from year to year
in the ratio of profits plus compensation of officers to receipts for
corporations in the industry.
The value of product of noncorporate enterprises in manufacturing was taken for 1929 and 1939 from the Census of Manufactures. Separately for the 20 major types of industries, estimates for the intervening odd-numbered years were obtained by
interpolation on the basis of the total value of product of all
enterprises reported in the biennial manufacturing censuses. The
even years were then interpolated by gross sales plus gross receipts from operations of corporations in manufacturing, as published in Statistics of Income. The resulting series was then multiplied by estimated profit ratios. These were derived for each industry for 1936 from the special tax return tabulations and extended
to other years of the 1929-38 period chiefly through use of a linear
regression between noncorporate profit ratios for 1936, 1939, and
1941 and annual (adjusted) corporate profit ratios from 1929 to 1941.

Current estimates
Pending the availability of the tax return tabulations and other
comprehensive information, estimates of the net income of unincorporated enterprises in the business segment for current years
(since 1948 at present) must be prepared from fragmentary and
indirectly relevant data.
The main general procedure, again, is to derive net income as
the product of separate extrapolations of sales and profit ratios.
The principal source materials for this purpose are corporate
data from sample compilations of Government agencies, of private
organizations in some cases, and of the National Income Division
from published income statements of individual firms. These sample
data are described in the section on Corporate profits. To obtain
the benefit of appropriate weighting, the extrapolations are carried out in as much industiy detail as feasible, such as by lines of
business in retail trade.
For the 20 industries of manufacturing, some improvement, in
principle, over the use of aggregate corporate data as extrapolators is possible, since unpublished data of the joint quarterly
survey of the Federal Trade Commission and Securities and Exchange Commission permit the use of sales and profit ratios of
the smallest-sized corporations. These detailed cell data, however,
are subject to sizable sampling errors and must be used cautiously. The large expansion of the manufacturing sample initiated in the first quarter of 1951 should greatly improve the data
for this type of use. More importantly, the extension of the sample
work of these agencies to corporate trade will strengthen the
sources for estimating business incomes in this large segment.



For many industries—most of them relatively small—even reasonably satisfactory corporate information is lacking (or entirely
inappropriate) for current extrapolations of the proprietors' income estimates. This generalization applies to wholesale trade,
agricultural services, forestry and fisheries, and most of the finance, nonprofessional service, and transportation and public
utility industries. For these groups, the movement of net income
is based on one or a combination of such series as number of
proprietors (extrapolated by the Office of Business Economics
data on number of operating firms), average earnings of employees, wages and salaries, consumer expenditures, and estimates
of net income in related industries. For contract construction,
principal reference for this purpose is had to estimates of wages
and salaries in the industry and construction activity. For wholesale trade, net income in current years is derived by the usual
procedure of multiplying number of proprietors by average net
income per proprietor based on the movement of the average in
retail trade.
A procedure adopted in recent years is to check the currentperiod movement of the estimated total of net income in the business and professional industries against the movement of a series
derived from Federal individual nonwithholding tax collections,
appropriately lagged and adjusted for tax-rate changes. This
series, available in the aggregate only, consists largely of taxes
against the net income of nonfarm unincorporated enterprises, but
covers also personal income from higher-bracket salaries, farming,
rents, interest, and dividends, as well as capital gains and losses.
Allowance for these other sources of personal income is made in
the comparison with the tax series; but because of its broader
coverage and the difficulty of adjusting for changes in tax rates,
the measure of the relative movement in total nonfarm entrepreneurial income which it affords is far from precise. It nevertheless serves as a useful check, particularly in view of the weakness of source materials underlying the individual-industry estimates for very recent years. These estimates are subject to a
possible upward or downward adjustment from the analysis of the
tax data.

Revisions of business and professional income estimates
Recent-year estimates of noncorporate net income in the business and professional service industries are revised when more
reliable data become available—such as Bureau of. Internal Revenue tabulations of receipts and net income of sole proprietorships
and partnerships; Census of Business data on number of proprietors and legal-form tabulations of receipts and other relevant
materials; and the labor-force enumerations of the Census of
Population and Housing.™ For the war and postwar period, the
revisions of preliminary estimates of the totals have been sizable
in some instances, as shown in Exhibit '&. Revisions of the estimates for individual industries have varied widely in relative terms.
« The results of the 1948 Census of Business and the 1950 Census of Population
and Housing have not yet been incorporated into the estimates.

Exhibit 4.—Successive Estimates of the Income of Unincorporated
Nonfarm Business and Professional Enterprises
[Millions of dollars]
Date of publication
July 1947
1942
1943
1944
1945
1940
1947
1948

_

12,464
14 266
15^69
16,754
21,046

July 1948
12,464
14 266
15,486
16,853
21,815
24,384

July 1949
12,945
15 117
17,226
18,832
22,676
24,727
24,874

July 1950
12,945
I5f 1H
l^'*oO

22,510
—

SURVEY OF CURRENT BUSINESS

77

The revisions for 1942-47 published in the July 1949 Survey of
Exhibit 5.—Derivation of Net Income of Farm Proprietors, 1947
Current Business were based mainly on the 1945 Bureau of In[Million* of dollui>]
ternal Revenue tabulations of sole proprietorships and partnerships made available in that year. The subsequent revisions for
GROSS FARM INCOME.
32.4
1946 and 1947 published in the July 1950 Survey reflected chiefly
Cash receipts from ftirm marketings.
:u).o
the incorporation of the similar Bureau of Internal Revenue tabuMeat animals
lations covering 1947.
Dairy products-__
4.0
The revisions in the July 1949 report stemmed mainly from
failure to take account of the war and postwar legal-form shifts.
Those in the July 1950 report reflected a previous missing of the
sharp decline in noncorporate profit ratios in 1947. These two
phenomena could not be discerned or measured from the statistical
materials available when the preliminary estimates were made,
and were not anticipated on the basis of judgment.

Net Income of Farm Proprietors
The estimates of total net income of farm proprietors are prepared by the Bureau of Agricultural Economics. They are described in chapter 20 of The Agricultural Estimating and Reporting Services of the United States Department of Agriculture

Poultry...
Cotton
Food grains
Feed crops
Other marketings.

2.8
2.3
(1.5

Value of home consumption
Gross rental value of farm homes
Government payments
Value of change in fur in inventories..

3. 1
1.2
.3

LESS: PRODUCTION E X P E N S E S , . .
Depreciation.
Hired labor...
Taxea^,
Farm mortgage interest
Net rents and Government payments to noufarm landlords.
Current operating expenses
Feed purchased
3.7
Livestock purchased
1.3
Operation of motor vehicles
1.5
Fertilizer and lime
.7
Miscellaneous.
1.8
EQUALS: NET INCOME OF FARM PROPRIETORS.

1G.8
2.0
2.8
1.5

15.0

(Miscellaneous Publication No. 703), Washington, 1949. The description here is limited to very brief compass.
Farming as an industry comprises about 5 ^ million independent
enterprises, most of which do not keep accounts permitting them
to calculate net income on any uniform basis. However, an extensive body of both benchmark and current statistics on farming
operations in the aggregate has been developed over a long period
of time.
The general procedure used by the Bureau of Agricultural Economics in deriving the net income of farm operators is to make
an independent estimate for each item required for an incomeand-expense statement covering all farms, based on whatever combination of available data best represents that item. Net income
°f farm proprietors is then calculated by summing the estimates
jor components of gross farm income and deducting the sum of
the production expense estimates, as illustrated in Exhibit 5 for
the year 1947.
"Net income of farm proprietors" differs from the Bureau of Agricultural Economics* "realized net income of farm operators" by
|ne inclusion of the value of net change in farm inventories in
. e National Income Division series. Apart from this difference
|n definition, the net farm income figures included in the national
^come accounts differ slightly in most years from those of the
ureau of Agricultural Economics. For the most recent year the
ureau furnishes special preliminary figures, since it usually does
j o t Prepare and publish detailed estimates until a few months
a
«ir. I n addition, it has not been feasible to incorporate into the
r
oprietors' income series some back-year revisions made by the
ureau of Agricultural Economics.
J j s i c ^ a t a * o r Preparing the farm income estimates are obtained
* y f r o n * the farmers themselves through the quinquennial
c
nsus of Agriculture and a current Crop and Livestock Reportt
designed to include a t least one reporter in every
^ t < n v n s m P i n t n e country. An important part of the basic
wever is
> derived from the auxiliary industries and agencies
market
> transport, store, process, or otherwise aid or regula,
ass h> Production or distribution of farm products. As the
e
"ibling and processing of many of these products are either
aiuTtif^ ^ y . l a r g e firms o r a r e s u k J e c t t o sanitary inspection,
f
eas'bl i n d i v i d u a l Products are fairly homogenous in nature, it is
(with r t 0 °k t a * n from auxiliary industries very reliable data
t i m e lag
import
^ O n t h e m a r k e t i n £ s a n d ™ a r k e t prices of such
toba
Products as meat animals, most dairy products, cotton,
acc
o, and sugar beets.



Gross farm income
The major components of gross farm income are cash receipts
from the marketing of crops and of livestock and livestock products and the value of food and fuel produced and consumed on
farms. Cash receipts and home consumption are calculated for
each commodity by States from estimates of the quantities involved and the average prices paid to farmers. The price estimates
are based on monthly mail questionnaire returns from about 30
percent of the 35,000 dealers and farmers to whom such questionnaires are sent; the same price series are used in deriving
cash receipts from marketings and value of home consumption.
The estimates of quantities marketed and consumed on the farm
are made in a framework in which production data are reconciled
with disposition data.
Crop production is estimated as acreage harvested times average
yield per acre. To obtain acreage and yield figures, benchmarks
derived from the Census of Agriculture and several annual State
assessors' censuses are extended by sample data on acreage and
yield changes indicated by a sample of close to 100,000 reporting
farmers. The changes reported currently are adjusted on the basis
of past relationships between the sample data and the benchmarks.
Disposition of each farm product covers the respective quantities sold, consumed by the farm family, used for feed and seed,
and added to inventory. It is generally estimated in percentage
terms from annual mail reports filed by a selected sample of producers—by 15,000 wheat growers, for example. For most field and
vegetable crops, these percentages are applied to production estimates, and the results for quantity sold are generally reconciled
with totals based on annual reports by producers accounting in
many cases for the bulk of the commercial movement. Reports
from processors, handlers, or sanitary inspectors provide such good
coverage of certain other major crops and livestock products that
firm estimates of marketings can be based directly on these. Cotton
belongs to this class because of reports made by substantially all
ginners. Meat animals are another example, for which there are
Federal meat inspection reports, returns from a very large stratified sample of butchering firms, and data from common carriers.
Nonrecourse loans to farmers made or guaranteed by the Commodity Credit Corporation, net of current redemptions, are considered cash receipts from farm marketings. Such loans and redemptions are reported currently by the Corporation, and net
loans are added to the value of farm marketings discussed above.

78

1951 NATIONAL INCOME SUPPLEMENT

Gross rental value of farm dwellings covers housing on owneroccupied as well as rented farms. It is derived by (1) calculating
a return on dwelling investment from the estimated value of farm
dwellings and the average rate of interest on farm mortgage loans,
and (2) adding to this computed net value the portion of total
farm expenses estimated to he allocable to the upkeep of dwellings.
The basic estimates of the total value of dwellings are prepared
from Census of Agriculture data, with only the 1930 Census reporting separate data on dwellings as distinguished from other
structures. Value relationships are used to derive the proportions
of the various expense items allocated to dwellings.
Government payments in connection with the various farm programs are reported from the fiscal records of the responsible agency,
the Production and Marketing Administration.
Change in farm inventories
The value of the change in farm inventories is measured as
the difference between physical quantities of crops and livestock
on farms at the beginning and end of the year, multiplied by
year-end prices. It is derived as the sum of separate State estimates for each crop and livestock item.
This component of gross farm income is entered directly in the
gross national product as a component of "Change in business inventories". No inventory valuation adjustment is required, as in
the case of estimating the change in nonfarm business inventories,
since the farm inventory changes arc computed directly from data
on physical stocks and current prices.
Benchmark data on the number of each class of livestock on
farms are obtained every five years from the Census of Agriculture. These census enumerations are adjusted, where necessary, to
obtain complete coverage.
Current estimates of year-to-year changes in the number of
livestock on farms are prepared from surveys made each December. The rate of sampling varies among States, depending
largely on the needs of the individual States for livestock data.
In general, a sample of 3,000 to 6,000 farms is considered satisfactory for a principal livestock-producing State. Special surveys
(especially in States where the size of farm varies greatly);
records of marketings, slaughterings, and rail shipments; livestock
tax assessment data; and State farm censuses are used for checking the inventory estimates derived from the basic survey data.
Estimates of year-end farm inventories of crops are prepared
by one of two methods. For all major crops except cotton and
tobacco, farm stocks are estimated quarterly. These estimates are
based upon the results of mail surveys covering about 80,000
farmers, from which the usable response is approximately 30
percent. Each respondent reports the production of each crop
grown on his farm and the quantity on hand at the survey date.
For each crop the reported stocks on farms are expressed as a
percentage of total production for these farms, separately for
each State. These percentages are applied to the estimated total
State production of each crop to yield total stocks on farms at
the end of each quarter. Studies made in 1948 substantiated the
validity of this method.
The estimates of year-end inventories of crops derived in this
manner do not include crops which farmers own but may have
placed in commercial storage located off their farms. The magnitudes involved are not known, but believed not to be large. Also,
for certain crops a part of the estimated stocks on farms may
have been used to secure a Commodity Credit Corporation loan.
As the proceeds of such loans are included in gross farm income,
it is necessary to deduct the quantity of these crops under loan
from farm inventories in order to avoid double-counting. The adjustment is made on the basis of reported data on Commodity
Credit Corporation loans and redemptions.
For cotton and tobacco and a few relatively minor crops, inventory changes are calculated in terms of inventories "held for
ultimate sale." Crops held for use as feed or seed on farms where
grown are excluded. To estimate the quantity of each crop still



remaining to be sold on January 1 of each year, the amount of
the previous year's production of the crop actually sold through
December is subtracted from the total amount to be sold.
The prices used to value the change in physical quantities of
crops are the December 15 average prices received by farmers
for their products as sold at local markets or at points to which
the farmers deliver them. For livestock, inventory values per head
as of January 1 are used, based on farmers' estimates of replacement costs.

Production expenses
Estimates are made for each of some 40 categories of production expense. The largest include purchased feed, hired labor,
depreciation, net rents to nonfarm landlords, costs of operating
motor vehicles, purchases of livestock, and taxes. These accounted
for more than four-fifths of the 1947 total.
Purchases of feed are reported at 5-year intervals in the Census
of Agriculture. For interpolation and extrapolation, an index calculated from price and quantity data for 18 important feeds is
used. Average price data are based on monthly mail returns from
4,000 reporting merchants. Quantities are estimated as production,
indicated by reports from farm or factory producers, plus imports,
with the total adjusted for inventory change and exports and other
nonfarm uses.
The estimates of wages paid to hired farm laborers are described in the section on Wages and salaries.
Depreciation estimates are made separately for seven categories
of farm property, on the basis of replacement cost, rather than
original cost. Percentage rates of depreciation have been derived
for dwellings from a 1934 survey covering 600,000 farms and for
most other items from scattered sample data on length of useful
life. These are applied to estimates of current value based on the
Census of Agriculture and/or on cumulation of purchases (as a
measure of current gross increment), estimated for tractors and
other types of machinery and equipment from the annual Census of
Manufacture and Sale of Farm Machinery and Equipment, adjusted to reflect current values on the basis of Bureau of Agricultural Economics price index series.
Motor vehicle operating costs are estimated separately for automobiles, trucks, and tractors, and only 40 percent of the total cost
for automobiles is charged to farm production. The basic data on
number of vehicles are obtained from the Census of Agriculture
and extended on the basis of sales data on new tractors, less estimated scrappage, and truck and automobile registrations in predominantly agricultural states. Costs per vehicle for some items
were obtained from a survey in 1936, and have been extended on
the basis of changes in prices. Consumption of gasoline and oil per
vehicle have also been obtained from surveys, supplemented by
occasional spot checks of mileage and average mileage per gallon
in the case of automobiles and trucks, and the number of days
used and fuel consumption per day in the case of tractors.
The series on net rents to nonfarm landlords is discussed in the
section dealing with Rental income of persons. This series comprises the only rental figures explicitly included in the farm income statement. The explanation is as follows.
Rental flows within the farm sector do not appear in the statement shown in Exhibit 5 because it is a consolidated statement in
which intra-business flows cancel out. Net rents earned by farmer
landlords become merged with the net income of farm operators
and are not isolated statistically. However, rents paid to landlords
not living on farms must be recorded as flowing out of the farm
sector. Only net rents are shown explicitly. The difference between
them and the gross rents actually paid consists of expenses that
are included among the various expense items of the statement.
Farmers' expenditures for livestock, which are prepared by
States, cover purchases from all sources outside the State and
from public stockyards within the State. The estimates of cash
receipts from livestock are defined in a manner consistent witn
this treatment.

SURVEY OF CURRENT BUSINESS
Estimates of livestock numbers shipped across State lines for
stacker and feeder purchases are made from inspection records
of State veterinarians, inspections by the Department of Agriculture at 66 public stockyards, and data derived from truck and
railway movements of livestock. Estimates of the weight and price
of the livestock purchased are obtained from records of transactions at five important stocker and feeder markets, which handle
more than one-half of the transactions.
Taxes on farm property cover all ad valorem taxes levied on
farm property by State and local governments. Real estate tax
rates are developed from sample data from local tax officials or
from farmers, and from real estate tax data reported in the
Census of Agriculture. The tax rate estimates are applied to
value of agricultural land calculated from the censuses and interpolated by an index of farm land values constructed by the
Bureau of Agricultural Economics. Personal property taxes are
estimated from the real estate taxes in conjunction with ratios of
the amounts of farm real and personal property on tax rolls as
shown in published reports of "State tax commissions, boards of
equalization, or similar bodies.

Revisions
Revisions of the farm income estimates occur periodically to
incorporate the results of the Census of Agriculture or of special
surveys made by the Department of Agriculture in order to improve certain areas of the estimates. In 1948 the estimates were
adjusted to take account of new data from the 1945 Census of
Agriculture, chiefly affecting the 1944-46 production expense estimates. The resulting downward revision of about 7 percent in the
farm proprietors' income estimates for the 3-year period largely
reflected, on balance, a previous understatement of farmers* expenditures for feed. This is one of the largest single farm expense
items, and for intercensal periods the available direct information
relating to it is incomplete.

79

reported by tenants. Tax returns, census enumerations, and sample
surveys—the main sources of rental information—provide much
better coverage of rents paid than of rents received.
The resulting estimates of net rent are considerably less reliable
than the farm income series, which is derived by a somewhat
similar formula. Although the rent estimates pertain to an "industry" almost half as large as farming, public interest in real
estate renting as an industry has been insufficient to justify any
broad special program of data collection such as underlies the
farm income estimates. Moreover, the use of data from tenants
in estimating persons' net rental income is complicated by the
necessity of excluding rent paid to landlords other than persons.
Derivation of the net rent estimates via a detailed structural
analysis of gross rent flows and expenses has the virtue of providing a framework which facilitates the consistent use of all available data on rents. While on balance this is a distinct advantage,
the necessity of deriving the final figures in this way has made
for complexity in the statistical methodology, with consequent
danger of errors. In particular, it will be noted, the final estimates
are often calculated as the difference between much larger items
which, in turn, are also obtained as residuals. Even small errors
made at the various stages of the estimating procedure may significantly affect the final results. Both as to general level and relative movement the rental estimates must be regarded as among
the least satisfactory of national income statistics.
The property-type components of the net rent estimates may be
grouped as follows, to show their relative magnitude and the order
in which they are discussed in the following pages.
Exhibit 6.—Components of Net Rental Income of Persons, 1947
Types of property
1. Rented nonfarm property
a. Rented dwellings
b. Royalty-earning
c. Business and industrial

.^

3. Farm realty
Tota1_

items appear on both sides of the national income and
Product accounts. Net rental income of persons is a distributive
s
are of national income, and space rental value of housing is a
c
°niponent of personal consumption expenditures for services. Space
ental value of nonfarm housing is estimated at an intermediate
a
£e in the derivation of persons' net rental income arising from
rm rental housing or imputed to owner-occupancy of nonfarm
jings, and is discussed below in connection with these net
ing r ents. Rental value of farm housing is estimated by the
u of Agricultural Economics and is described in the section
come of unincorporated enterprises.
imary dat
a on rent income are notably inadequate. Rents are
rec ^
ei ed b v
a large number of individual landlords who maintain
onl ^
gmentar
corn
y accounts. The only major attempt to obtain inG
F statements from these landlords is in connection with the
B^
individual income tax. The rent data tabulated by the
eau of
internal Revenue are derived from a sample of the tax
ret
rns a n d
are restricted to the net rent item. Lack of gross rent
and
sour G X p e n s e tabulations precludes systematic use of collateral
for ^ m a ? e r i a l s t o adjust the Bureau of Internal Revenue data
r
eporr° n S i S t e n c i e S d u e t 0 i n a d e c * u a t e bookkeeping and incomplete
mar^ * ? r e t u r n tabulations were used to derive a 1941 benchcl1 c o v e r
Wt
s net rent from property types accounting for
one t
of t h
- nird of persons' net rents in that year. The remainder

a

derived h "s uebs t i m a t e a n d t h e t o t a l s f o r o t h e r y e a r s h a v e b e e n
gross
tracting sample-based estimates of expenses from
rent
receipts computed largely from data on rent paid as



2,992

_

2. Owner-occupied nonfarm dwellings.

4-—RENTAL INCOME OF PERSONS

Millions of dollars

1,071
320
1,001
2,580
1,403

_

16 ,975

1
This figure is $84 million less than that published. The difference consists of revisions
which have been effected here but not yet incorporated in the national income and
product tables.

1. Rented Nonfarm Property
Persons' net rental income from rented nonfarm property is
derived in the course of a rather intricate estimating procedure.
The following synopsis will facilitate understanding of the estimating sequence, details of which are described later.
An estimate of persons' net rental income from rented nonfarm
pi*operty for 1941 was derived from net rents reported on individual Federal income tax returns. For purposes of extrapolation, the 1941 total was broken down into three groups: (a) Net
rents from rented dwellings, (6) royalties, and (c) net rents from
business and industrial property.
(a) Personal net rents from rented dwellings are calculated
annually as the difference between gross rental receipts and landlords' expenses on all such dwellings, after nonpersonal landlords'
receipts and expenses have been eliminated from these gross totals.
(b) Personal net royalties are estimated annually by applying
suitable corporate ratios to the series described below on gross
rental receipts of persons from business and industrial property.
(c) Personal net rents from business and industrial property
were obtained as a residual for 1941. Their extrapolation involves
estimating persons' gross rents from business and industrial property for 1941 and other years as gross rents paid by business
and government less gross rents received by business and govern-

1951 NATIONAL INCOME SUPPLEMENT
ment from business and industrial property; deducting the 1941
benchmark figure for persons' net rent from such property from
the 1941 estimate of persons' gross rent to obtain persons' expenses
as a residual; breaking clown this residual into component parts
and extrapolating them by use of corresponding expense items
of the series on nonfnrm rental dwelling expenses; and subtracting
expenses from gross rents to obtain personal net rents.
Details of these procedures are discussed below.

Benchmark estimates
Total net rents and royalties of individuals and fiduciaries reported on the rent schedules on Forms 1040-41, as tabulated by the
Bureau of Internal Revenue for 1941, were adjusted to cover nontaxable fiduciaries, individuals reporting on the short Form 1040A,
and persons and nonprofit organizations not reporting. They were
further adjusted to deduct losses on property rentals reported by
some filers, an estimate of net room rents reported, an allowance
for neglected or misplaced expense entries, and an estimate of
net rents reported by farmers. The original total of $1.8 billion
was reduced to a figure of $1.4 billion, representing net rent from
nonfnrm property and net royalties.
The taxpayer filing Form 1040 may report his net rents either
on the business schedule or on the rent schedule. These two
schedules arc adapted, respectively, to large and complex rental
activities and to small or simple transactions. It is reasonable to
suppose, therefore, that most taxpayers who receive rent as an
occupational income fill in the business schedule, and that rents
which arc merely a supplemental source of income or accrue to
persons without occupation are generally reported on the rent
schedule. This distinction between occupational and non-occupational income underlies the distinction in national income measurement between the distributive shares of income of unincorporated
enterprises and rental income of persons.
Statistically, the use of the income tax data has serious drawbacks. Of the total of $1.8 billion reported by the Bureau of Internal Revenue for 1941, nearly three-fourths is an estimate (for
income classes under $5,000) based on samples comprising less
than G percent of the returns. Moreover, reporting requirements
are peculiarly difficult to enforce in the case of rental income,
because such income is received in small amounts by large numbers of landlords and because difficult accounting problems are
involved in calculating net rent. Finally, the various adjustments
of the tax data made by the National Income Division had in most
cases to be based on fragmentary or otherwise unsatisfactory data.
It would be possible to estimate net rents directly from income
tax returns for most other years as well as for 1941. However,
the relatively high tax exemption limits in effect in the earlier
years meant that a very substantial part of persons' rental income was not reported for tax purposes. After 1941, the movement
of net rents indicated by individual income tax return data diverged
increasingly, not only from the prewar trend, but also from the
movement indicated by a rather substantial bedy of other data.
These include sample series on net dwelling rents and synthetic
income statements for all rental housing, as well as corporation
income tax tabulations showing the net flow of rent out of the
corporate sector of business. As individual income tax data do not
increased with the requirement since 1941 that landlords file the
long Form 1040 instead of the much simpler alternative forms
available to most non-landlords.
The estimating procedure actually adopted for years other than
1941 assumes that corporate tax returns provide a firmer statistical base than tax returns of individuals. It may be noted that
incentives to nonreporting of rents received by individuals have
increased with the requirement since 1941 that landlords file the
long Form 1040 instead of the much simpler alternative forms
available to most non-landlords.
The derivation of persons' net rents from rented nonfarm property, and of persons' royalties, in 1941 is summarized in lines 1,
2, and 3 of Exhibit /. For extrapolation the total is broken down



as shown in lines 4, 5, and 6, corresponding to items a, b, and c
in the synopsis given above for line 1 of Exhibit 6. This break*
down and its extrapolation will next be considered.
Exhibit 7.—Derivation and Breakdown of Persons* Net Rents from
Rented Nonfarm Property and of Royalties, 1941
Millions
of dollars

Item
1. Not rents tabulated from tax returns
2. Loss: Adjustments for coverage and concept
3. Equals: Persons1 not rents from rented nonfarm property, and royalties-.

1,770
388
1,382

4. Less: Persons' net rents from rented nonfarm dwellings
5. Less: Persons' net royalties
G. Equals: Persons' net rents from rented nonfarm business and industrial
property

549
193
640

Persons' net rents from rented nonfarm diuellings
' The first step in preparing annual estimates of personal net
rents from rented nonfarm dwellings is to derive, separately for
urban and rural nonfarm dwellings, midyear annual numbers
of rented dwellings and of mean annual contract rent per dwelling. Annual contract rent for each of the two cells is then obtained by multiplication. For the period from 1929 through 1940,
dwelling unit numbers and mean and total rentals were estimated
separately for each of four cells, cross-classified between one- and
multi-family structures as well as by urbanization. After 1940,
however, neither mean rent indexes nor numbers of rented units
were available with a structure-type breakdown.
Next, cell estimates of landlords' total expenses for facility and
utility services included in rent are obtained by an analogous
formula. Deduction of these from the contract rent aggregates
yields Space rent of tenant-occupied nonfarm divellings, a component of personal consumption expenditure and of gross national
product.
Landlords' other expenses are then estimated and deducted from
space rent to determine landlords' net rental income.
Finally, net rents of nonpersonal landlords are estimated and
deducted to obtain the nonfarm rented dwelling component of the
rental income of persons.
The magnitudes involved in these calculations are illustrated
by the 1947 values shown below.
Exhibit 8.—Calculation of Space Rent and Net Rent for Nonfarm
Rented Dwellings, 1947
Item

Rural
nonfarm

Urban

1. Rented nonfarm dwellings (number in millions) _2. Times: Average annual rent (rounded to dollars) - Equals: Total contract rent (millions of dollars) —

12.441
407
5,0GS

3.339
269
896

3. Less: Landlords' expenses for facility and utility
services included in rent
.
4.
Use of cookstoves, refrigerators, furnishings. 5.
Electricity, fuel, water, gas, and miscellaneous
Equals: Personal consumption expenditure for
space rent
__

481
980

60
39

3,607

797

Total

6. Less: Landlords' other expenses.
7.
Depreciation „
8.
Taxes
9.
Mortgage interest
10.
Other
Equals: Net rental income of landlords.

5,964
1,560

14,404
3,249

743
910
418
1,178

1.155

11. Less: Nonpersonal landlord net income.
Equals: Net rental income of personal landlords]
from nonfarm rented dwellings

1,071

1
The published series for consumption expenditure for space rent also inc ! ude r s p iived
ances, totalling $214 million in 1947, for certain lodging house rents and lodging ^ < £ J
gratis a s a perquisite of employment. These allowances are rough approximations
on a variety of census, income tax, social security and other data.

The derivation of the values in Exhibit 8 is of special i p
tance for two reasons. In the first place, substantially the sai
procedures and data sources used here are used also in d^riYi
estimates for owner-occupied dwellings. Secondly, the esti

SURVEY OF CURRENT BUSINESS
expense series for rented dwellings are used in extrapolating the
expenses incurred by persons as lessors of business and industrial
property. For these reasons the exhibit will be discussed line by
line.
1. The total number of nonfarm rental dwelling units has been
benchmarked on the decennial Censuses of Population and Housing for 1930, 1940, and 1950. Census Bureau data, based on interviews with scientifically constructed samples of 20,000-30,000 families surveyed in connection with the Bureau's "Monthly Report
on the Labor Force", were used for the years 1944, 1945, and
1947-49. The 1948 and 1949 sample surveys yielded only the
total numbers of occupied dwellings, which were distributed by
tenure and raised to cover vacancies ^with the aid of ratios interpolated between the survey-based figures for 1947 and those
indicated for 1950 by preliminary sample tabulations from the
decennial census of that year. Data for 66 cities included in the
Commerce Department's Real Property Inventory of 1934 were
used in much the same way in making the 1934 estimates as were
the Census Bureau surveys for 1944, 1945, and 1947, except that
data for the 66 cities were used for extrapolation instead of being
treated as a stratified sample and expanded.
Estimates for years not covered by decennial census or sample
data have been derived by adding to the base-year totals the cumulative net number of new multi-family units provided in each
subsequent year by construction or conversion, and deducting an
allowance for the number of units demolished. The construction
series rest on Bureau of Labor Statistics estimates of housing
starts, which are based chiefly on reports of building permits
issued. (See section on New construction.) The conversion and
demolition series have been derived, partly by graphic interpolation, in the process of reconciling the decennial census totals and
the Census Bureau's sample-based data with the estimates for the
same dates made by adding new construction cumulatively to the
base stock. For the war and early postwar years, such reconciliations also required allowance for the shift of many dwellings out
of the rental market to owner occupancy.
The annual midyear number of rented nonfarm dwellings occupied is estimated from the total number of rental units by use
°; °ccuPancy ratios based on the Census sample surveys and decenniaI
enumerations.
2. Average annual rent for rented units likewise has been de5?ved fr°m the decennial censuses of 1930, 1940, and 1950 and
h
« sample surveys made by the Census Bureau for 1944, 1945,
* 1947. Minor adjustments have been made in the decennial
<*nsus data for nonreporting of rent and to convert the final
ans f o r
April to an annual-average basis. Values for other
years represent interpolations and extrapolations by reference
jnamly to the Rent Index component of the Bureau of Labor Sta«<* Consumers' Price Index. Also used for this purpose were
e
inean rent data provided by the Financial Survey of Urban
fusing for a 12-15 percent sample of all families in 52 cities,
er
ing the years 1929, 1932, and 1933.
fainT R ^ n t I n d e X i s b a s e d o n returns filed by about 100,000
in 3 4 cities
the
- The National Income Division has modified
r Yalues in t h e I n d e x to allow for the
comparatively
erL
° f n e w l y c o n s t r u c t e d dwellings (as indicated by proptee) S m o r t g a S e d under Federal Housing Administration guaran^ nd f o r changes in the common practice of landlords with
re
the ] +t0 t h e i n c l u s i °n of facilities and utilities in rent. Data for
ad
Unit S
Justment are obtained through periodic Dwelling
bury
eys by the Bureau of Labor Statistics.
3
by ' th acilit Y expenses and utility bills, although sometimes paid
clude,e,resident family directly to the producer, are often inth
*n contract rent and paid by the landlord. As outlays for
consu -S a i e c l a s s i f i e d i n £ r o s s national product under personal
to
ex l I*021 ex P end itures for household operation, it is necessary
fr m the housin
tads
°
g component the allowance which landma
*e for them in fixing rents. The total amount to be



81

excluded for each item is estimated by multiplying together two
factors: the average cost of providing the item for one dwelling;
and the number of dwellings for which the item is provided at
the landlords' expense. The derivation of each of these factors is
outlined below under (4) for facilities and under (5) for utilities.
4. The average cost of providing each type of facility (cookstove, refrigerator, or furnishings) for one dwelling is calculated
for the present purpose as the sum of annual depreciation plus
maintenance cost, since tills sum is the extra amount which the
rent must cover to make the inclusion of the facilities in it worth
while from the landlords' standpoint.
The estimates of average maintenance cost (except for furnishings) are flat rates based on trade opinion. Depreciation averages
are calculated from the estimated original average price of the
equipment in use, by straight-line amortization over the estimated useful life of the equipment. The length of useful life is
determined for most items from studies made for the Bureau of
Internal Revenue. The original average price which is amortized
is generally calculated as a weighted moving average of annual
prices covering a back period equal to the length of useful life.
For stoves and refrigerators, it is derived by dividing the total
value of sales during the back period by the total number sold
during that period. Annual value of sales and number sold have
been estimated basically from Census of Manufactures data, which
have been interpolated, extrapolated, and raised to cover distribution cost by use of information from trade sources.
For furniture, a sample-based average expense benchmark was
derived for 1933 in the Financial Survey of Urban Housing. This
is extrapolated by Bureau of Labor Statistics price indexes, and
the annual results are averaged over the back period without
weighting the years.
The numbers of dwellings for which facilities are provided at
the landlords' expense are estimated by applying percentage ratios
to the series on total number of rented units described under (1)
above. Base-year percentages of dwellings let furnished were determined from the 1940 Census of Population and Housing and
from the 1934 Financial Survey of Urban Housing, and interpolated
and extrapolated by use of data gathered periodically by the
Bureau of Labor Statistics from families in the sample underlying its Rent Index. Percentages of dwellings let with refrigerator were estimated from the 1934 Financial Survey of Urban
Housing and the 1935-36 and 1941 studies of consumer purchases,
and their trend was established from data analogous to those used
in extrapolating the percentages of dwellings let furnished. For
cookstoves, an arbitrary percentage has been selected on the basis
of general impressions.
5. The average costs of- utilities per dwelling are generally
derived from fairly complete annual data supplied by agencies
such as the Edison Electric Institute and the American Gas Association. Average fuel bills, however, were based on the Financial
Survey of Urban Housing of 1934. They are extrapolated by an
indicator representing the product of the Consumers' Price Index
fuel component times an index of heating season degree days
as reported by the Weather Bureau.
The aggregates in line 5 of Exhibit 8 are products of average
cost, total number of units, and percentages of units including
the respective utilities in rent. The latter percentages are based
on the Financial Survey of Urban Housing and on recent studies
by the Bureau of Labor Statistics using the sample which underlies the Rent Index.
6. The other expenses deductible from contract rent in calculating rental income are estimated largely from value ratios
applying to all dwellings, and may therefore conveniently be
described here for owner-occupied as well as for rental units.
7. Depreciation is derived by applying a flat rate of 2 percent
to the estimated original cost value of all nonfarm dwellings. The
result is allocated by tenure groups, in the absence of original
cost breakdowns, in proportion to aggregate fair market value in
each category.

82

1951 NATIONAL INCOME SUPPLEMENT

The depreciation rate is based on several surveys of average
length of useful life of dwellings, including in particular that
made by the National Association of Real Estate Boards for the
Bureau of Internal Revenue.
Original cost value of all nonfarm dwellings is estimated by
cumulating annual estimates of original and subsequent construction outlays on units still existing. The 1040 Census of Population
and Housing reported u distribution of the current stock of housing by year of construction. Unit mean original cost of dwellings
in each age group was estimated chiefly from the building permit
data described in the section on New construction, and was multiplied by the number of units found by the Census in that age
group to obtain a census-year aggregate. The corresponding aggregates for noncensal years are derived by adding subsequent-year
construction outlays to (or subtracting previous-year outlays from)
the benchmark.
The tenure-class distribution of fair market value used for the
allocation of the depreciation total is based chiefly on the tenureclass series for number of units and mean rent (or rental value,
for owner-occupied units). The rent and rental value means are
converted to fair market value equivalents by use of a regression
derived from the 1940 Census of Population and Housing, and
multiplied . by the respective numbers of units to secure value
aggregates.
8. Taxes are estimated as a variable fraction of the property
tax series described in the section on Government receipts and expenditures. This tax series is allocated among nonresidential property, rental housing, and owner-occupied dwellings.
For the period from 1929 through 1941, the allocation was derived from a detailed study of State and local government fiscal
reports. For subsequent years, it has been made in two parts—
the tax series is allocated between nonfarm residential and all
other realty; and the nonfarm residential portion is then allocated
by tenure groups. The primary allocation of the tax series between nonfarm residential and other realty has been carried forward in terms of taxable value, allowing for new construction,
depreciation, and trends in assessment practice. The tenure-class
allocation has been extrapolated from 1941 by the tenure-class
distribution of fair market value described above in connection
with the estimates of depreciation.
9. Mortgage interest is calculated as the product of mortgage
debt in each tenure class times a general mean rate of interest.
Debt on owner-occupied units is estimated from the benchmark
averages found by the 1940 Census of Population and Housing and
from the Federal Home Loan Bank Administration's series on oneto four-family units, which is based on reports from a large sample
of lending agencies. The latter series provides the chief component
for an annual estimate of total nonfarm residential debt, which
takes into account the value of multi-unit building construction
and trends in apartment-house debt retirement. Owner-occupants'
debt is subtracted from this total estimate to derive debt on rented
and vacant units. The general interest rate series used is based
on the 1940 Census of Population and Housing, with adjustments
to make it a weighted average and applicable to the calendar year
as a whole. Interpolations and extrapolations of the rate series
utilize such sample materials as the Federal Home Loan Bank
Administration's series on mortgage loans and interest income of
substantially all building and loan associations.
10. Other property expense consists of estimates for repair and
maintenance, insurance, and miscellaneous costs. Repair and maintenance cost accounts currently for two-thirds of the sum of these
three components. Benchmark averages derived from the 1935-36
Study of Consumer Purchases and from a similar but much smaller
survey made in 1941 were multiplied by 1930 and 1940 Population
and Housing Census data on number of dwellings to obtain subtotals for each of a large number of regional, rent-level, and
structure-type cells. The sum of the subtotals for owner units is
extrapolated with the aid of State sales tax data on sales of
building material retailers. The average per rental unit is extrapo


lated by an indicator series pieced together from sample data
reported in rent control agency surveys and from collateral information such as average repair and maintenance for owneroccupied dwellings and average space rent for rented units. Extrapolation to 1929 and interpolation between 1930 and 1940 were
accomplished in terms of,averages per unit by use of series on
income per nonfarm family.
The foregoing estimates of facility, utility, and other expenses
incurred on rented nonfarm dwellings are deducted from the
estimated rentals of such dwellings to obtain the figure for net
dwelling rents of all landlords.
11. Rental housing, however, is owned by business enterprises
and government agencies as well as by persons. In the absence
of any direct information, contract rentals arid expenses on holdings of persons are derived by eliminating the business- and government-owned portions from the totals. In line 11 of Exhibit 8
only the net adjustment is shown.
For government, the estimates of rental receipts are derived
chiefly from reports and records of the Public Housing Administration. Business dwelling-rent receipts are calculated as the sum
of (a) real estate corporation apartment building rentals; (6)
other dwelling rentals received by real estate corporations, and
dwelling rentals of insurance companies; (c) dwelling-rent receipts of corporations in banking, brokerage, and finance, n.e.c;
(d) for all other corporations, an arbitrary five percent of their
total rent receipts as reported for income tax purposes; and (e)
for each of these groups of industries, the same percentage of
noncorporate as of corporate total rent receipts.
(a) For corporation-owned apartments, the base-year estimate
was obtained by a reconciliation of total rent receipts shown on
real estate corporation income tax returns for 1937, which excluded
apartment buildings, with those shown on returns for 1938, which
included them. This estimate was extrapolated over the 1929-40
period by total rent on multi-family dwellings. It has been carried
forward from 1940 by an index of mean rent on all rented urban
dwellings. The use of the latter index in this connection is a makeshift, adopted for lack of a more appropriate extrapolator series
for this period.
(b) The estimates of insurance company dwelling rentals and
nonapartment dwelling rentals of real estate corporations utilize
tax return data to determine total rent receipts, which are distributed between residential and nonresidential by use of reported
figures on value of life insurance companies' investment holdings of
dwelling and nondwelling real estate.
(c) An analogous method is applied for banking, brokerage, and
finance, n. e. c, using reported data on types of bank-owned realty.
Part (d) requires no comment, and the noncorporate totals required for (e) are benchmarked on Federal tax return data for
sole proprietorships and partnerships and extrapolated by the
corporate series for the respective industries.
The resulting series for dwelling rental receipts of business is
used in two connections—as a deduction from total nonfarm dwelling rents in arriving at dwelling rental receipts of persons, and
as the basis for the estimates of business firms' expense on rental
housing, which are deducted from total nonfarm dwelling landlords' expenses in arriving at dwelling rental expenses of persons.
For the latter purpose, the business receipts series is multiply
by expense ratios based on income statements appearing in Moody's
Manuals of Finance, Insurance and Real Estate corporations for
a sample of about 150 concerns. Expenses on public housing, lilce
rental receipts, are estimated from fiscal reports and accounting
records.

Net royalty receipts
These are estimated annually by use of Federal income tax return data, on the assumptions that (1) the ratio of royalty receipts to nonfarm nonresidential rental receipts is the same for
persons as for corporations, and (2) the ratio of net to gross royalty income is the same for persons as for corporations specialize

SURVEY OF CURRENT BUSINESS
in royalty-yielding investments. Preliminary estimates for the two
most recent years, pending the availability of the tax return tabulations, are made by extrapolation using a suitably weighted index
of mineral production and an index of the net/gross rent ratio for
nonfarm business and industrial property.
Since the basic use made of these estimates of net royalties is
in the allocation and extrapolation of the net rents and royalties
total derived from the individual income tax returns, any error in
the 1941 level is balanced by an opposite error in the benchmark
level of persons' net rent from business and industrial property.
The net effect of any such error is therefore to mis-weight the
extrapolator series.

Rent on business and industrial property
In estimating net rental income of persons from nonfarm business and industrial property, individual income tax return data
for 1941 were adjusted for coverage and concept and to eliminate
net rent from nonfarm dwellings and net royalties, as shown in
Exhibit 7 above. The resulting benchmark has been extrapolated
as the difference between annual estimates of gross rental receipts
and of expenses. The calculations involved are illustrated in Exhibit 9.

Exhibit 9.—Persons' Net Rents from Business and Industrial
Property, 1941 and 1947
[Millions of dollars]
Item

1941

1947

Rent on nonfarm business and industrial property:
- I. Paid by business and government
-s. ^ess: Received by business and government -._ __

3,685
1,747

5,988
2,952

3. Equals: GROSS RENTAL RECEIPTS OF PERSONS from
nonfarm business and industrial property

1,938

3.03G

4. Less: PERSONS' EXPENSES as landlords of nonfarm business and industrial property
_

i 1,298

1,435

2 640

1,601

5- Equals: PERSONS' N E T RENTS from such property

&T

ExMbU7

3 le3s
? Usntei m a t e blin e 5. in 1941 only.
e
a

sed on data from Federal individual income tax returns. See

Gross rental receipts of persons from nonfarm business and
industrial property (line 3) are estimated by a residual method:
usiness enterprise and government rent receipts other than from
dwellings and farm property (line 2) are subtracted from busie s enterprise and government rent payments (line 1). Of the
e
nes used in this calculation, total business enterprise rent receipts and payments are estimated primarily from Federal income
ax return data for corporations, partnerships, and sole proprietorips. Total government rent receipts and payments are estimated
jom the Federal Budget and fiscal reports of sample States and
um
cipalities. Dwelling rent receipts by government and business
e derived as indicated above (in the discussion of line 11 of
* blt 5 ) a n d netted out of their total receipts. Rents on farm
roperty, likewise netted out, are estimated partly from governal records a n d
stud
Partly by use of percentages from a 1945
*? of a sample of 150,000 farm owners.
ersons' expenses (line 4) were estimated for 1941 as persons'
r * s ^ceipts (line 3 obtained as described above) less their net
« (hne 5 derived from tax data as shown in Exhibit 7). For
*as-? . on» ( a ) t h e r e s u l t i n S estimate of total 1941 expense
itemized, and (b) the value for each expense item is moved
fent 1 r e n ° e t o tt hh ee ccoorrrreessP°nding expense series for nonfarm
P°nding expense series for n o n a m
pers , s i n £- T h e sum of the expenses is then deducted from
Ons
gross rental receipts to yield annual net rental income
of
, r ^ n s fr<>m nonfarm business and industrial property.
percenta
1941 t
g e distribution of expenses used in itemizing the
tion T ? W a S b a s e d o n t a x return data for real estate corporatOtal f r e a c h ex ense i t e m
tions
°
P
reported by such corporato r e ^T' first adjusted to eliminate the portion of it chargeable
al
housing, calculated as corporations' dwelling rent receipts



83

(from 11 above) times the expense ratio shown by the sample of
about 150 rental housing corporations from Moody's Manuals.
(6) In extrapolating the resulting nondwelling expense benchmarks by the dwelling expense series, it is necessary to allow for
the fact that expenses rise and fall with changes in the number
of rental units. To correct generally for any divergence of this
sort between dwelling and nondwelling expense series, the sum of
persons' expenses so extrapolated is multiplied by an index of
the ratio of persons' gross rental receipts from nonfarm nonresidential property to landlords' gross rental receipts from dwellings.
Tax return data become available at intervals of varying length
for the various items used in estimating net rent on business and
industrial property. Annual tabulations from corporate income tax
returns are completed only after a lag of three years; and periodic tabulations from individual and partnership tax returns
must be extrapolated over periods ranging up to four or five years.
The extrapolations necessitated by these lags are based for corporations upon indexes of employment, payrolls, or industrial production and upon samples of published corporate financial statements; and, for noncorporate business, upon the rent series for
corporations in the same industries.

2. Owner-occupied Nonfarm Dwellings
Imputed income derived from owner-occupancy of nonfarm
dwellings made up over one-third of total net rental income of
persons in 1947, and a somewhat smaller fraction in most of the
earlier years. This imputed income item is defined as the gross
return which the owner-occupants of nonfarm dwellings could
theoretically have realized had they offered their houses for rent,
less their expenses. The implied option is considered from the standpoint of the individual owner-occupant, but without regard to any
special treatment accorded under the rent control legislation to
dwellings previously owner-occupied.
In general, the methods used to estimate the imputed item of
rental income as well as the corresponding consumer expenditure
component, Space rental value of owner-occupied nonfarm dwellings, parallel those discussed above for rental housing in the use
of population census benchmarks, periodic sample surveys, and the
Rent Index. Even the statistical problem of facilities included
in rental value occurs with owner-occupied as well as with rented
dwellings, since the 1940 Population and Housing Census, which
provides the sole benchmark for rental value of owner units, reported such value inclusive of cookstove, refrigerator, and (for
multi-family structures) any utilities included in the rent of other
dwellings in the same structure.
Accordingly a separate description of the methodology underlying the imputed rent estimates is not given. Only two points
of difference between imputed and contractual rent estimation
need be noted. First, in the case of owner-occupied dwellings it
is unnecessary to allow for ownership by landlords other than
persons. Secondly, the estimation of mean contract rental value
per unit is complicated for owner-occupied dwellings both by a
relative paucity of data and by the more subjective character of
such data as exist.
The benchmark data for mean rental value of owner-occupied
units are estimates for the individual dwellings reported in the
1940 Census of Population and Housing. Enumerators were instructed to base the estimates on rents actually being charged for
similar dwellings in the neighborhood. In deriving the benchmark
means from these data, a systematic downward adjustment,
amounting to about two percent, was made to eliminate the apparent effect of enumerators' having occasionally used a rule-ofthumb ratio to market value in estimating rental value.
A direct estimate was also developed for 1930, based on Population Census value data for that year used in conjunction with
value-rent relationships indicated by the 1940 Census. Estimates
for 1932 and 1933 are extrapolations from 1930 by data for 22
cities from the Financial Survey of Urban Housing. They recon-

1951 NATIONAL INCOME SUPPLEMENT

84

cile very closely with the results of extrapolation back from 1940
by series underlying the Kent Index compiled in the Bureau of
Labor Statistics.
The estimates of rental value for 1944, 1945, 1947 and 1950 were
obtained by extrapolation from 1940, as follows: (a) The mean
rental value of all occupied units combined (rented as well as
owned) was extrapolated by mean rent for rented units, which in
turn had been estimated from Census Bureau sample data; (6)
the means for all occupied units and for rented units were multiplied respectively by the corresponding numbers of units, and (c)
the products were differenced to secure aggregate rental value of
owner-occupied units. This procedure was adopted primarily to
take account of the effect of the shifting of units from rental to
owner-occupancy.
For other years, compilations made by the Bureau of Labor
Statistics for its Consumers' Price Index have served as the chief
basis for interpolating and extrapolating mean rental value. The
compilations used for 1935-39 were indexes of rent by rent ranges.
Other interpolation estimates were based in most cases directly
on the published Rent Index.

3. Farm Really
The basic series used in estimating net rent from farm property are prepared by the Bureau of Agricultural Economics, using
the data-collecting system and some of the specific estimates described in the section on Income of unincorporated enterprises.
In conformity with the Department of Agriculture treatment, all
farm net rents received by or imputed to landlords living on farms
are regarded as incident to the business of farming, and hence are
included in national income under the heading of net income of
unincorporated (farm) business rather than under the heading of
rental income of persons. The magnitudes involved in the 1947
estimates are as follows:
Exhibit 10.—Persons* Rentals from Farm Properly, 1947
Item
1. Gross farm rent and Government payments to landlords
2. Less: Kent payable to farmer landlords, nonfarm business, and government
Equals: Gross rental income of persona from farm property
3. Less: Expenses of personal landlords
4. Equals: Net rental income of persona from farm property^----

Characteristics of the Revisions
As has been indicated above, the rent estimates are based upon
. a wide variety of sources, many of which are nonrecurrent, or
become available infrequently and irregularly or with substantial
delay.
To the extent that the estimates of rents rely on corporate
income tax data, the figures for the two most recent years published each July are subject to revision. However, revisions may
extend further, for instance when new benchmark data lead to
the substitution of interpolations for previous extrapolation procedures over a number of years. The forthcoming results of the
1950 decennial Census of Population and Housing will lead to
changes of this type.
A particular aspect of the net rent estimates should be noted.
The published totals for the years 1929 through 1941 are based
upon a more summary methodology than has been described in
this section. The present methodology and estimates corresponding
to it were developed after the publication of the comprehensive
changes made in the national income estimates in 1947. Because
of subsequent decisions to limit revisions in these estimates, the
new rent series have not yet been incorporated for years prior to 1942.

Millions
of dollars
3,207
1,127

5.—CORPORATE PROFITS

2,080
677
1,403

1. Gross rent payable to landlords includes crop share, livestock
share, and cash rents. It is estimated by the Bureau of Agricultural Economics from acreage and production statistics, using
relationships from Agriculture Census reports, Crop Reporter data,
and a special survey for 1936 of a sample group of 15,000 reporting landlords. As used by the National Income Division, the series
also includes income from Government payments made to landlords qua landlords (as distinguished from such payments made
to farm operators as such).
2. The distribution of the total by landlord groups is based on
data from the 1936 survey mentioned above and from over 150,000
returns to a 1945 survey. A primary distribution between landlords living on farms and other landlords is calculated by the
Department of Agriculture from these surveys, and ratios from
the 1945 survey are used by the National Income Division to
break out for that year nonfarm business and government rent
receipts from the total going to landlords not living on farms*
For other years, the business and government receipts are extrapolated by government fiscal and corporate tax return data.
3. Landlords' expenses represent those shares of farm production expense items such as taxes, depreciation, repairs, insurance,
and seed (see discussion of farm proprietors in the section on
Income of unincorporated enterprises) which are borne by per


sonal landlords. The total paid for each item is allocated first
between rented and owner-occupied farms, generally by use of
acreage or property value ratios derived from the quinquennial
Census of Agriculture. The major expense items involved for
rented farms can be assumed to be paid by the landlord rather
than by the tenant. Seed, fertilizer, and binder twine, however,
illustrate a different treatment, lessors being estimated to pay
a fraction of these determined by the ratio of share-cropped acreage to total crop acreage. The amounts of expenses ascribed to
landlords are prorated between landlords living on and off farms
in proportion to the land owned by each, as indicated by the 1936
and 1945 surveys. Finally, expenses of landlords living off farms
are prorated between persons and nonpersonal landlords by use of
the corresponding distribution of rental receipts described above,

The basic estimates of corporate profits are derived from annual tabulations of corporate income tax returns compiled by the
Bureau of Internal Revenue. The tabulations are available, for
the most part, from the Bureau's annual Statistics of IncomePart 2, or are taken from the "Source Book", unpublished volumes
supplementing Statistics of Income with more detailed information.
These data are sufficiently complete and reliable to overcome
many of the difficulties which are inherent in the estimation oi
profits. Filing of detailed returns is mandatory, and the r e ^ r * s
are prepared in the knowledge that they are likely to be audited.
Although the measurement of profits involves many conceptua y
difficult problems, the imposition of administrative rules and regulations during the long time period over which the Bureau
Internal Revenue reporting system has been in operation has go
far toward standardizing accounting practice for corporate incom
tax reporting.
On the other hand, certain important problems still arise i
the translation of the tax return data into estimates of cor ? or t a e(i
profits for national income purposes. The data must be adjus
in various ways to secure comparability with other entries in ^
national income and product tables. One of these adjustments,
particular, involves a considerable amount of e s t i m a t i o n ^ i
ance for the additional profits disclosed by auditing. The
process to which returns accounting for the bulk of profits in
year are subjected requires about fifteen years to complete,

SURVEY OF CURRENT BUSINESS
its ultimate, full effect in revising the profits figures originally
tabulated must be estimated from reports of its progressive effect
on tax liability as the auditing proceeds.
There is a time lag before the tax return data become available. This necessitates reliance on extrapolation procedures to
obtain estimates for the two most recent years. As is indicated
at the end of this section, such extrapolations have at times led
to errors of significant size, particularly on an industry basis.
The situation in this respect is improving, however, due to progress
in the current reporting of corporate profits through the joint
surveys of the Securities and Exchange Commission and the Federal Trade Commission. These surveys have provided improved data
on manufacturing since 1947. They are being further strengthened
and extended to other industries.
The corporate profits estimates are classified industrially on the
basis of companies, or firms, rather than establishments. As discussed briefly in the Introduction to this Part, this results in incomparability with the income shares that are classified on an
establishment basis. The most serious practical limitations in this
connection arise in the comparison of payrolls and profits in certain industries.
Use of the company, as against the establishment, as the unit
of classification leads to an industrial distribution further removed from a product, or activity, basis. This is so because the
operations of companies are generally more heterogeneous than
those of establishments. Consequently, with companies assigned to
specific industry groups on the basis of their major activity as
measured by receipts, there is more likelihood that movements in
the industry series will reflect changes in classification of firms
due to marginal changes in the composition of their activity,
rather than substantive changes in the type of industrial activity
indicated by the industry designation. Special cases of shifts of this
type resulted from Federal tax legislation affecting the filing of
consolidated and unconsolidated returns. In this respect, the industry breakdown of corporate profits in the periods 1929-33 and
19
42 to date is not strictly comparable to that for the years 193441, when, with certain exceptions, filing on an "unconsolidated basis
was required.
In the following pages the base year estimates and their current
extrapolations will be discussed in turn.
Base Year Estimates
All of the adjustments made in the tax return data are indicted in table 38, Part V of this report. Exhibit 11 below lists for
tn
e year 1947 those which involve no estimation, the required
values being shown separately in the tax return data or reported
elsewhere on a complete basis. Further adjustments which must be
m
ade using estimated values are shown in Exhibit 12.
he "Totals as reported7* from tax returns are tabulated by
hibit 11.—Adjustments Not Requiring Estimation in the Derivation
of Corporate Profits Before Taxes, Profits Taxes, and
Net Dividend Payments, 1947
___^_

[Millions of dollars]
Profits
before taxes

Iten

Profits

Dividend
payments

derivetl

from tax returns:
s as reported.

31,615

11,011

Minstments:
domestic dividends received.
foreign dividends received...

+1,210
-925
-323
+325
-21

epletion

^ t capital sain
v!!: p a i n ' s a l e s o t her than capital assets
*>et loss, sales other than capital assets
;
F

Ami

utual nonlife insurance companies.°feign income taxes

_

>UI

»*s reported by Federal Reserve S y s t e m

T taIs

°

1,882
-341

-1,882
-341

D

fro m t a x r eeturns, as adjusted..
,




8,365

-10

4-5

-230

+93

+75

+3

29,751

10,846

6,150

85

the Bureau of Internal Revenue as Compiled net profit, Total
tax (consisting of Federal income and excess profits taxes), and
Dividends paid in cash and assets other than own stock, respectively. These totals provide the starting points for the estimates'
described in the present section.
Dividends received arc deducted from profits and dividends to
obtain unduplicated totals reflecting income originating in United
States corporate production; depletion is added to profits since it is
not regarded as an element of capital consumption in the national
income and product accounts; and capital gains and losses are
eliminated from profits as not measuring incomes arising in current production.
The adjustment for mutual nonlife insurance companies will be
commented upon in connection with a similar adjustment in Exhibit
12 for mutual life insurance companies. The adjustments for foreign
dividends received and foreign income taxes paid also will be discussed under Exhibit 12, in connection with related international
adjustments.
Finally, reported data for the Federal Reserve System are
added, since they are not included in the basic Bureau of Internal
Revenue tabulations.
In addition to these adjustments, there are others which are
made by use of estimated rather than reported values. These are
itemized in Exhibit 12.
Exhibit 12.—Adjustments Requiring Estimation in the Derivation
of Corporate Profits Hefore Taxes, Profits Taxes,
and Net Dividend Payments, 1917
[Millions of dollars]
Profit 8
before
tuxes

Item

Profits
tuxes

Totals from tax returns, as adjusted per Exiiihit 11

1O,H1G

Adjustments:
Profits disclosed by audit
"Rest of the world" industry
Foreign income tux on branch profits
Foreign income tax on dividends
Mutual life insurance companies
Final estimates

-{-213
-120

!

j

_

+251

~+no
+:*o

—1 ,W.)
-HK)l
30,4 89

G.ir.o

-H'JO

+1,350

j

State income tuxes

Net
dividend
payments

|

]

TGOI
11 ,'J 10

cr.ci

Audit adjustment
The tax return data shown in Exhibit 11 are compiled from the
returns before audit. The first adjustment indicated in Exhibit 12
is the addition of the estimated profits and tax liability disclosed
through subsequent audits by the Bureau of Internal Revenue. It
should be noted that not all returns are audited, and that even in
the audited returns there may remain some understatement of
profits.
Furthermore, the national income estimates of the actual results of audit are subject to a significant margin of error, because they must be based on data rather unsatisfactory for the
purpose. In the first place, the auditing process is far from complete for many of the years for which estimates must be made.
Secondly, the results of audit are reported in terms of net additional tax liability only. The additional profits disclosed are not
tabulated, and neither are the effects of audit in reducing the
size of deficits originally reported.
The estimating procedure is carried out in three steps. The
first is to determine the results to date of the auditing process for
the given tax year. This is done by cumulating the net additional
corporate tax assessments made for that tax year to the end of
the following June, to the end of the second following June, and
so on up to the latest reported. Such additional assessments are
calculated in practice as "gross additional assessments" less the
sum of "refunds," "credits," and "duplicate abatements," all as
tabulated by the Bureau of Internal Revenue.

86

1951 NATIONAL INCOME SUPPLEMENT

The second step is to add the expected results of further auditing of returns for the given tax year. These are estimated by
applying experience-based ratios to the total obtained in the first
step. The case of the tax year 1940 will illustrate the method. At
present (July 1951), the first step yields a measure of the net
additional taxes assessed against 1946 income as a result of about
four years of work by the auditors. Study of the auditors* rate
of progress in auditing returns for earlier tax years indicates that
the fifth year of the process is likely to add about 20 percent to
the results obtained in the first four years, the sixth year is likely
to add about 15 percent to the initial four-year total, and so on.
Cumulating these percentages forward suggests that future auditing of 1946 tax returns may add about 75 percent to the net
assessments already reported due to audit. The estimate obtained
in step 1 is accordingly raised 75 percent to obtain the estimated
audit adjustment applicable to the tax liability originally tabulated
from the 1946 returns. (The 194G adjustment implied in table 38
was actually made in 1950, when fewer data were available, and
will be revised from time to time to take account of the audit
results obtained in 1950 and subsequent years.)
The third step is to calculate the additional profits implied by
the estimated additional tax assessments. Income tax liability is
divided by net income subject to tax, both magnitudes being calculated from tabulations based on the original tax returns. The
quotient, representing an effective tax rate, is divided into the
estimated additional tax assessments to derive the corresponding
additional profits.
Special complications have occasionally been introduced into the
first and third steps described above, mainly as a result of tax
legislation in connection with World War II. For the first step,
adjustments were made in the basic tabulations of audit results
to eliminate the effects of recomputing emergency amortization
charges, and the effects of the carry-backs of net operating loss
and of the unused excess profits tax credit. The adjustments
applied to profits and/or taxes for these items are derived independently of the audit adjustment, as indicated later in this section. Similarly, the effects of the credits for debt, retirement and
postwar refund (under the World War II excess profits tax) were
eliminated, since tax liability is measured net of these credits in
the national income accounts.
For the third step, it was generally necessary to utilize separate
estimates of income tax assessments and excess profits tax assessments, and separate estimates of effective tax rates.
The results obtained by the auditors during the first three or
four years after the returns are filed are believed to provide a
fairly adequate basis for applying the method that has been outlined. For the most recent years, the audit adjustment is obtained
as a constant proportion of the total compiled deductions of all
corporations as tabulated from the tax returns. The constant proportion chosen represents an average based on past experience.

Adjustments for international flows
The international adjustments listed in Exhibits 11 and 12 are
designed collectively to yield: for profits, an aggregate which includes profits and dividends received from abroad but excludes
profits and dividends paid to abroad; for dividends, an aggregate
which includes dividends received from abroad but excludes dividends paid to abroad; and for taxes, a measure of liability to the
United States Government.
For profits, the tax return data as adjusted in Exhibit 11 exclude (1) the dividends received by United States stockholders
of foreign corporations. On the other hand, these data include
(2) dividends accruing to foreign stockholders of United States
corporations and (3) profits to foreign corporations from their
branches in the United States. The "Rest of the world*' adjustment added to profits in Exhibit 12 is a correction for all three
of these characteristics of the data.



It is calculated as the total inflow of dividends (item 1 above)
less the sum of dividends paid to foreigners (item 2 above) and
profits of foreign corporations* United States branches (item 3
above). All of the items in the adjustment are measured net of
income taxes levied by the payer country, in accordance with the
definitions used in calculating net foreign investment. The same
definitional principle requires that foreign taxes be netted out of
the income earned by United States corporations from their
branches abroad; this is not done in the tax return data and is
accomplished by the second international adjustment to profits
shown in Exhibit 12.
For profits taxes, foreign taxes on both branch profits and dividends are deducted (in Exhibit-11) from reported Federal tax
liability, against which they constitute a credit.
For dividends, the tax return data as adjusted in Exhibit 11
have three inappropriate characteristics. They exclude dividends
received by United States stockholders from foreign corporations;
they include dividends accruing to foreign stockholders of United
States corporations; and foreign taxes on United States corporations* dividend receipts have been netted out along with the dividend receipts themselves, since the latter are reported (and deducted as in Exhibit 11) gross of such taxes. In Exhibit 12, the
"Rest of the world'* adjustment (calculated as the total inflow of
dividends less dividends paid to foreigners) and the adding back
of foreign income taxes paid by United States corporations on
dividend receipts from abroad together correct for these characteristics.
Of the series entering into these international adjustments,
foreign income taxes are taken from the corporate income tax
returns. The series composing the Rest-of-the-world adjustment
are prepared in connection with the balance-of-payments estimates
of the Office of Business Economics. (See section on Net foreign
investment.) The distribution of foreign income taxes between
taxes on branch profits and taxes on dividends is based on the
relative proportions of branch profits and dividends earned from
abroad.

Exclusion of mutual insurance companies
Mutual companies are not considered part of the corporate universe for national income purposes, and it is therefore necessary
to remove from the tax return data the values included for mutual
insurance companies. For mutual nonlife companies, the amounts
to be removed are reported separately by the Bureau of Internal
Revenue and are used as shown in Exhibit 11. Tax return data
for mutual life insurance companies are tabulated in combination
with the data for stock life insurance companies, and must be
isolated statistically to permit the adjustments for them shown in
Exhibit 12.
The amount of the adjustment to corporate profits before tax
is calculated by subtracting an estimate of stock life company
profits from the total of life insurance company profits given
in the tax return data. The required series for stock life company
profits is estimated as the sum of cash dividends paid and Federal
income tax liability (these items as reported to the Bureau of
Internal Revenue are applicable only to stock companies) less stock
life company receipts of dividends. These dividend receipts are
computed as 20 percent of the total dividend receipts reported on
life insurance company tax returns, the ratio being based on a
special tabulation from reports compiled by the Spectator Company for its Insurance Yearbook.
The adjustment shown in the final column of Exhibit 1% f ° r
insurance companies represents the remaining 80 percent of the
reported dividend receipts of life insurance companies. These are
ascribed to mutual life carriers, and added back to net dividends
to cancel the effect of their inclusion in the corporate dividend
receipts previously deducted. The original over-all deduction ana
the corresponding adding back of dividend receipts of mutual nonlife insurance companies are shown in Exhibit 11.

SURVEY OF CURRENT BUSINESS
State income taxes
State income taxes are among the deductions made by the taxpayers in arriving at the profits figures shown in the Bureau of
Internal Revenue tabulations, but are not shown separately from
other taxes in these tabulations and must therefore be ascertained from other source materials. For 1937 and subsequent
years, the Governments Division of the Census Bureau has compiled statistics on collections under State corporation income tax
laws, from reports filed by the various State governments. The
total so reported for each year has been taken as a measure of the
tax liability incurred in the preceding year, to obtain the amount
of the adjustment illustrated in Exhibit 12. For the years prior to
1936, the adjustment was estimated from a sample including.States
which in 1939-42 assessed about half of the national total of such
taxes. The raising ratio applied to the sample data was varied
annually to allow for the adoption of corporation income taxes by
additional States.

Adjustments not applicable to 1947
A number of adjustments not applied for 1947 had to be made
in the Bureau of Internal Revenue data to derive profit estimates
for other years. (See table 38.) These included corrections for
gross renegotiation refunds, emergency amortization acceleration,
war losses, the unjust enrichment and Vinson Act excess profits
taxes, and the carry-back tax refund.
Renegotiation of war contracts led to refunds by the, contracting corporations which reduced their profits and their tax liability from the amounts originally reported, mainly for the war
years. The totals tabulated from the tax returns originally filed
were adjusted accordingly, by use of special tabulations published
in Statistics of Inccme for the years in which the item was quantitatively important.
The adjustment applied to the profits series for the emergency
amortization acceleration is discussed in the section on Capital
consumption allowances. The corresponding adjustment applied to
the tax series was calculated by multiplying the adjustment applied to the profits series by estimates of effective tax rates.
The tax return data on profits, for 1942 particularly, were net
°* deductions claimed by some corporations for losses due to
enemy capture of properties they owned abroad. A minimum allowance for such losses was estimated from the published income
statements of United States corporations believed to have such
or
eign holdings. This allowance was added back to profits as reported h u h e tax return data, to bring the treatment of the losses
involved into conformity with the treatment of capital losses generally.
The unjust enrichment and Vinson Act excess profits tax colections reported by the Treasury Department were allocated to
e
years i n which the liabilities were estimated to have accrued,
™ were added to the profits tax series for those years.
aft i C a i r y " b a c k t a x r e f u n d s reduced tax liability for the years
er 1940 below the amounts originally reported. They were oct a x ° n e d . b y s t a t u t o r y provisions allowing unused excess profits
car - C ? d i t s a n d n e t operating losses for a current year to be
ned back and applied in recomputing the tax liability of the two
Previous years.
therl a t i ° n W a s r e c l u i r ed because of two circumstances. First,
year W n W a r d r e v i s i o n i n t h e e x c e s s P r o f i t s t a x l i a b i l i t y f o r P a s t
the S f f r e s u l t i n S from the carry-back of later-year tax credits had
therpfGCt ° f i n c r e a s i n S income subject to the net income tax and
crea • t h e n e t i n c o m e t a x liability. The amounts of the intax ^ m p a s t n e t i n c o ™e tax liability were allocated back to the
S aff
the
- ected by the revision approximately in proportion to
to t h ° S S r e f u n d s s p o r t e d as due to carry-back of tax credits
Se y e a r
s . Secondly, the adjustment had originally to be
mad °
some «! S ° m e c l a i m s f o r refunds were still outstanding and
had been settled but not
these
tabulated. Allowance for
Was m
ade by a procedure somewhat similar to that de


87

scribed above in connection with the audit adjustment. Only small
amounts were involved.
Additional tax refunds, not allowed for in the adjustments described above, have been claimed (1) under Section 722 of the
Internal Revenue Code, which provides for cases in which the
base-period experience used in calculating excess profits tax credit
allowances was abnormal, (2) as a result of the reopening of
contract renegotiation on account of the reduction in wartime
profits caused by the recomputation of emergency amortization
charges, and (3) as a result of recent-year operating loss carrybacks to 1946-49. When the estimates were last revised, available
data were insufficient to provide a basis for allowances for these.

Industry breakdown of estimates
In the derivation of corporate profits, taxes, and dividends by
industry, such of the adjustments in Exhibits 11 and 12 as are
applicable to more than one industry are made separately to the
respective Statistics of Income industry benchmarks. The corrections illustrated in Exhibit 11 are generally available in the
required industry detail, with the exception of the item for foreign
income taxes which appears also in Exhibit 12, For those in
Exhibit 12, the relevant all-industry totals are disti'ibuted as follows: the audit adjustment, proportionately to income and excess
profits taxes as originally reported; foreign income taxes, proportionately to foreign dividends received; and State income taxes,
proportionately to Federal corporate income taxes.
Further adjustments are made in the industry estimates so
derived to improve their industrial comparability. They deal with
changes made by the Bureau of Internal Revenue in its classification system from time to time (mainly in 1938), and, less
important, with categories of firms whose precise industrial attachment is not determined by the Bureau of Internal Revenue.
Changes in the system cause minor industries previously tabulated under a major industry heading to be transferred to another
heading. Generally the resulting discontinuity is eliminated by
transferring the prior-year values for the minor industry to the
new heading. If the minor industry values to be transferred are
not reported separately for all years, those for the missing years
are estimated by extrapolation using the broader industry series
which contain them.
To eliminate the "not allocable" categories in the industrial
breakdown of the tax return data, the values in these categories
are generally prorated by the corresponding values in the industries among which the "not allocable" totals are to be distributed.
Formal comparability over time in the individual industry estimates is thus secured by methods that are reasonably satisfactory.
The more fundamental difficulties affecting comparisons, for which
no adjustment can be made, have been noted earlier.
Recent Year Estimates
As indicated above, the tax return tabulations do not become
available until more than two years after the year to which they
refer. It is accordingly necessary to use extrapolation procedures
to obtain the estimates of profits, taxes, and dividends for the
two most recent years. Extrapolators are applied to industrial
benchmark estimates uncorrected for audit results, and an adjustment for audit results is then introduced into the resulting estimates. This specific adjustment is extrapolated from the base
year on an all-industry basis by the difference between corporate
sales and profits before tax, which in turn are obtained by extrapolation using the data sources described below.
The source materials available for the construction of extrapolator series may be classified into four categories. These are
listed in Exhibit IS together with the industries for which they
are used. The results of the individual industry extrapolations are
checked by, and occasionally modified in the light of, independent
estimates of total corporate profits derived from tax collection
data. The estimates obtained by extrapolation and those based
on the tax data will be discussed in turn.

1951 NATIONAL INCOME SUPPLEMENT

88

Estimates for the Rest-of-the-world industry, which is not included in Exhibit 13, are discussed in the section on Net foreign
investment.
Exhibit 13.—Components of Current Corporate Profits Estimates,
by lSu*i.s for Extrapolation, 1947
Profits before taxes
Industry

Data used in extrapolation

AH industries, total. OXCIIHIIIIK Itt"«tof-the-world

Millions
of dollars

Percent
of total

30,270

2. Hanking; railroads, highway pussenutT tnniMportiition, highway
freight transportation and wan>iKm.sincairtninwportaiion (i'ommon rarricris), piprlitio transportation; telephone, tolonruph
and rtluhni scrvicrs: radio l»roadra.ntini; and television; utilities:
electric and vans.

11

19

4,110

14

Tabulations of sample data
from nongovernment
sources.

4. ARruudture, forestry, and fl.slieries;

5(5

Data reported to Federal
regulatory agencies.

3. Mining; nrwnp:iper publishing; retail trade; real estate; local railWiiy.s and bus lines; hotels and
other lodKinjc places, motion
pictures.

17,070

5,097

IVderal Trade Commission
and Securities and Exchange Com mission, Quarterly Industrial Financial
Import Srrictt For All U.S.
Manufacturing Corporation*.

100

3,393

1. Miimtfticturing, oxrept nruspujxr
publishing.

Miscellaneous inadequate

trade,; finance, excluding banking ami real estate; water transportation, HervJce.H allied to
transportation; local utilitieHand
other than motion pictures and
hotels.

Industry extrapolations of corporate profits
1, The Quarterly Industrial Financial Report Series is by far
the most important source noted in Exhibit 13, being used for
manufacturing industries which accounted for more than one-half
the all-industry total of corporate profits in 1947. It is based on
regular reports from al:out .5,500 corporations in a sample drawn
primarily from among companies which filed 1943 Federal income
tax returns. The sampling and estimating procedures were designed to obtain current statistical aggregates for all manufacturing corporations. The sample is stratified, and the sample data
are expanded, in terms of assot-size classes.
Estimates for all manufacturing corporations with securities
registered on a national stock exchange are prepared in the Securities and Exchange Commission. These companies are crossclassified by industry and asset size. The reported figures for each
cell are multiplied by the ratio of the preceding-year assets of all
registered corporations in the cell to the assets of reporting corporations in that cell. Estimates for unregistered manufacturing
corporations are prepared in the Federal Trade Commission, by
multiplying the data for each reporting corporation in the sample by the ratio of the total number of unregistered corporations
in that asset class to the total number reporting.
The measures of pi'ofits ("net income before Federal income
taxes"), Federal tax liability, and dividends in this survey are
based on definitions similar to those used by the Bureau of
Internal Revenue, except for the effects of (1) consolidated reporting and (2) more liberal rules in the survey for the expensing
of current additions to reserves. The chief variations between
the national income definitions and those used for the survey
are therefore due to the items listed in table 38. The impossibility
of adjusting for any of the latter (apart from the expected results of audit) inevitably introduces some error into the estimates.
All reporting corporations are classified by industry (as of
1946), and industry aggregates are derived by summing the



reported amounts expanded as described above. These industry aggregates are not in all respects satisfactory for use in extrapolation. The industry breakdown has shortcomings because of the
general use of consolidated returns for affiliated corporations, and
because the basic design of the sample and the expansion factors
used by the Federal Trade Commission are not primarily intended
to yield reliable individual-industry details.
In spite of these limitations, the Financial Report Series provides extrapolators for these manufacturing industries substantially more reliable than those (compiled from privately published
financial statements as described under 3 below) used prior to
the initiation of the Financial Report Series in 1947.
2. Banking, transportation, and communications and public
utility corp.orations accounting for" the bulk of the profits in their
industries are subject to Federal regulation, and submit regular
financial statements to the respective regulatory agencies—the
Federal Deposit Insurance Corporation, the Interstate Commerce
Commission and the Civil Aeronautics Administration, the Federal Communications Commission, and the Federal Power Commission. The coverage of the data used in extrapolation for most
of these industries is consequently very good. On the other hand,
neither the industry classification scheme nor the report forms
can be made to match exactly the definitions used in national
income estimates; in some cases, there are important differences
in concept or coverage. These discrepancies affect the level and
movement of the extrapolator series, and result in errors in the
estimates based on them.
3. For a number of industries covered neither by the Financial
Report Series nor by reports to regulatory agencies, the estimates
are extrapolated with the aid of sample data compiled from
published financial reports of individual companies. These samples
include substantially every domestic nonmanufacturing corporation
for which the requisite data are published in Moody's Manual of
Industrial Securities, Nevertheless, their coverage is much less
adequate in general than that of the data obtained from regulatory agencies, and they fall short in coverage also of the manufacturing sample. Moreover, they are less well designed than
the latter, since in general only large corporations can be included. Their definitional comparability with the benchmark estimates is subject to the same general limitations as the extrapolators described under (1) and (2) above. Capital gains and
losses, as well as charges to special reserves not allowable for tax
return purposes, are eliminated to the extent permitted by the
published details, in accordance with national income definitions.
The results are tabulated and weighted in as fine an industrial
breakdown as the sample reports and the basic tax return tabulations allow.
Retail trade is by far the most important industry in this
group, accounting for about 60 percent of the profits listed in line
3 of Exhibit 13. The sample includes about 150 corporations which
earned approximately 25 percent of total retail profits in 1947.
Sample data on profits, dividends, and taxes are compiled for
eight lines of trade (general merchandise, food stores, apparel
furniture, auto accessories, filling stations, drug stores, and restaurants) which together account for about 60 percent of total
retail profits. For four other groups (automobile and truck dealers;
auto repair shops; hardware, building materials, fuel and ice
dealers; and a miscellaneous category), the estimates are extrapolated by reference to sales series and rough allowances for
changes in profit-sales ratios.
The coverage of the sample data varies widely among the eight
lines of trade listed, depending to a large extent on the prevalence
of large corporations in each line. In general, benchmark profits
for each line are extrapolated by the movement of the corresponding sample profits. However, sample sales are compared
with estimated total retail sales in each line of trade (see section
on Personal consumption expenditures for commodities), and the
profit estimates are modified if the movement of the sample sales
appears to be unrepresentative.

SURVEY OF CURRENT BUSINESS
Adequate sample data on profits are not available for the other
four groups. The profit estimates for these are derived by multiplying estimated sales by profit-sales ratios. The sales estimates
are obtained, separately for each of the four lines included, by
extrapolating benchmark sales, as tabulated in the corporation
income tax returns, by the corresponding components of total
retail sales. Profit-sales ratios are obtained by moving the benchmark ratios by reference to the movement of sample-based ratios
in other lines of retail trade, and on the basis of available limited information from trade sources.
It may be noted that the inclusion of these residual parts of
retail trade in line 3 of Exhibit 13 is somewhat arbitrary and
dictated largely by expositional convenience. The methodology is
very similar to that applied to wholesale trade, which is listed
in line 4 and discussed below.
Other major components of the total in line 3 of Exhibit IS are
mining and real estate, which account respectively for about 20
percent and 8 percent of this total. The sample used in extrapolating each includes more than 100 companies. In the case of mining,
it should be noted that the ratio of sample profits to universe
profits is quite high—around 70 percent—but that many of the
sample reports are consolidated statements reflecting operations
of affiliates in other industries. The sample ratio for real estate
is relatively small, and the sample itself is unavoidably biased
toward corporations whose stock is not closely held.
Similar comments apply to the sample for newspaper publishing and in lesser degree to that for motion pictures. Tabulations
by the accounting firm of Horwath and Horwath, based on reports
from about 100 hotels in more than 50 cities, provide the indicators used for the hotel industry. For local railways and bus
lines, the American Transit Association compiles the extrapolator
series on the basis of returns from corporations representing
about 90 percent of the industry; conceptual differences impair
the usefulness of these data in extrapolating profits, however.
4. The final category of industries distinguished in Exhibit 13
consists of those for which little or no current data on profits are
available. For these industries, base year profits estimates are
extrapolated by tenuous procedures involving, in general, indicators of total sales adjusted to allow for probable changes in
profit ratios.
Wholesale trade is by far the most important of these industries,
accounting for about two-thirds of the total in 1947. The basic estimate of corporate sales is extrapolated by the sales of service and
limited-function wholesalers. The sources and methods for estimating this sales series are the same as those for wholesale inventories, summarized in the section dealing with the change in business inventories. A basic ratio of profits to sales for corporate
wholesalers is. derived from the income tax return data and extrapolated by reference to the corresponding sample-based ratio series
f
or retail trade. The resulting ratio series is applied to estimated
corporate wholesalers' sales to derive corporate profits.
For other industries in this group sales data are in general less
adequate than for wholesale trade and use is sometimes made of
other indicators of gross business volume such as payrolls. Applicable profit ratios are estimated in principle by means of regresS1
ons of profits against these indicators based on past experience.

Industry extrapolations of profits taxes and net dividends
For the industries listed in lines 1, 2, and 3 of Exhibit 18, the
atest base-year data on corporate profits tax liabilities are extraPolated in general by the movement of series on "provision for
F
ederal income taxes" taken from the same sources. In instances in
*hich such data are not available, or in which they yield erratic
Results, effective tax rates are estimated by reference to base year
^ta with allowance for changes in tax rates. These estimated
r
ates are then applied to the estimates of profits before tax described above. This latter procedure is used also for the industries
lls
*ed in line 4.
Ne
t dividends (dividends paid minus dividends received) are
J




89

estimated for each industry by extrapolating base year figures by
total dividends paid. Dividends paid by the industries listed in line
1 of Exhibit 13 are shown in the same source used for the extrapolation of profits before tax and taxes. Dividends paid by industries listed in lines 2, 3, and 4 are extrapolated by the corresponding industry components of the National Income Division's
series on publicly reported dividend payments, compiled monthly
from data in Moody's Dividend Record and published regularly in
the Survey of Current Business. For these industries, the coverage
of this dividend series is broader than that of the corresponding
profits series, because many corporations report their dividends but
not their profits.

All-industry estimate based on tax collections
The profits estimates obtained for the latest years through industry-by-industry extrapolation as described above are summed
to obtain a tentative aggregate for all industries combined. This
aggregate is checked, and in some cases modified, by reference to
an independent estimate of total corporate profits based on collections of current Federal corporation income taxes. These data are
available with little time lag. The procedure followed in deriving
this estimate may be summarized in terms of five steps.
The first step is to multiply total collections by the estimated
ratio of liabilities to collections, to obtain a figure for total tax
liability. The collections data are lagged one year in deriving the
ratio, which is projected from past experience. Liability for the
most recent past year must be estimated from tax collections made
in the current year, which are still incomplete. Collections reported
to date in the current year are raised to a full-year basis by use of
past patterns.
The second step is to divide the estimated tax liability by an
effective tax rate, to obtain a figure for taxable net income of all
corporations having net income. The effective tax rate is determined
from tax return data for the recent years for which such data are
available, and is projected forward with adjustments to take account of changes in statutory tax rates.
The third step is to estimate and to deduct the total net deficit
of corporations having no net income, since for national income
purposes corporate profits are calculated net of corresponding
losses. The net deficit is estimated by projection from recent years
for which tax return data are available, its movement being determined in the light of the total obtained in step (2) and the relationships between the two series shown in the tax return data for
earlier years.
Taxable income of all corporations, as derived in step (3), is
next increased by estimates of tax-exempt interest income, the
amount of prior-year operating loss carried forward, and the credit
for dividend receipts. These three items together represent the difference between taxable income and the Bureau of Internal Revenue's current definition of "compiled net profit".
The interest item is estimated by projecting the trend shown in
the tax return data for recent years. The allowance for loss carried
forward is likewise projected from tax return data, its year-toyear movement being based on that of estimated (or reported)
prior-year losses appropriately lagged. The dividend receipts credit
is extrapolated from the latest tax-return-based estimate by the net
dividend component of national income.
The final step is to proceed from the estimate of compiled net
profit, obtained in step (4), to an estimate of corporate profits as
defined for national income purposes. The adjustments required
are those indicated in Exhibits 11 and 12 (and in Part V, table 38).
Some of them must be made on a more or less arbitrary basis, in
the absence of current data.
The procedure outlined is subject to significant error at several
stages: the estimation of the ratio of part-year to full-year tax
collections; of the ratio of tax liabilities to collections; of the ratio
of taxable profits to tax liabilities; of the magnitude of corporate
deficits; and of the adjustment items (notably for capital gains and
losses) between taxable profits net of deficits and profits as defined

1951 NATIONAL INCOME SUPPLEMENT

90

for national income purposes. Consequently, a rough range of overall error is calculated. If the sum of the industry estimates falls
outside this range, their detail is reexamined and adjustments are
made in the direction indicated by the tax data.
Characteristics of the Revisions
Comparisons of the revised estimates of profits based on tax
return data with the interim estimates based on less reliable
sources and methods are shown in Exhibit 14*
It can be seen from the exhibit that revisions, usually of minor
amounts, continue to be made in the estimates after incorporation
of the tax return data. These occur primarily as a result of
changes, based on progressively accumulating data for the given
year, in the estimate of the effects of audit.
Exhibit 14.—Preliminary and Revised Estimates of Corporate
Profits Earned in 1945-47
[Mi lions of dollars)

Estimates for year Published in t h e Survey
of Current ]iuxin<'.*s
194 5
July
July
July
July

10-17
19 18
194!>_
1950

i 20 222
20 ,:i89
19 ,717
19 ,717

1940

1947

a

21 140
i 21,840
23,500
23,404

^29 ,784
i 31
30 ,489

1
Extrapolated forward 1 year from tax return data base.
* Extrapolated forward 2 years from tax return data base.

Since the estimates published in the Survey of Current Business
three years after the event are based upon much more nearly
complete information than are the initial preliminary estimates
published with a lag of less than a year, comparisons between the
two cast some light on the reliability of the latter.
In general, compensating errors in the industry series make the
detailed extrapolations less accurate than the sums of these. Thus
the initial estimate of the all-industry total for 1947 differed only
2.3 percent from that which replaced it when the tax return data
became available, while the corresponding differences for the industry groups distinguished in Exhibit 13 were 9 percent for those
extrapolated by regulatory agency data; 10 percent for those (other
than manufacturing) extrapolated by use of published company
reports; and 31 percent for those extrapolated by miscellaneous
inadequate data. The initial estimates for 1946 were relatively
better in detail, but not so good in total, since the sample-based
extrapolators rather uniformly failed to reflect the 1946 shift of
numerous enterprises from the noncorporate to the corporate form
of organization.
The sample-based series prepared for manufacturing by the
Federal Trade Commission and the Securities and Exchange Commission began in 1947. The preliminary estimates shown in Exhibit
14 had therefore to be made without use of these series, and for
manufacturing were based instead on sample data compiled by the
National Income Division from the published reports of individual
corporations.
Certain significant variations exist within the groups in Exhibit
13. Among the industries for which extrapolation is based on data
from regulatory agencies, differences of coverage and concept
between the national income estimates of railroad profits and the
Interstate Commerce Commission series used as extrapolators have
necessitated revisions of significant size. Among the nonmanufacturing industry estimates for 1946 and 1947 based on published
company reports, those for retail trade have been subjected to percentage revisions somewhat larger than those for the group as a
whole. The extrapolations for wholesale trade, the most important
based on materials considered definitely inadequate, have likewise
been revised by comparatively large percentages when the tax return data became available.



Revisions in the preliminary estimates of taxes have been similar to those in the profits estimates, since both are based largely
on a common set of source materials. Sample data for dividend
payments are more adequate than for profits or taxes. Revisions in
the preliminary estimates of net dividends have in general been
smaller percentage-wise than the revisions in the profits series.

6.—INTEREST
This section contains a discussion of the interest components
of national income and personal income, as well as of the three
components of personal consumption expenditures for services
which are estimated in an interrelated statistical procedure. These
are Interest on personal debt, the interest element of Brokerage
charges and interest and investment counselling, and Services
furnished without payment by financial intermediaries except life
insurance.
The basic accounting data underlying the interest estimates
and the reporting systems by means of which they are summarized
are quite satisfactory for large areas of the economy. Corporate
interest transactions are covered in income tax return tabulations
published by the Bureau of Internal Revenue in its Statistics of
Income—Part 2, and those of mutual financial institutions in reports of regulatory agencies or in other comprehensive summaries
of basic data. Information on government interest transactions is
also, in large part, comprehensive.
Personal landlords, unincorporated enterprises (farm and nonfarm), households and institutions, and the rest-of-the-world sector
are the major remaining groups whose interest transactions must
be taken into account in calculating interest flows for national
income purposes. The quality of the information with respect to
them varies widely. In general, the estimates must rely on distinctly less adequate and regular sources. The largest single item
in this group is mortgage interest paid by personal landlords.
Although the interest flows in national income measure amounts
accruing to United States persons and government, these accruals
cannot be estimated directly, because of lack of information from
individual recipients. Instead they are measured as the payments
less the receipts of relevant payer groups. This residual method
of estimating has some advantages, mainly because it leads to
entries consistent with the measurement of corporate profits in
the income and product accounts. But it is subject to the shortcomings of all residual estimating procedures, in which small
errors in the minuend and subtrahend may lead to significant ones
in the remainder. The fact that the recording of interest by creditors and corresponding debtors may differ both as to coverage
and timing introduces special hazards into the procedure.
The above evaluation refers to years for which Bureau of Internal Revenue corporate tax return tabulations are available.
For the two most recent years, for which information is much less
adequate, the reliability of the estimates is reduced, particularly on
an industry basis.
As will become apparent, the definition of interest flows in the
national income is a complex matter, mainly with respect to the
imputed interest flows arising in connection with financial institutions. In this section, the operational procedures used in the determination of these flows are set down precisely, with but little
attempt to explain their basic rationale, which is discussed in
Part II.
The actual measurement of imputed interest flows is based, m
general, upon data of a high order of reliability, but accuracy *s
somewhat impaired by the necessity (as explained later) of substituting in some instances statistical assumptions for lack of the
precise data called for by the definitions.

SURVEY OP CURRENT BUSINESS
Relation of Major Interest Flows

91

Monetary Interest Paid

The interest component of the national income, "net interest",
The composition of total monetary interest paid in 1947 is shown
measures total interest (monetary and imputed, private and govin Exhibit 16.
ernment) accruing- to United States persons and governments
Exhibit 16.—Components of Monetary Interest Paid, 1947
minus total interest paid by United States governments. Government interest (Federal and State and local) is deducted because
Millions
it is not considered income arising in current production. It is
of dollars
Percent
Item
necessary not only to exclude the portion of it paid directly to
2,501
Corporations.
38.9
persons and governments, but also to deduct the portion of it paid
to business, because the latter is reflected in the incomes paid out
2,501
Corporations reporting to Bureau of Internal Revenue._
0
Less: Mutual insurance carriers (life and nonlife)
or retained by the business system.
0
Plus: Federal Reserve Banks
Since accruals to persons cannot be ascertained directly, net
815
Sole proprietorships and partnerships^
12.7
interest is obtained by estimating its algebraic equivalent—the
0.7
431
Farm
0.0
difference between (1) total interest paid by United States busiNonfarm.
384
ness and persons plus total interest paid to the United States
30.5
Other private businesses.
1,965
by foreigners, and (2) total interest received by United States
Mutual financial institutions
509
4.1
business plus total interest received by foreigners from the United
Mutual savings banks
2G4
.0
Alutual nonlife insurance carriers
States.
0
3.7
Savings and loan associations
235
.2
Credit unions
The interest component of personal income, "personal interest
10
.3
Nonprofit organizations servicing business.
19
22.3
Personal landlords (nonfarrn)
income," measures total monetary and imputed interest paid to
1,437
14.5
932
Households and institutions.
United States persons. It is obtained algebraically by adding to the
13.3
358
interest component of national income the excess of interest payConsumers
_-.
1.2
74
Nonprofit organizations servicing individuals-.
ments by United States governments over their interest receipts.
3.4
222
Rest of the world
The nature of these algebraic relationships can be understood
100.0
6,435
Total monetary interest paid.
from the following schematic presentation. Since for the economy
as a whole total payments must equal total receipts, then:
(1) Total interest paid by U. S. business + (2) total interest
Corporations
paid by U. S. persons + (3) total interest paid by foreigners to
Monetary interest paid by corporations accounted for almost 40
the U. S. + (4) total interest paid by U. S. governments = (5)
percent of total monetary interest paid in 1947. With the single
total interest received by U. S. business + (6) total interest reexception of Federal Reserve Banks, this item is based on Federal
ceived by U. S. persons + (7) total interest received by foreigners
corporation income tax returns, tabulated by the Bureau of Infrom the U. S. + (8) total interest received by U. S. governments.
ternal Revenue in Statistics of Income—Part 2. Where greater
From this it follows, first, that the interest component of naindustrial detail is needed, it is obtained from the supplementary,
tional income, as initially defined above [(6) + (8) — (4)] is
unpublished "Source Book".
algebraically equivalent to the formula by which it is statistically
Adjustment of the tax return aggregate to the corporate universe
measured, [(1) + (2) + (3) — (5) —(7)]. It also follows that
as defined for national income purposes involves for all years the
the interest component of personal income (6) can be obtained
from the interest component of national income by adding to it the deduction of estimates for mutual insurance carriers and the addition of data for Federal Reserve Banks. In both cases, adjustments
excess of total interest paid by U. S. governments over total inhave been negligible for the entire period.
terest received by U. S. governments [(4) — (8)].
In order to obtain formal comparability in the industrial classiThe derivation of the two interest series is shown in summary
fication over the period, numerous adjustments and estimates have
f
om in Exhibit 15, and will be discussed in the same order in
been required to correct for changes in the Bureau of Internal
tne text The derivation of the related components of personal
Revenue classification. These related chiefly to years prior to 1938.
consumption expenditures will be explained at appropriate stages
Apart from this factor, however, the industrial classification of
of the discussion.
monetary interest paid (and received) by corporations is affected
( While the concept of national income calls for measurement of
- by classification on a company basis and by changes in revenue
Merestflowson an accrual rather than cash basis, this distinction
laws regarding the filing of consolidated and unconsolidated recannot be maintained in statistical practice. In Exhibit 15 the
turns. (See comments regarding this in the Introduction to this Part
ma
Jor components of the interest flows are labelled uniformly on
and in the section on Corporate profits.)
* cash basis—as "paid" or "received." In the subsequent detailed
For the latest two years, for which Statistics of Income data
^scussion the terms "paid" and "payable" and "received" and
are not yet available, total corporate monetary interest paid
receivable" are used to indicate the exact nature of the flows
is obtained by adding separate estimates for banking and for the
w
nenever possible.
total of all industries except banking.
Banking interest is obtained by extrapolating the last base year
*hibit 15 Derivation of the Interest Components of National
estimate by interest paid by insured commercial banks on time and
-__^
Income and Personal Income, 1947
savings deposits, raised to the all-commercial bank level on the
Millions
basis of yearly asset ratios (Federal Deposit Insurance Corporaof dollars
-""—^^.
Item
tion data.)
tere8t
6,435
Estimates for all corporations except those classified in bank!a?uteKn?
PaW._
4,502
^ ^ ^ e s t p a nit ed e s t
"ing are obtained on the basis of a regression derived from plotting
* 6,283
ImnuhP i r received
"
"
lm
1,164
Puted interest received
interest paid during a year against National Income Division
s
i 3,489
• Net interest (component of national income)
estimates of corporate gross long-term debt plus notes and acU
counts payable as of the beginning of the year. The debt figures
^ted Sta+ptSt oPva el d n b ye neovernment (excess of interest payments by
lov
r m
t
ernrnente3) g
s over interest received by United States
are based on Statistics of Income balance sheet data, and estimated
4,378
for current years by adding increments derived from Securities
i 7,867
. - ^ ^ ^ o n a ] interest income (component of personal income)
and Exchange Commission, Federal Deposit Insurance Corporalffers f r o m
tion, and Interstate Commerce Commission reports.
Published estimates because of a revision not yet incorporated in them.



92

1D51 NATIONAL INCOME SUPPLEMENT

To obtain a breakdown of the nonbank total, direct estimates
are made for several industries. For farms, the last Statistics of
Income figure is extrapolated on the basis of interest paid by
unincorporated enterprises in that industry (described below). For
contract construction, extrapolation is by the value of new private
construction activity (described in the section on New construction). For railroads, telephone and telegraph, and electric and gas
utilities, interest paid data (reported, respectively, to the Interstate
Commerce, Federal Power, and Federal Communications Commissions) are used as extrapolators.
For each individual industry not listed above, the latest base
year figure is extrapolated by the estimated total for all industries
less the industries for which specific estimates are made.

Sole proprietorships and partnerships
In 1947, monetary interest paid by sole proprietorships and partnerships amounted to about 13 percent of total monetary payments.
The 13 percent was about evenly divided as between farm and nonfarm proprietors.
Farm.—The series for long- and short-term interest payable by
farmers (exclusive of that payable by nonfarm landlords) is obtained from the Bureau of Agricultural Economics of the Department of Agriculture. In general, the computation of these interest
charges is based upon multiplication of the amounts of different
types of debt outstanding by relevant interest rates. The long-term
debt and interest rates are estimates by the Bureau of Agricultural
Economics on the basis of Census of Agriculture benchmarks and
sample reports from lending agencies. The short-term debt to
institutional lenders and interest rates are based on reported information from Federal farm lending agencies and from commercial banks. The short-term interest payable to non-institutional
lenders (amounting to $122 millions in 1947) has been described
by the Bureau of Agricultural Economics as "merely a rough
approximation*'.
Nonfarm,—Total monetary interest paid in this sector is obtained
as the sum of industry estimates. For the years 1929 -through
1941, 1939 is the general benchmark. For many industries this
benchmark was obtained by multiplying estimated total receipts
of all proprietorships and partnerships in the industry (see the
section on the Income of unincorporated enterprises) by the ratio
of interest paid to total receipts, taken from 1939 informational
partnership tax returns published by the Bureau of Internal
Revenue in the Sttpplement to Statistics of Income—Part 1. In other
areas, where total receipts are not available, a frequently used
method was to multiply interest paid per partner (as calculated
from the partnership returns) by the total number of active proprietors (see Part V, table 27).
Bureau of Internal Revenue tabulations itemizing interest paid
by industry for both partnerships and sole proprietorships in 1945
were used directly to establish nonfarm benchmarks for that year.
The coverage of these tabulations was much higher in 1945 than
in 1939. Also, partnership tabulations for 1947 permitted benchmarks for that sector and fairly reliable estimates for sole proprietors.
The general method of extrapolation and interpolation used to
obtain industry estimates is to employ the corporate interest paid
series, adjusting to the three benchmark years. In the mining and
manufacturing sub-groups, Census of Mineral Industries and
Census of Manufactures value of product data for 1929 and 1939
permitted a further adjustment for the changing relative importance of the corporate and noncorporate segments.

Interest payments by mutual savings banks from 1943 forward
are based on data compiled by the Federal Deposit Insurance Corporation for insured banks, raised to the universe level by asset
ratios for all. banks to insured banks in each year. Prior to 1943,
the series was estimated on the basis of Federal Deposit Insurance Corporation and Comptroller of Currency tabulations, reports
on savings banks by the Commissioner of Banks in New York
State, reports by the Commissioner of Banks in Massachusetts,
and reports by the American Bankers Association.
For savings and loan associations, interest paid and dividends
paid to shareholders are together considered interest. The estimates
are based on Federal Home Loan Bank Board reports from member
associations raised to cover nonmembers. Dividends paid by credit
unions (assumed to measure the whole of interest payments o
n
deposit and share accounts) are also estimated on the basis o
f
reports to official agencies.
Nonprofit organizations servicing business.—These organizations
(mutual utility companies, fanners' cooperatives, etc.) have been
required to report their operations to the Bureau of Internal
Revenue. Their combined statements were published in Supplement
to Statistics of Income for 19 US—Part 2. Reporting was incomplete by an indeterminate amount, but the total involved was
undoubtedly small. In general, the method used is to extrapolate
the 1943 reported figure over the entire period by other relevant
interest series.
Personal landlords (nonfarm).'—'Monetary interest payable b
y
nonfarm individual property owners (other than professional real
estate operators) represented 22 percent of total monetary interest
paid in 1947. This component includes interest payable on mortgages against farm property owned by nonfarm landlords, owneroccupied nonfarm dwellings, and other nonfarm residential and
nonresidential property owned by individuals. The farm mortgage
interest series is prepared by the Bureau of Agricultural Economics, using sources and methods outlined above. The two series
on nonfarm mortgages are derived in connection with the estimates
of the rental income of persons.

Households and institutions

Monetary interest paid entered under the heading "Households
and institutions" amounted to about 14 percent of the total in
1947. The major share of this represents nonmortgage interest
paid by individual consumers.
Consumers.—Nonmortgage interest payable by individual consumers is of several types. The first embraces interest payable
on ordinary consumer debt and is obtained by applying estimated
average monthly interest rates against Federal Reserve Board
estimates of consumer debt (for installment credit extended o
n
automobile sales; for installment loans by commercial banks, smal
loan companies, industrial banks and industrial loan companies,
credit unions, and miscellaneous lenders; and for single-payment
loan credit). The Federal Reserve Board consumer credit estimates are based on monthly samples of lending agencies, adjusted
periodically to more comprehensive benchmarks. The estimates for
average monthly effective interest rates are prepared in the M'
tional Income Division and are based on fragmentary sample oat*
from lending agencies.
Automobile sales credit is consumer-allocated in line with the
consumer allocation of automobile purchases. (See the section
on Personal consumption expenditures for commodities.) No interest on charge account debt, service debt or installment sa
debt other than on automobiles is included, for reasons of conOther private businesses
sistency. It is believed that, in general, business creditors do n^
Mutual financial i7tstitutio7is.—Mutualfinancialintermediaries enter in their books an explicit interest item as received from su
in 1947 accounted for about 8 percent of total monetary interest
loans, but rather include the amount in the sales price or in otn
paid. For each of the components the estimated series is based
income."
on reported information from a substantial portion of the industry
The second type of consumer interest payments arises in
and is reliable both as to level and to movement.
nection with borrowings against life insurance policies. The : "



SURVEY OF CURRENT BUSINESS
)le to life insurance carriers is estimated by applying an
interest rate series against average policy loans outstanding, both
obtained on the basis of Institute of Life Insurance data. The third
class of consumer payment is that made to U. S. Government life
insurance and adjusted service certificate funds.
The total of these three categories is entered in personal consumption expenditures as Interest on personal debt
A fourth type of interest payments by individuals arises in connection with brokers' loans. This segment was large in 1929, but
in recent years has been of minor importance. The method of
estimation here is to apply averages of quoted short-term money
rates (New York Federal Reserve Bank) against average brokers*
loans to customers (members only, New York Stock Exchange).
This item is also entered directly in personal consumption expenditures, as part of Brokerage charges and interest.
Nonprofit organizations servicing individuals.—Informational returns by labor unions, social groups, etc., to the Bureau of Internal
Revenue were tabulated for 1943, thus establishing a benchmark,
undoubtedly to be interpreted as a minimum estimate. However,
the amounts involved are negligible. Larger in amount, but still
relatively minor in comparison with the monetary interest paid
total, are the payments made by other types of organizations
such as churches, hospitals, and private schools. Here only fragmentary data have been available and the estimates take the form
of average interest rates applied against estimated mortgage indebtedness, or mterest-to-receipts ratios applied against estimated
total receipts.

93

monetary interest received. Imputed charges made by financial
institutions (analytically distinct from the imputed interest flows)
are also discussed, to the extent that they are derived in a statistically interrelated procedure. The charges for life insurance,
for which the methodology is different, are covered in the section
on Personal consumption expenditures for services.
In general, imputed interest paid by financial intermediaries is
measured as the excess of property income received over property income actually returned in monetary form to owners of the
funds entrusted to the intermediary. As will be noted in the following discussion, the precise content of this formula varies
among the several types of financial institutions involved. The
composition of imputed interest paid in 1947 is shown in Exhibit 17.
Exhibit 17.—Components of Imputed Interest Paid, 1947
Item
Corporations
Commercial banks
Federal Reserve Banks.
Finance, n.e.c
Stock life insurance carriers.Other private businesses.
Mutual savings banks
Mutual life insurance carriers
Savings and loan associations
Credit unions
Total imputed interest paid

Millions
of dollars

Percent

2,789

61.9

2,274
53
143
319

50.5
1.2
3.2
7.1
38.0
5.0
20.8
5.0
.4

1,713

205
1,206
4,502

100.0

of the world
Interest paid to United States residents by foreigners is estimated in connection with the United States balance of payments
estimates of the Office of Business Economics. The series is described in the section on Net foreign investment.
Imputed Interest Paid
In addition to monetary interest, national income and personal
^come include imputed interest flows. These arise in connection
w
ith the transactions of financial intermediaries. In national income accounting commercial banks are conceived of as paying out
fteir depositors the entire amount of property income received,
so
that imputed interest paid by commercial banks equals their
property income received less interest actually paid on deposits.
Correspondingly, they are conceived of as making a charge for the
services rendered to their depositors in excess of the monetary
se
*vice charges actually made. These imputed service charges are
numerically equal to imputed interest paid.
To the extent that these imputed flows represent intra-business
transactions, they cancel out in the aggregate and have no effect
?n t/le siz e of national income and product, although they do affect
.industrial distribution. To the extent that they reflect transitions between commercial banks and persons, they result in
etching entries in the interest components of national and perj O n a l mcome and in personal consumption expenditures for services.n ^ similar procedure is applied to corporate financial instiions of the investment trust type.
An
interest imputation is made also in connection with life ine r t ^ * ImPuted interest is measured in this instance by propy income received, which in national income accounting is
re
ated as though paid out to policyholders. In turn, policyholders
re assumed to make payments to life insurance companies to cover
^eir operating expenses. Mutual financial institutions other than
j Insurance are given a similar treatment.
p mpU . ted interest paid is described immediately below, and ime
d interest received is described following the discussion of
t h e deta
^rStnI
»l o* the imputed flows, it will be noticed that imputed
°*nt s*« nOt scrv fce charge transactions between commercial banks and governba
*ks a n d
jm.i ^cosmzed a n d a r e inatead treated as occurring between commercial
Personal recipients.




Corporations
Most of the imputed interest paid by corporations originates in
commercial banking.
Commercial banks.—In estimating imputed interest paid by commercial banks, basic data are drawn from annual reports of the
Federal Deposit Insurance Corporation for the period beginning in
1935 and from the Board of Governors of the Federal Reserve
System for the 1929-34 period. This departure from the general
use of the Bureau of Internal Revenue data in the corporate area
was occasioned by shortcomings in the industrial classification of
the Statistics of Income banking industry.12
Imputed interest paid by commercial banks is measured as the
excess of interest and dividends received over interest paid on
demand and time deposits. Reported data for member banks (Federal Reserve System) in the 1929-34 period and for member banks
(Federal Deposit Insurance System) in the 1935 forward years
were raised to all-commercial bank levels on the basis of asset
ratios derived from the above sources and from Comptroller of
the Currency data.
Federal Reserve Banks*—Imputed interest paid by Federal Reserve Banks (measured as interest received less interest paid and
profits) is calculated from aggregate financial statements published by the Federal Reserve Board.
Finance, not elsewhere classified.—Imputed interest paid by
corporations classified in the "Finance, n. e. c." group, mainly Investment trusts, holding companies, and long-term and short-term
credit agencies, is measured as property income in the form of
interest and dividends received less the sum of interest paid and
profits (before income and excess profits taxes and without deduction for dividends received).
When income accounts are not in such a form as to permit an
isolation of loan and investment activities from other operations,
profits as reported reflect both elements, and a statistical isolation
of profits earned in loan and investment activities is needed, in
order that the imputation procedure be confined to these activities.
In view of the fact that operations other than loan and investment
1S
It may be noted that, as a conseauence, net interest originating in banking
(excluding Federal Reserve Banks) differs from dividends received by banking, to
which by definition it should be numerically equal.

94

1951 NATIONAL INCOME SUPPLEMENT

activities play a significant role in the finance, n. e. c. industry,
this refinement seems desirable.
To effect the separation, investment trust companies of the
management type are assumed to be institutions in which operations are substantially limited to loan or investment activities.
Yearly relationships between imputed interest paid and property
income received for investment trust companies are computed and
applied to the total property income in "finance, n. e. c." to estimate total imputed interest paid by this group.
These ratios were based for years prior to 1938 upon a report
of the Securities and Exchange Commission, Investment. Trusts
and Investment Companies, Part Ttvo (March 1939), and for 1938
and subsequent years on Statistics of Income—Part 2, including
unpublished detail from the "Source Book". For the two most
recent years, the ratio is held at the level given by the latest
Statistics of Income data.
Series for interest and dividends received by the "finance,
n. e. c." group generally are based upon Statistics of Income—Part
2 data and unpublished detail from the "Source Book". Only data
for the 1929-33 period and after 1941 have been used directly,
because of the break in the series introduced by corporate reporting for tax purposes on an unconsolidated basis from 1934
through 1941. For these years, estimates were interpolated by total
monetary interest and net dividends paid by all corporations.
For the two most recent years, the Statistics of Income series is
extrapolated by the sum of (1) monetary interest payments by all
corporations except those in the finance industries, and (2) publicly reported cash dividend payments by all United States corporations except those in finance. (The series on publicly reported
dividend payments is compiled by the National Income Division
from data in Moody's Dividend Record and published regularly in
the Survey of Current Business.)
Stock life i?isurancc carriers.—The property income (monetary
and imputed interest, dividends, and net rents) received by life
insurance carriers is regarded as being withheld to the, account
of policyholders and is treated as though it were actually disbursed. Accordingly, a payment is imputed for life insurance in
Exhibit 17.
Basic data for the measurement of dividend and monetary
interest receipts of both stock and mutual life insurance carriers
combined are taken from Statistics of Income—Part 2, supplemented by unpublished detail from the "Source Book". Reported
dividend figures from 1929 through 1939 were adjusted to include
dividends received from foreign corporations. Receipts of imputed
interest are derived by procedures described below under imputed
interest received. Series for gross rents received, also taken from
Bureau of Internal Revenue sources, are converted to net rents
realized by means of net-gross rent ratios. The break between
stock and mutual life insurance carriers is estimated on the basis
of data published in The Spectator Company's Insurance Year
Book.

Extrapolation of the Statistics of Income based series to current years is accomplished by means of Institute of Life Insurance
data. An extrapolating series is constructed by multiplying security and mortgage asset holdings (averages of year-end figures)
by net earning rates.

Other private businesses
Mutual savings banks.—Imputed interest paid by mutual savings banks is measured as (a) property income received (interest
and dividends) less (b) interest and dividends paid depositors and
interest paid on capital notes and debentures. The nature of the
series for (a) and (b) is described under "Monetary interest
received" and "Monetary interest paid", respectively.
Mutual life insurance earners.—The procedure for estimating
imputed interest paid by mutual life insurance carriers has been
described above under "stock life insurance carriers".
Savings and loan associations.—Imputed interest paid by sav


ings and loan associations is measured as total interest income
less the sum of interest and dividends paid. The two flows are
identical to those entered under "Monetary interest received" and
"Monetary interest paid", except for the addition to the former
of imputed interest received from commercial banks, estimated
by procedures described below.
Credit unions.—Imputed interest paid by credit unions is measured as interest received less dividends paid (the latter taken as
interest payments on both shares and deposits). Interest received
by credit unions is assumed to equal interest paid to them by
individuals (see above "Monetary interest paid, Households and
institutions"). Dividends paid are obtained from compilations of
annual reports to the Bureau of Labor Statistics.
Monetary Interest Received
In the calculation of monetary interest received by business
and foreigners, business recipients are defined to include all corporations (63 percent of the total in 1947), unincorporated security and commodity brokerage firms and miscellaneous proprietors in the finance, n. e. c. category (together less than 1
percent of the total), mutual financial intermediaries (35 percent),
and nonprofit organizations (negligible). Interest received by the
rest of the world from the United States accounts for about 1
percent of the total. Further details are shown in Exhibit 18.
Exhibit 18.—Components of Monetary Interest Received, 1947
Millions
of dollars

Item
Corporations

3,983

Corporations reporting to the Bureau of Internal Revenue
Less: Mutual insurance carriers (life and nonlife)
Plus: Federal Reserve Banks

43

Rest of the world

1

„

A
.3

2,207

Other private businesses

.T

22
21

Security and commodity brokers
Finance, n.e.c

Total monetary interest received

63.1

4,958
1,133
158

Sole proprietorships and partnerships

Mutual financial institutions
Mutual savings banks.,.
Mutual insurance carriers (life and nonlife)
Savings and loan associations.
Credit unions
Nonprofit organizations servicing business
- _

Percent

35.1

2,193
529
1,187
450
27
14

34.9

II
A

49

.8

16,283

100.0

See footnote to Exhibit 15.

Corporations
The general nature of the basic data covering interest received
by corporations has already been discussed under "Monetary interest paid*'. Interest received by mutual insurance carriers (measured in conformance with the Bureau of Internal Revenue definition
of interest received) is removed by use of the data described above,
under "Imputed interest paid, stock life insurance carriers". Interest
received by Federal Reserve Banks is tabulated by the Board
of Governors of the Federal'Eeserve System.
For the two most recent years, for which Statistics of Income
data are not available, total monetary interest received by corporations is obtained by adding separate estimates for the banking
and insurance industries and for all industries except banking
and insurance.
The estimates for banking (excluding Federal Reserve Banks)
are obtained by extrapolating the last base year estimate w
income from loans and investments reported by insured commercial banks to the Federal Deposit Insurance Corporation (raised to
the all-commercial bank level). Interest received by Federal Reserve
Banks is available from the Board of Governors of the Fed.eI^
Reserve System. Current estimates for monetary interest receive^
by stock insurance carriers are prepared jointly for life and nonW

SURVEY OF CURRENT BUSINESS
carriers. Interest receipts of all stock companies (life and nonlife)
are assumed to vary with the corresponding series obtained for
total life insurance. (See "Imputed interest paid, stock life insurance carriers.")
The recent-year estimates for all corporations except banking
and insurance are prepared separately for interest received on
holdings of taxable United States Government securities and all
other investments. This break is available in the Statistics of
Income data. Interest received on taxable United States Government securities is extrapolated by a series calculated as United
States securities held by corporations and associations (excluding
banks and insurance companies) times the computed mid-year
average interest rate on the Federal debt, both available in the
Treasury Bulletin. All other interest received is extrapolated by
the series for monetary interest paid by all corporations except
banks and insurance companies.
To obtain further industrial breakdowns, direct estimates are
made for railroads, pipeline transportation, telephone and telegraph, and electric and gas utilities, in general by extraDolatine
the base year estimates by interest received as reported to the
respective regulatory commissions.
For each individual industry not listed above, the latest base
year figures are extrapolated by the estimated total for all industries less the estimates for all industries for which specific
estimates are made.

Sole proprietorships and partnerships
Monetary interest received by unincorporated security and commodity brokers and certain loan companies classified under "finance,
n. e. c." is assumed to be received as an integral part of business
operations. It is deducted in arriving at the interest share and
correspondingly included in the receipts of these enterprises in
calculating their net income.13 Source materials are similar to
those noted under monetary interest paid. Except for security
and commodity brokers in 1929, amounts involved are small.

Other private businesses
Mutual financial institutions.—In general, the source materials
used for estimating monetary interest receipts of mutual financial
institutions are identical to those employed in the "Monetary
interest paid" estimates.
Monetary interest received by mutual savings banks is measured
as interest and dividends on securities plus interest and discount
°n loans. The method of estimation is similar to that used for
monetary interest paid.
Monetary interest receipts of mutual insurance carriers are
measured as the sum of interest and dividends for national income
Purposes. (This accounts for the difference between the two entries for these institutions in Exhibit 18.) The method of estimate
*°r life insurance carriers has been described above, under "ImPUted interest paid, stock life insurance carriers". Receipts of
mutual nonlife carriers are obtained from Statistics of Income
tabulations, extrapolated by the method described under "Imputed
Merest paid, stock life insurance carriers."
Monetary interest received by savings and loan associations is
measured on the basis of reports by member associations to the
Federal Home Loan Bank Board. Receipts by credit unions are
assumed equal to payments by individual borrowers, and are estimated by methods described above under "Monetary interest paid,
households and institutions".
Nonprofit organizations servicing business.—The basis for estimation has been described above, under "Monetary interest paid."




95

Rest of the world
Interest received by foreigners from United States residents is
described in the section on Net foreign investment.
Imputed Interest Received
The outflows from financial intermediaries of imputed interest
paid become imputed interest received when viewed from the standpoint of recipients to whom such imputed interest accrues. It is
necessary, consequently, to determine what groups receive the imputed interest that arises in each of the financial intermediaries.
The underlying procedure in making this determination is based
upon the ownership of the funds by use of which financial intermediaries obtained property income.
Data on ownership are not generally available except for commercial banks, for which there is indication of ownership by broad
categories. It is necessary, therefore, to solve the problem of
ownership in most cases by use of assumptions.
A review of the several financial intermediary groups indicates
the substantial validity of assuming that persons own all the
funds entrusted to mutual savings banks, life insurance carriers,
savings and loan associations, and credit unions. The corporate
component of the finance, n.e.c. group, comprising investment
trusts, holding companies, and both long-term and short-term
credit agencies, is less clear-cut. It is quite possible for business
as well as persons to own securities of these companies. Lacking
ownership data, it is nevertheless assumed that for this intermediary group also ownership is vested in persons. However, the
consequent error of assuming that all imputed transactions in this
area are with persons should be appraised in the light of the fact
that imputations, at least among affiliated companies, are eliminated by the statistical estimating methods employed. (See the
reference to the use of consolidated returns under "Imputed interest paid, finance, n.e.c")
In summary, for all financial intermediaries except commercial
banks the flows of imputed interest paid by intermediaries are
treated as going entirely to persons. For commercial banks (including Federal Reserve Banks), imputed interest is allocated among
recipients by use of estimates of the ownership of deposits. The
main sources of data for the allocation to principal classes of
recipients are the published banking statistics of the Board of
Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, together with the Federal Reserve
liquid asset surveys. The distribution of imputed interest paid
by commercial and Federal Reserve Banks is shown in Exhibit 19.
This distribution is accomplished in three major steps:
1. Imputed interest received is estimated for three broad
groups: (a) Federal Government, (b) State and local governments, and (c) persons and businesses. The procedure consists
of allocating the elements of imputed interest paid by commercial banks (total property income, interest paid on demand deposits, and interest paid on time deposits) on the basis of percentage distributions showing the ownership of demand deposits
and of time deposits by the three groups, and then deducting the
sum of the two interest paid estimates from total property income.
These distributions are computed from Federal Deposit Insurance
Corporation deposit data from 1934 forward, and from Federal
Reserve Board deposit data from 1929 to 1933. The sources are
the Annual Reports of the Federal Deposit Insurance Corporation
and Banking and Monetary Statistics.
2. The further distribution of the total received by persons
and businesses is based primarily on Derivation of Liquid Asset
Distribution Estimates (mimeograph), Board of Governors of the
Federal Reserve System. This publication gives the distribution
of demand and time deposits by selected groups of holders, as of
the end of December, from 1939 forward. For the most part,
estimates presented in Solomon Shapiro's article on "Distribution

1951 NATIONAL INCOME SUPPLEMENT
of Deposits and Currency in the United States, 1929-1939", in the
Journal of the American Statistical Association, December 1943,
were used to extrapolate the Federal Reserve figures back to 1929,
using a December 1939 link.
Exhibit 19.—Imputed Interest Paid by Commercial and Federal
Reserve Ranks, by Major Recipients, 1947
Millions
of dollars

Item
Imputed interest paid by commercial and Federal Reserve
bankn (>oo Exhibit 17); to bo distributed among major

2,327

Percent

100.0

Step It
40

United States Ooverniiinit
State and local covernuients
I'oraons and businesses

1.7

14G

^. -

1.6
42.8

1,164

Finance, insurance and real estate
... „ .
Security and commodity brokers
Other finance, insurance and real estate
Other indudtricij
~.*- - - . -Farm.... . . . .
-- * *
Nonfarm.
.... .
Mutual life insurance carriers
Mutual nonlifc insurance carriers

1.3

34
910

Finance, insurance and real instate
Stock life insurance carriers -..-.._.....»,..
Stock nonlifc insurance carriers
Other finance, insurance and real estate
Other industries

Other private businesses.. „

45.6

27

Itu.sinoHses (nee Exhibit to).

Proprietorships and partnerships

100.0

977

Persons
Trust funds for individual1*
Nonprofit organization* semciiiK individuals
Indi vidualt

92.0

2,141

Step 2

6.3

2,141

54.4

G99
84
G
21
57
615

32.6
3.9
.3
1.0
2.7
28.7

427

19.9

30
11
19
397

1.4
.5
.9
18.5

115
282

l.S

22

1.0

Net Interest Paid by Government
A breakdown of the government interest calculation is shown
in Exhibit 20. It should be noted that the transactions covered
comprise not only those of general governments (including trust
funds) but also those of government enterprises.
Exhibit 20.—Net Interest Payments by United States
Governments, 1947

13.2

38

corporate finance, n. e. c, mutual savings banks, savings and
loan associations, and credit unions.
Services furnished without payment by commercial banks to
persons are numerically equal to imputed interest received by
persons from commercial banks. For corporate finance, n. e. c.
the entry equals the imputed interest paid item whose derivation
has been explained above, under "imputed interest paid". For
mutual savings banks, savings and loan associations, and credit
unions the entry equals imputed interest paid, calculated as explained above, less income taxes and retained profits (before
deduction of dividends). In general, the series on retained profits
and taxes are developed from the same sources as the series on
interest and dividend flows.

6
10

5.4

3
.5

Millions
of dollars

Item
Excess of interest payments by United States governments
over interest received by United States governments

4,378
5,763

Monetary interest received by governments
„

.......

90.8
9.2

1,385

Federal Government

100.0

5,230
533

Monetary interest paid by governments

Federal Government
State and local governments

Percent

100.0
80.4
19.6

1,113
272

Step 3 >
1

Consists of a further detailed industrial breakdown of allocations shown undor step 2

3. This step consists of a further industrial breakdown, within
the industry groups specified under step (2), thus completing
the allocation by major and minor industries under the National
Income Division industrial classification. In general, the method
is to distribute imputed interest to industries on the basis of
relative holdings of cash and deposits, as there is no further
information on deposit ownership by industry.
Cash and deposits held by corporations reporting balance sheets
are tabulated by industry in Statistics of Income—Part 2, The
reported data are raised (by industry) on the basis of ratios of
total compiled receipts of all corporations to total compiled receipts
of those submitting balance sheets, and are adjusted to the National Income Division industrial classification.
For sole proprietorships and partnerships, only indirect methods
of estimating cash and deposit holdings are available. In general,
ratios of cash and deposits to total receipts for proprietorships and
partnerships are assumed to equal similar ratios for corporations
with assets under $50,000 in the respective industries. These corporate ratios were obtained from Statistics of Income—Part 2, for
1941, and extrapolated to all others years by similar ratios for
all corporations.
For both corporations and unincorporated firms, the relative
distributions of cash and deposit holdings are assumed to remain
constant in the two years prior to availability of the Statistics
of Income data.

Services furnished without payment by financial intermediaries, except life insurance
It is convenient to describe at this stage the derivation of the
"Services furnished without payment by financial intermediaries,
except life insurance" component of personal consumption expenditures. This component includes entries for commercial banks,



Monetary interest paid
Federal Government—The largest component of interest paid
by the Federal Government is that paid or payable on the public
debt. Data for all years are available in the records kept by the
United States Treasury Department. The published source is the
Daily Treasury Statement. Small amounts of interest are also paid
on several types of government-administered trust funds. Calendar
year estimates of the latter are obtained by averaging fiscal year
data from the Budget of the United States Government Estimates of interest paid by Federal Government enterprises are prepared in connection with the derivation of the enterprise surplus or deficit (see section on Government receipts and expenditures) .
State and local governments.—Estimates of interest paid by
State and local governments, prepared separately for several
types of government units, are based upon data drawn from the
Government Finances publications of the Census Bureau, particularly the releases on Governmental Debt in the United States.
Interest payments by State governments are available for fiscal
years 19^9-32 and 1937 forward, and for intervening years are
interpolated on the basis of the reported gross debt of State governments. The latest fiscal year estimate is obtained by extrapolation on the same basis. Adjacent fiscal years are averaged to
obtain calendar year estimates.
Comprehensive coverage of local government interest payments
can be obtained from the Census reports for the years 1931, 1936,
and 1940 forward. Since the reported data represent diverse fiscal
periods, minor adjustments of timing are required to place them
on a calendar year basis.
In the years of incomplete coverage, total municipal interes
payments are assumed to move proportionately to those report*
for the larger cities only, while interest payments by other types
of local government units are interpolated or extrapolated on
the basis of reported gross debt statistics.

SURVEY OF CURRENT BUSINESS

97

Monetary interest received

Nature of commodity flow method

Federal Government.—Interest received by the Federal Government comprises interest income of the social insurance funds,
interest income covered into miscellaneous receipts of the Treasury,
and interest received by government enterprises, as well as trivial
amounts received by several other funds. It may be noted that the
bulk of these receipts is intra-governmental, and offsets identical
amounts under interest paid.
Interest received by the social insurance funds is reported in
the Daily Treasury Statement Other miscellaneous interest receipts of the Federal Government are derived from annual analyses
of miscellaneous receipts of the Treasury as detailed in the Budget
document, fiscal year totals being averaged to obtain calendar year
estimates. Interest received by Federal Government enterprises
is, in general, obtained on the same basis as the corresponding
interest paid component.
State and local governments.—Estimates of interest received
by these governments, like those of their interest payments, are
drawn from the various Census releases on Government Finances.
Fiscal year data for State governments are available for the
years 1929-32 and 1937-40. Estimates for the 1933-36 period are
obtained by straight-line interpolation, while those for years after
1940 are based primarily on reported investment earnings (not
entirely confined to interest) of State pension, sinking, and trust
funds. The fiscal year totals are averaged to obtain calendar year
estimates throughout the period.
The Census reports of interest received by local governments
are fragmentary. A comprehensive benchmark for 1931 can be established from the 1932 Census of Governments, however, on the
assumption that the interest component of reported revenue from
"highway privileges, rents, and interest" for local units other than
cities of more than 30,000 is proportionately the same as for
cities of 30,000 to 100,000 (for which, along with the larger
cities, a more detailed breakdown is available). Extrapolations
from this benchmark are governed primarily, through 1942, by
reported data on investment earnings of public trust, pension,
and sinking funds of cities with populations over 100,000. Beginm
ng with 1943, the basic extrapolating series cover only cities of
250,000 or more.
Because of the time elapsed in compilation of the basic Census
reports, interest receipt estimates for the most recent year, both
for States and for local governments, have to be extrapolated in
more or less arbitrary fashion, with due regard for the trend
tn
e series and for miscellaneous collateral information.

This approach of starting with producers' output is, in fact,
the basic one employed in this report. Termed the "commodity
flow" method, it was used to derive estimates for the 1929-39 period
for consumer commodities making up 84 percent of the $42.0billion total in 1939, the last year for which benchmark estimates
are presently available. (See Exhibit 21.)

7

—-PERSONAL CONSUMPTION EXPENDITURES
FOR COMMODITIES

Personal consumption expenditures for commodities—like wages
salaries—represent transactions that can best be estimated
g . /--«««d, rather than individual, records. Unlike wages and
aries, however, consumer commodity purchases involve indirect
.imation. The business sales data underlying the latter series
to th g e n e r a l l y n o r uniformly distinguish sales to consumers or
e otne
^ broad purchaser groups (such as business and gove
ei
*t) relevant to national income measurement.
The
, general problem, then, is to derive consumer sales, valued
at
Pl c es
P a i d by consumers, from total sales. This qualification
re l .
warding p r i c e s i s i m p o r t a n t ^ I f t h e estimating procedure starts
them SaleS ^° r o u t P u t ) a t t h e producer level and then adjusts
to cover sales of finished consumption commodities only,
r e sti11
remains the substantial task of raising their valuation
to
c
°nsumer-price basis.



Exhibit 21.—Personal Consumption Expenditures for
Commodities, 1939
Item
Estimated by commodity flow method.
Estimated by other methods

Millions
of Hollars
3.1,064

Percent

6,923

83.5
16.5

5,148

12.3

2,181
1,079
1,288

5.2
4.0
3.1

—
—
'
Retail valuation method.
Gasoline and oil
Xew passenger cars and net purchases of used
Fuel (except gas) and ice
Imputations.
Food produced and consumed on farina
Fuel produced and consumed on farms
Standard clothing issued to military personnel
Miscellaneous..

1 , 2GG

3.0

1.134

no

~2/7
.3
.0

22

1.2

50»
Flowers, seeds, and potted pla
Tips (mealsand beverages)...
Lighting supplies
Other '__
Total.

80
101

.5
.3
.2
.2

Tl9S7

100.0

1
Comprising tiie following items, listed in order of their importance in 1039: painting
and art objects; products of custom establishments, n.c.c; expenditures by United States
Government personnel abroad; and miners' expenditures for explosives, lamps, and smithing.

First developed by Simon Kuznets of the National Bureau of
Economic Kesearch and detailed in his National Bureau volume
on Commodity Flow and Capital Formation (1938), the procedure
involves numerous estimating steps. In broad outline, these entail
securing commodity data at producers' prices on the output of factories, farms, and fisheries; segregating for each commodity the
portion of total output not requiring further processing, and destined
for personal consumption; and then passing from finished output
at producers' prices to final costs to consumers by tracing the commodities through the various stages of the distributive system.14
The Census of Manufactures, with its vast commodity detail,
is the basic statistical source for the commodity flow method. This
census was available biennially for odd-numbered years of the
1929-39 period. The most important supplementary sources utilized
by the method are the Censuses of Retail Trade and Wholesale
Trade, which during that period were taken for the years 1929,
1933, 1935, and 1939. These censuses—together with the Censuses
of Distribution of Manufacturers' Sales (taken for 1929, 1935,
and 1939 in conjunction with the manufacturing censuses)—provide most of the basic information for segregating consumer commodities from total output, tracing their flow, and measuring their
costs of distribution.
Taken at such frequent intervals, the manufacturing and trade
censuses furnished a comprehensive basis for estimating consumer
commodity purchases during the 1929-39 period. The gaps during
this period left by the absence of one or more of these censuses
were filled, in generally satisfactory manner, by an interpolation
process carried out within the commodity flow framework. For
this purpose, a wide variety of statistical series was assembled
from government and trade associations and other private sources,
and some reliance was placed on relationships developed from the
census materials.
** The commodity flow procedure was also used in the estimation of producers'
purchases of durable equipment for thi3 period. This is covered more particularly
in the section on Producers' durable equipment.

98

1951 NATIONAL INCOME SUPPLEMENT

The commodity flow method is admittedly "roundabout" and
complex. It was adopted mainly because of the very detailed commodity classification and the comprehensive coverage of output
afforded by the Census of Manufactures. For both of these reasons,
the method was distinctly to be preferred to the principal alternative method employing the Census of Retail Trade as the basic
source. This method, the retail sales approach, involves adjusting
retail sales to eliminate all sales by retail establishments not
made to consumers and then estimating independently, and adding in, that part of consumer expenditures on commodities not
made in retail establishments.

Use of retail sales for extrapolation
While it has not been feasible to employ the simpler, more direct
retail sales approach in preparing benchmark estimates of consumption expenditures on commodities, retail sales data have furnished the principal basis of an extrapolation procedure used in
deriving estimates for the post-1939 period. For those commodity
groups estimated by the commodity flow procedure in the 1929-39
period, estimates for years since 1940 have been obtained very
largely by extending the 1939 estimates forward by the relative
changes in retail sales data.
This method, adopted in the absence of manufacturing and
trade censuses during World War II, has important shortcomings.
It cannot take account of the changing importance of business
purchases at retail and consumer purchases outside retail trade.
Moreover, with the exception of department store sales figures,
the retail sales data are not available by commodities, but according to a not very detailed classification by type of store. Thus, in
the extrapolation the general assumption is made for the various
commodity groups that 1939 relationships of consumer purchases
to the sales of selected types of retail stores remain valid.
Now in preparation are new benchmark estimates for the commodity flow segment of consumer commodity purchases for 1947,
based very largely on the Census of Manufactures for that year
and the Censuses of Retail Trade and Wholesale Trade for 1948.
These postwar census materials, however, are somewhat deficient
for this purpose, notably in the lack of the information provided
in earlier censuses on the distribution of manufacturers' sales and
on retailers' operating expenses. Also in process, therefore, is an
estimate of consumers' total commodity purchases based on the
retail sales approach. This will be checked against the total obtained by summing the individual commodity groups as derived
by the commodity flow procedure. Extensive study will be given
to the reconciliation of the two totals and to the possible use of
variant procedures to arrive at the most reliable figure.
In short, then, the bulk of all consumer commodity expenditures
—84 percent of the total in 1939—was estimated by the commodity flow method for the years 1929-39 and by an extrapolation on the basis of retail sales for subsequent years. For certain
commodity groups, different methods were considered preferable.
For others, such as food and fuel produced and consumed on farms,
the commodity flow method was not appropriate.

Other estimating methods
The main alternative to the commodity flow and retail-sales
extrapolation methods was the direct approach of multiplying
estimated quantities purchased by consumers by appropriate average
retail prices. This procedure, which may be termed the "retail valuation" method, was used in estimating consumer expenditures for
passenger cars and for gasoline and oil for all years and for household fuels for the years 1929-39, with a retail sales extrapolation
being employed for subsequent years. These three groups accounted
for 12 percent of the $42.0-billion total in 1939.
The remaining estimates are of minor importance except for
an imputed item covering food produced and consumed on farms.
This accounted for about 3 percent of the 1939 total.



General considerations of reliability
The subsequent description of methodology will afford, at various
places, judgments about particular aspects of the estimates of
consumption expenditures on commodities. Several propositions regarding their general character may be worth noting at this point,
with, however, the realization that any appraisal of over-all reliability is necessarily indirect and cannot be definitive.
Concerning the estimates for 1929-39 derived by the commodity
flow method, there is the primary fact that they entailed lengthy
procedures processing large masses of data and resting at times
to an uncomfortable degree on judgment. Counterbalancing this
are several considerations pointing toward the general appraisal
that the final estimates of the totals are not markedly in error.
The first is the wealth of census information on which the estimates for this period were founded—information which, if not
ideal, was adequate for the requirements of most phases of the
estimating process. Secondly, certain evident sources of error in
the individual commodity estimates—such as the necessity of using
type-of-store data in computing retail markups—may be assumed
to have a tendency to compensate, or offset, in the total. Thirdly,
substantial temporal comparability in the estimates—that is, reliability of movement over time—seems indicated from the use of
census data having a high degree of comparability and the application of uniform procedures and assumptions.
Pending the availability of the new 1947 benchmarks, there is
little basis for a definitive opinion about the accuracy of the
post-1939 estimates derived by the retail sales extrapolation. A
considerable disadvantage, as noted, is the lack of commodity data
and of information on the changing relative importance of consumer purchases to retail sales. Also, the retail sales data themselves are estimates based on sample information. Relevant in
this connection, however, is the fact that the Office of Business
Economics estimates of retail sales—the principal extrapolating
series used—checked very closely with the 1948 Census results in
total, and quite well for many of the type-of-store classifications.
Of the commodity groups derived by other methods, it may be
noted that the estimates for passenger cars, gasoline and oil, and
purchased household fuels are subject to a significant qualification.
The allocation of these commodities to consumers is based on limited information and may be considerably in error.
Though indirect and inconclusive, some evidence bearing on the
general reliability of the consumer commodity totals is afforded
by the size of the statistical discrepancy between the income and
expenditure sides of the national income and product account.
For a component series as large as consumer commodities—comprising in most years nearly half of the gross national product-the small size of the discrepancy throughout the period of the
estimates may be taken as some external indication that the general level of the series is not markedly in error. This is particularly
the case since considerable reliability can be attached to certain
other large income and product components, such as wages and
salaries, corporate profits, and government purchases of goods and
services.
The following, main section of the notes gives a description of
methodology in terms of the principal types of methods, as summarized in Exhibit 21. The description is particularly limited for
the large commodity flow segment, since notes of this scope cannot deal with the numerous departures from general procedure
or with the individual commodity groups, for which the relative
importance of the various steps in the estimating procedure (»nd
hence reliability) often varies significantly.
Commodity Flow Method, 1 9 2 9 - 3 9
The individual steps in deriving total personal consumption expenditures estimated by the commodity flow method are summarized for 1939 in Exhibit 22. Each of these steps will be described
briefly.

SURVEY OF CURRENT BUSINESS
1. Distribution of finished and mixed manufactured commodities.
The basic source of manufactured commodities is the Census of
Manufactures. Detailed output data—for about 4,000 commodities
in 1939—were reported there for odd years of the 1929-39 period.
For the most part, the census data were comparable from year
to year. There were, however, several minor deficiencies. One was
that census coverage was slightly less complete in 1933 than in other
years. The 1933 census data were raised whenever some indication
was given of the degree of incompleteness in an individual industry—
usually less than 2 percent. Another minor deficiency stemmed from
the fact that the reported commodity information was somewhat less
detailed for some years, notably 1933, than others. It was often
necessary to break down combinations of commodities on the basis
of the details reported for proximate years.
Still other limitations lay in the difficulty of establishing strictly
comparable series over the 1929-39 decade for many commodities
made in the textile and apparel industries, and in the differing
degrees of coverage of some of these industries in particular
census years. Aside from careful attempts to achieve proper classiExhibit 22.—Derivation of Total Personal Consumption
Expenditures Estimated by the Commodity
Flow Method, 1939
[Millions of dollars]
. Distribution of finished and mixed manufactured commodities, before
deduction of government purchases of durable equipment
a. Finished
1. Producers* durables
2. Consumer commodities
3. Combined, allocated to
.
a. Producers' durables
b. Consumer commodities

'.

b. Mixed, allocated to
1. Producers' durables.2. Consumer commodities
3. Unfinished

25,969

»

----

12,437
334
8,233
3,870

Manufacturers' production of finished consumer commodities [la(2) +
la(3b)+lb(2)l
-

18,697
43

Subtract; Change in manufacturers' inventories

18,654

Equals: Manufacturers' sales of finished commodities

2,657

Producers' sales of finished nonmanufactured commodities-

21,311

Producers' sales of finished commodities (4,+5)—_

1,001

Add: Transportation charges
• Equals: Producers' sales, inclusive of transportation charges, distributed
to:_.
„
„_-.
a.
b.
c.
a.

504

9- Imports..
10. Total purchases by wholesalers (8b +9)
11. Subtract: Change in wholesalers' inventories

U.

Equals: Wholesalers' sales of finished commodities-

15,391

a. Retailers
t>. Consumers
17. Total purchases by retailers (8c +16a)
13. Subtract: Change in retailers'inventories

21.
22.

107
12,613

Subtract: Wholesalers'exports
16. ^Wholesalers' domestic sales, distributed to:

20.

12,720

-*

15.

19.

22,312
170
12,216
8,818
1,108

Exports
Wholesalers..
Retailers
Consumers--

12. Equals: Cost of goods sold by wholesalers
13. Add: Wholesalers* markups

13,532
2,873
9,245
1,414
195
1,219

2,778

308

—

15,083
14,196
887

•

23,014

•

231

Equals: Cost of goods sold by retailers-

•

22,783

Add: Retailers'markups

•

9,895

-

32,678

Equals: Retailers'sales of finished commodities
C

° 2 i ) U i n e r s ' p u r c h a s e s exclusive of general retail sales taxes (8d+16b +

23.

Add: General retail sales t a x e s . . •
24. Equals: Personal consumption expenditures estimated by the commodity
flow method
„
__
_
-—




34,673
391
35,064

99

fication, little could be done to overcome these limitations. It is
possible that, especially for 1935 and 1937, the figures for some
of the component commodities of the clothing and semidurable
house furnishings groups are slightly too low.
Following these and other minor adjustments of the reported
census commodity values, the first major task was to classify the
full array of commodities into the categories of finished, unfinished,
and mixed.
Finished commodities were defined to include (a) commodities
that had reached the stage at which they would be taken over by
individual consumers without further processing, and (6) durable
equipment intended for multiple use in production and with an
average life of three or more years.15 Classification under (a)
did not depend solely on the degree of processing; it was based
also on the use to which a commodity is put. Flour, for example,
was classified as finished if consumed in households but as unfinished if consumed by a factory making bread or other products
for which flour is a raw material.
Unfinished commodities were defined to include (a) all commodities entering further into the productive process other than
those lasting on an average of 3 years or more; and (b) in the
context of this statistical study, finished commodities purchased
by government and by nonprofit institutions serving persons, as
well as construction materials—all of which are accounted for in
other segments of the gross national product and estimated by
methods other than the commodity flow.16 Exports, counted under
net foreign investment, also are unfinished in this context. They
were not classified as such initially, but were eliminated at a subsequent step in the estimating process.
The mixed category is a tentative grouping for commodities having appreciable diversity in use, and which therefore could not be
classified wholly as finished or unfinished. The mixed commodities
belonged in part to the unfinished grouping and in part to the
producer durable and/or consumer commodity groupings, and required allocation among them. In the strictest sense, it is realized,
most commodities are mixed, but it would not have been feasible
to allow for very small fractions of finished or unfinished use.
Therefore, only when there was reason to believe that the secondary use of a commodity was appreciable was it assigned to the
mixed category for allocation.
The classification of commodities as finished, unfinished, or
mixed was greatly facilitated by the extent of commodity detail
in the Census of Manufactures. This detail made it possible to
classify as finished or unfinished many product categories which,
if combined, would have required allocation. For example, soap
chips, flakes, washing powder, cleansers, and similar products
were reported in 1939 broken down between packaged and bulk.
While consumers buy some of the latter and businesses and other
"nonconsumers" some of the former, the reported breakdown undoubtedly furnished a satisfactory basis for distinguishing between
consumer and nonconsumer uses. On the other hand, the equally
important granulated, powdered, and sprayed soaps were reported
without a breakdown between packaged and bulk and therefore
had to be allocated.
15
The formulation under (a) covers the bulk of the consumer items. A more
precise definition of a finished consumer commodity would add to the phrase
"without further processing" the qualification in manufacturing or the services.
This qualification is needed to take account of marginal cases in the application
of the commodity flow method. If a commodity is further processed outside manufacturing and the services, it is counted as finished in the present context. For
instance, cloth bought by custom tailoring establishments is classified as finished
because the output of such establishments is not listed in the Census of Manufactures, and hence would be missed if purchases of materials by custom tailors
were not classified as finished. However, if a commodity is purchased by a service
establishment and covered in its service receipts it is treated as unfinished in the
commodity flow method to avoid duplication, as it is accounted for in personal
consumption expenditures for services. For instance, spark plugs purchased and
installed by automobile repair service establishments and covered by their service
receipts, rather than sold separately to consumers, are classified as unfinished as
they are reflected in consumer purchases of services.
i« One complicating element, which is explained in the section relating to producers' durables and need only be mentioned here, is that for statistical reasons
government purchases of durable equipment were not eliminated as "unfinished"
in the process of commodity classification, but at a later stage.

100

1951 NATIONAL INCOME SUPPLEMENT

The greater number of the commodities reported could be classified directly as either finished or unfinished. An overwhelming
proportion of commodities in this initial finished classification
could be assigned immediately to either the producers' durable or
the consumer commodity category. However, some finished commodities—household furniture and tools are examples—fell into
both of these categories, and so required allocation. This combined
group of finished commodities was not relatively large—as shown
for 1939 by the data in Exhibit 22—and its allocation was not a
likely source of appreciable error, particularly with respect to the
gross national product total. Misallocation between consumer commodities and producers' durables would not lead to error in that
total except for the addition of an inappropriate distributive cost
element in passing from the producer value to the final value.
Commodities which could not be classified directly as wholly finished or unfinished—the "mixed" commodities—required special
study to allocate them among the categories of producers' durables,
consumer commodities, and unfinished. Fortunately, census reports
provided two types of commodity information that were very
useful for this purpose: (1) Data in the biennial Census of Manufactures on the quantity and cost of principal materials consumed
in certain industries; and (2) data on the distribution of sales by
class of purchaser in the Distribution of Manufacturers' Sales
for 1929, 1935, and 1939 and in the Census of Wholesale Trade for
1929, 1933, 1935, and 1939. These census data were checked and
supplemented by use of numerous special commodity studies from
both government and trade sources, and by correspondence with
business firms and commodity experts.
The materials consumed data were used to estimate the unfinished part of a number of mixed commodity items in the large
food group. Special commodity data were used in the allocation
of durable equipment items. In some cases, with adequate data
lacking, the allocations had to be based on judgment, including
outside expert opinion. But the method most generally followed
in estimating the nonconsumer portion of mixed commodities involved application of the sales distribution data.
In the manufacturers' and wholesalers' sales distributions provided by the censuses, sales to "industrial, commercial, professional, and institutional users"—the 1939 designation, termed
"sales to industrial users" for brevity—were taken to indicate
nonconsumer use. Included in the coverage of this designation were
private institutions and governmental bodies. In addition to sales
to industrial users by manufacturers and wholesalers, interplant
transfers by manufacturers were included in the measurement of
nonconsumer use.
Nonconsumer use of mixed commodities was estimated in two
parts. First, the percentages that manufacturers' interplant transfers and sales to industrial users constituted of manufacturers'
total transfers and sales were calculated for industries representing the individual commodities most closely. In some instances the
industry sales and transfer data were adjusted by commodity data
to make their coverage more representative, and thus to prevent
bias.
Secondly, the percentages of manufacturers' total interplant
transfers and sales formed by their sales to wholesalers were
multiplied by the percentages of wholesalers' sales (adjusted for
duplication) made to industrial users, with the lines of trade given
in the wholesale census having to be matched with the commodities
involved.17
IT
Wholesaling In this analysis is defined to cover service and limited function
wholesalers, manufacturers' sales branches and offices, assemblers, and, in 1929
and 1033, chain store warehouses (classified in retail trade by the 1935 and 1939
censuses). Agents and brokers, included in the census definition of wholesale
trade, are generally excluded; their operations are covered by sales distribution
and other data reported by their principals, manufacturers and wholesalers. Also
to avoid duplication, the sales distributions were adjusted to eliminate sales to
other wholesalers from the total sales and sales distributions of the trade making
them. For most trades, wholesalers' reporting of sales distribution data to the
census was substantial but not complete; in each such trade the data reported
by each type ot wholesaling (service and limited function wholesalers, manufacturers1 sales branches, etc.) were blown up to total sales reported by that type
and added to give the sales distribution of the trade.




The two percentages were then added and applied to the detailed commodity totals. For mixed commodities allocated by sales
distribution data, the unfinished portion thus represented sales by
manufacturers to "industrial users" either directly or through the
channels of wholesale trade. The allowance for nonconsumer use
represented by wholesalers' sales to industrial users could have
been estimated and deducted later, but was handled at the manufacturers' level to simplify the estimating procedure.
By using the sales distribution data, materials consumed data,
and special commodity information, it was possible to achieve
fairly reliable breakdowns for most of the mixed commodities.
Nevertheless, by their very nature these breakdowns were approximations, and undoubtedly were subject to errors. As computed from the data shown in Exhibit 22, allocations from mixed
commodities formed 44 percent of the estimated value of manufacturers' production of finished consumer commodities in 1939.
The area over which estimation and judgment were used in
unusual degree in the classification of manufactured commodities
was thus sizable for consumer commodities. It was much larger
than in the case of producer durables, for which commiodities that
were allocated from the mixed commodity total constituted only
9 percent of the manufacturers' 1939 value of finished equipment,
before deduction of government purchases. Even when government purchases of durable equipment—handled separately from
the classification process in estimating producers' durables—are
taken into account as being closely akin to the problem of mixed
commodity allocation, the conclusion remains that the 1929-39 consumer commodity series was subject to larger error than the producer durable series with respect to the very important aspect of
commodity classification. A rough quantification of this appraisal
might be gained from the following fact: net errors of 20 percent
—an unlikely extreme—in the mixed commodity allocation and in
the estimate of government purchases of durable equipment would
have affected the 1939 value of manufactured finished output by
9 percent for consumer commodities and by 4 percent for producers' durables.
At this point the procedure of estimating consumer commodities had arrived at the manufacturers' value of finished production for odd years of the 1929-39 period. This was computed, with
reference to Exhibit 22, by summing the values of consumer commodities (1) assigned directly as finished, (2) allocated from the
combined total of finished output of consumer commodities and
producer durables, and (3) allocated from the mixed commodity
total.
The detailed commodity figures were next combined into the
groupings shown in table 30, Part V of this report. Further steps
in the commodity flow procedure related to commodity group totals, rather than to individual products within the groups. In
these steps, the various sales, output, inventory, foreign trade, and
mark-up data—whether for commodities, industries, lines of wholesale business, or types of retail store—were always first combined
so as to correspond best with the commodity groups.
For the even years of the period, the estimates of manufacturers' output of finished consumer commodities were of necessity
based on partial information, which was utilized for interpolation
between the census-based estimates. Nevertheless, the intercensal
figures are believed to be of a fairly high order of reliability.
With respect to the actual procedure, either manufacturers'
production or manufacturers' sales were interpolated, depending
on whether the best available interpolating data related to production or sales. In instances of the latter, the interpolation was
carried out, of course, at the stage of the estimating procedure indicated by line 4 of Exhibit 22—where manufacturers' sales had
been derived by subtracting changes in inventories from manufacturers' production.
From a wide variety of sources were assembled as many different
interpolating series for each commodity group as were available.
These series, representing various product and industry data, were
tested against one another by examination of coverage and of relative

SURVEY OF CURRENT BUSINESS
movement from one census year to the next. Reasonably good intercensal interpolations were obtained for every commodity group.
2. Manufacturers* production of finished consumer commodities.
Following the lengthy process of classifying the biennial census
data and then making interpolations for other years, estimates
of manufacturers' production of finished consumer commodities
were available for all years of the period 1929-39. (The procedural
exception noted above regarding interpolations of sales may be
mentioned again.) The estimates represented manufacturers' output for export and consumer use.
3. and 4. Subtraction of change in manufacturers7 inventories
to derive manufacturers1 sales.—Annual changes in the inventories of finished consumer commodities held by manufacturers
were estimated and subtracted (algebraically) from the production figures to obtain manufacturers* sales of finished commodities.
Much of the 1929 census data, however, already represented manufacturers' sales, and no adjustment was necessary.
Changes in manufacturers' inventories of consumer products
for the years 1937, 1938, and 1939 were estimated from values
of finished product inventories reported in the manufacturing censuses for 1937 and 1939. These censuses obtained beginning and
ending inventories broken down into finished product inventories
and all other inventories—materials, work in process, merchandise,
etc. The ratios of finished product inventories to total products
of establishments in each appropriate industry were applied to the
individual commodity values to obtain beginning and year-end inventories of finished consumer commodities for 1937 and 1939.
These were summed by commodity groups, and the resulting inventory totals were differenced to obtain the annual changes for 1937,
1938, and 1939.
For the years 1929-36 the inventory adjustments were based
on inventory and sales data compiled by the Bureau of Internal
Revenue from corporate income tax returns, as given in Statistics
of Income—Part 2 and the underlying "Source Book", containing
further industrial detail. Inventory changes were not actually calculated for this period. Rather, the procedure for translating the
commodity output data to sales was to (1) compute sales-production ratios for the commodity groups for the year 1937; (2) extend them to earlier years by similar ratios computed from the
corporate industry data; and (3) multiply the commodity group
production values by the resulting ratios.
A limitation of the 1937-39 inventory-change estimates stems
from the fact that the census finished-product data on inventories
were too broad in scope for the purpose at hand, covering finished
nonconsumer, as well as consumer, goods. The corporate data used
for the 1929-36 period were much less satisfactory. They represented total corporate inventories (the unfinished part generally
being large and relatively volatile), and were available in an industrial detail too limited to provide appropriate representation of
roany of the individual commodity groups.18 Little confidence can
be placed in the inventory adjustments for the earlier period.
Fortunately, however, they do not, for the most part, form an appreciable element of the final consumer commodity values.
5. Producers' sales of finished nonmanufactured commodities.—
Producers' sales of foods reaching consumers without undergoing
manufacture were added at this stage. Since the initial basic data
u
sed represented sales, rather than production, no inventory adjustment was required.
Statistics on agricultural products, available annually, were secured from the Department of Agriculture. Because substantial
amounts of fruits, vegetables and other farm products are used
jn the manufacturing process, the estimates of farmers' cash receipts
* r o m marketings had to be allocated between finished and unfinished.
he
^locations for the many individual products—believed, in general, to be fairly reliable—were derived largely from data of the
^ P t
of Agriculture.
to
teke
i
account of the differential movement of inventories in the
'noncorporate sector, for which data for the 1929-39 period are fragmentary.
Probably only a very minor source of error.




101

Nonmanufactured foods also included the products of commercial fisheries. Estimates of the value of edible fish other than
that canned, dried, or otherwise preserved (already covered under
manufactured foods) were derived chiefly from compilations of the
Bureau of Fisheries.
6. Producers* sales of finished commodities.—With the addition
of producers* sales of nonmanufactured foods to manufacturers'
sales, there was obtained a complete measure of finished commodity sales (f.o.b. at producers' prices) for export and consumer
use. In 1939, this measure accounted for 61 percent of the final
market value of consumer commodity purchases estimated by the
commodity flow method. Manufactured commodities represented 53
percent of that value, and nonmanufactured foods 8 percent.
7. Addition of transportation charges to producers* sales.—The
transportation allowances added to producers* sales covered transportation from producer to the first buyer, whether retailer, wholesaler, or consumer, and to port of export. Costs of transporting
consumer commodities beyond the first buyer were assumed to be
included in wholesalers' and retailers' markups. While this treatment was substantially correct, it very probably resulted in some
incompleteness of coverage of the transportation cost element.
The estimates of transportation charges were based almost
wholly on data from the Interstate Commerce Commission. The
procedure followed was to multiply producers' commodity sales by
annual ratios of freight revenue per ton to value per ton at point
of production for most nearly appropriate Interstate Commerce
Commission commodity classifications. Ratios were calculated for
89 of the Interstate Commerce Commission's 157 commodity classifications found to be related to one or more of the consumer commodity classifications.
Freight revenue per ton of freight carried was computed for
each year of the 1929-39 period from freight revenue and tonnage
data published annually by the Interstate Commerce Commission.
Values per ton at point of production were obtained from Interstate Commerce Commission publications for the years 1928, 1930,
1933, 1936, and 1939. Data on value per ton for other years were
derived for the relevant Interstate Commerce Commission commodity classifications by interpolation on the basis of 1928-39 price
indexes constructed principally from wholesale price series of the
Bureau of Labor Statistics.
For lack of data on other forms of transportation, rail freight
charges formed the sole basis of the specific transportation allowances in the commodity flow estimates except for a rough supplementation to cover trucking in the case of nonmanufactured foods.
Truck transportation is important for many consumer commodities,
and to the extent that truck rates differed from rail rates the
procedure would lead to error in the estimated cost of moving the
commodities from the producer to first buyer.
8. Distribution of producers' sales, inclusive of transportation
charges.—-The distribution of manufacturers' and other producers'
sales among exports, wholesalers, retailers, and consumers is a
vital step in the commodity flow method. Producers' exports are
eliminated at this point since they are accounted for, by a different methodology, in the net foreign investment component of the
gross national product. The three remaining channels are differentiated because varied markup treatments must be applied
to the finished consumer commodities flowing through them.
No markups are applied to producers' sales direct to consumers,
which become immediately a part of the consumption expenditure
estimates. Wholesalers' markups are applied to commodities sold
by producers to wholesalers and then either exported or sold directly to consumers. Cumulative wholesalers1 and retailers' markups
are required for consumer commodities sold by producers to wholesalers and then sold by them to retailers. Lastly, only retailers'
markups must be added to sales made by producers directly to
retailers.
The distribution of manufacturers' sales, inclusive of transportation charges, was estimated for 1929, 1935, and 1939 very largely
from data provided in the census reports on Distribution of Man-

102

1951 NATIONAL INCOME SUPPLEMENT

ufacturers* Sales. With two qualifications noted below, appropriate
percentage distributions were derived directly from the reported
data for detailed industry groups and applied to the consumer commodity groups. For intercensal years, the derived census-year percentages, which did not change appreciably, were interpolated
along a straight line. The distributions of other producers' sales—
nonmanufactured foods—were based chiefly on estimates of farmers' sales distributions made by commodity specialists in the Bureau of Agricultural Economics.
In two particular aspects, sales distributions as reported by the
censuses required modification. First, since wholesalers' sales to
industrial users had been eliminated in arriving at manufacturers'
sales of finished consumer products, census data on manufacturers'
sales to wholesalers were reduced by the proportions of wholesalers' sales to industrial users which had been employed in estimating the nonconsumer-use portion of mixed commodities.
Secondly, exports required special estimation since the census
sales distributions showed manufacturers' exports separately only
in 1930. The export estimates derived for 1939 by applying the
industry sales distribution data to the commodity values were
extrapolated to the years 1929-38 by selected commodity data on
exports obtained from Foreign Commerce and Navigation of the
United States, published by the Bureau of Foreign and Domestic
Commerce.19 The 1929,and 1935 sales distributions and the annual
estimates of producers' commodity sales were then adjusted to
eliminate exports, and the distribution estimates were made in
terms of domestic sales to wholesalers, retailers, and consumers.
It would appear that the most significant limitations of the
estimated distributions of producers' sales stemmed from the necessary application of industry and line of trade data to product
data. Although every effort was made to achieve appropriate matchings of these data, the distributions for some commodities could
have been appreciably in error.
9 and 10. Addition of imports to producers* sales distributed to
wholesalers to arrive at total purchases by wholesalers.—Imports
are a source of commodities sold to consumers and must be added
to producers' domestic sales. In the commodity flow process imports are handled entirely as purchases by wholesalers. In the
main, this accords with fact, as only a minor portion of consumer
product imports is made by manufacturers, by retailers, or by consumers directly.
Imports were estimated for the various consumer commodity
groups for the years 1929-39 from annual commodity data on
""imports of merchandise for consumption" (with "calculated duty"
added) published in Foreign Commerce and Navigation of the
United States by the Bureau of Foreign and Domestic Commerce.
Nonconsumer use was not allowed for explicitly—that is, by carrying out the sort of allocation process employed in classifying
the domestic output of manufactured products. Instead, commodities shown in the import statistics were selected by inspection to
correspond with the various consumer commodity groups, and reliance was placed on compensating errors of inclusion and omission.
The estimated value of consumer imports, amounting to less
than 2 percent of the final value of consumption commodities in
1939, was somewhat understated. Because of the nature of the basic
data, the estimates omitted ocean transportation charges from
country of export to the United States. Also, they did not cover
handling, transportation, and related charges between port of import and purchaser, although this factor is minimized by the fact
that to a considerable extent importers are located in ports of
import.
11 and 12. Subtraction of change in wholesalers' inventories
to obtain cost of goods sold by wholesalers.—The next stage in the
commodity flow procedure calls for estimation of changes in wholesalers' inventories of finished consumption commodities. They are
** The derivation of the export aeries is discussed in step 15, deduction of wholesalers' exports.




subtracted from wholesalers' purchases in order to derive the costs
of commodities sold. To these costs can then be added wholesalers'
markups to arrive at their sales of consumer commodities.
The general procedure for estimating changes in wholesalers'
inventories of finished consumer commodities was to prepare inventory-cost of goods sold ratios and to apply those ratios to the
annual estimates of wholesalers' purchases.20 The procedure may be
outlined as follows.
(1) Ratios of wholesalers' year-end inventories at cost to annual sales (adjusted for duplication) were computed for the
years 1929, 1933, 1935, and 1939 from data contained in the
Census of Wholesale Trade.
As the first element of these computations, total inventories
reported by type of operation—service and limited function wholesalers, manufacturers' sales branches and offices, and, in 1929 and
1933, chain store warehouses—in each relevant line of trade were
prorated among sales to other wholesalers, sales to industrial users,
and other sales (exports and sales to retailers and consumers).
The data did not permit of any^other apportionment of reported
inventories, but it is believed that the assumption of a uniform
rate of inventories to sales within a single trade and type of
operation was substantially correct.
Inventories held against Nsales to other wholesalers were next
prorated between sales to industrial users and other sales. This
was done by commodity groups, combining all trades and types of
operation assigned to each group.
In combining trades and types of operation to obtain rates of
inventories to sales for the consumer commodity groups, the
weights used were the appropriate census sales totals—exports
and sales to retailers and consumers, plus the prorated portion of
sales to other wholesalers covering these categories.
(2) The ratios of inventories to sales for the census years 1929,
1933, 1935, and 1939 were converted to ratios of inventories to cost
of goods sold by use of wholesalers' markup ratios (described
below). With S = sales, M = markups, C — cost of goods sold,
I
and I = inventories, then C + M — S and — was computed as
C
I
M
- (1 + - ) .
S
C
(3) The ratios of inventories to cost of goods sold so derived
were multiplied by wholesalers' purchases to obtain year-end inventories of consumer commodities for census years.
(4) In the estimation of year-end inventories for intercensal
years, one of two procedures was followed. For some commodity
groups, the census-based inventory-cost of goods ratios were interpolated and multiplied by purchases. But the more general procedure followed, because of the nature of available data, was to
interpolate the census-year inventory fignres directly.
The information on wholesalers' inventories by line of trade
available for interpolations was quite limited. The wholesale data
used were sometimes not directly representative of the individual
commodity groups, and in many instances it was necessary to
resort to use of retail inventory data.
For the years 1929-34, department-store inventory data from
the Controllers' Congress of the National Retail Dry Goods Association were most generally used for interpolation. For the 1935-39
period, the principal interpolating data were sample series on
wholesalers' closing inventories compiled by Dun and Bradstreet
and by the Bureau of the Census from its monthly Wholesale
Survey. For commodity groups for which other information was
lacking, use was made for all or part of the 1929-39 period of
corporate wholesale trade data from Statistics of Income. These
related, for all wholesale corporations combined, to the ratio of
total inventories to cost of goods sold.
" I n deriving inventories, inventory-cost of goods ratios should be a P P l i e t i j
costs of goods sold, not purchases. Application to the latter yields only M *
approximations of inventories, which could have been adjusted. This was not
done because the quality of the daU did not warrant the labor involved.

SURVEY OF CURRENT BUSINESS

103

13 and 14. Addition of wholesalers* ma?*kups to obtain whole- however, is less than would obtain from treating total exports as
sal&rs' sales of finished commodities.—Wholesalers' markups formeither manufacturers' or wholesalers' exports. This is because of
an appreciable element of the final market value of consumer
the difference in markup treatment accorded commodities elimcommodity purchases, amounting to 8 percent in 1939.
inated from producers' sales and wholesalers' sales.
In the estimation of wholesalers' markups, ratios of operating
16. Distribution of ivholcsalers' domestic sales.—Wholesalers'
expenses to sales (adjusted for duplication) in 1929, 1933, 1935,
domestic sales of finished consumption commodities are broken
and 1939 were derived for each commodity group from wholesale
down into sales to retailers and sales to consumers. The latter,
census data for appropriate lines of trade. Because of the lack of
as final sales, are segregated, whereas sales to retailers are still
a relevant breakdown of the reported operating expense figures,
subject to inventory and markup adjustments.
the same sort of procedure was required as that applied to census
The Census of Wholesale Trade provided the basis for the sales
inventory data in estimating changes in wholesalers' inventories
breakdowns for 1933, 1935, and 1939. These censuses collected
of consumer commodities. In brief, total operating expenses for
data on sales to retailers for resale and on sales to consumers.
each relevant type of operation in each trade were first prorated
Only limited use could be made of the 1929 wholesale census,
among sales to other wholesalers, sales to industrial users, and
which obtained information on sales to consumers, but not to reother sales (exports and sales to retailers and consumers), after
tailers, and in certain other respects was deficient for this purpose.
The sales distributions as reported in the 1933, 1935, and 1939
which the operating expenses prorated to sales to other wholecensuses generally were somewhat incomplete. They were raised
salers were divided by commodity groups between sales to into reported total sales by line of trade and type of operation
dustrial users and other sales. The weights used in combining
(service and limited function wholesalers, manufacturers' sales
selected lines of trade and types of operation into a single operbranches and offices, and, in 1933, chain store warehouses). The
ating expense-sales ratio for each commodity group were the
resulting figures were summed for retailers and consumers, and
relevant sales totals, covering exports and sales to retailers and
the relationship of the two employed to break down the commodity
consumers and a prorated portion of sales to other wholesalers
estimates of wholesalers' domestic sales. The trades selected for
attributed to these categories as against industrial users.
application to each commodity group were, to the extent possible,
No allowance was made for the services of proprietors of unthe same as those utilized in deriving wholesale inventory and
incorporated establishments, but this omission results in an unoperating expense ratios. Changes in classification of lines of trade
derstatement of the ratio of total operating expenses to sales of
were ratio-adjusted so far as possible, but1 in some cases it was
only a fraction of one percent.
necessary to use 1935 retailer and consumer proportions for 1933.
Principal sources used to interpolate census-year expense ratios
For some commodity groups, analysis indicated the appropriatefor intercensal years were the series of wholesale surveys made
ness of utilizing for 1929 the proportion of consumer sales to
by Dun and Bradstreet and the 1941 report on Distribution Costs,
An International Digest of the Graduate School of Business Ad- total sales less sales to "industrial consumers" computed from
census data. But for most groups it was necessary to carry the
ministration, Harvard University. When appropriate wholesale
1933 or 1935 proportions back to 1929. In a few instances, where
data were lacking, the movement of the comparable group expense
fluctuations in the consumer and retailer proportions appeared to
ratio for retail trade was used.
be cyclical, 1939 proportions were used for 1929.
It was necessary to add profit ratios (ratios of profits to sales)
For intercensal years, percentage breakdowns of wholesale sales
to the operating expense ratios to obtain gross margin ratios.
to retailers and consumers were obtained (except where 1933 or
The available information on wholesale profits by line of trade
1935 percentages were held constant back to 1929) by interpolating
*as scanty. Some of the special wholesale surveys were helpful,
the census-based percentages along a straight line. The smallness
but frequent use was made of gross margin-operating expense
of the changes between census years suggested that this proratios developed for comparable retail trade groups. And for some
cedure was not markedly in error.
commodities the selection of the profit ratios had to be largely
17. Total purchases by retailers.—After the distribution of
arbitrary. Still, it should be noted, even large errors in the profit
wholesalers' domestic sales is accomplished, total purchases by reelement of wholesalers' gross margins would have little effect on
tailers are secured by summing wholesalers' sales to retailers and
toe consumer expenditure estimates.
(from 8c) producers' sales to retailers.
The annual wholesale gross margin ratios were converted to
18 and 19. Subtraction of change in retailers' inventories to
obtain cost of goods sold by retailers.—Estimates of changes in
markups by use of the equation M =™°®,
where M is the
retailers' inventories of finished consumer commodities were com100 — G
puted from inventory totals derived from a combination of two
markup percentage of cost, and G is the gross margin percentage
distinct procedures. (1) Tentative estimates were first prepared,
°f sales.
J
for individual commodity groups, by a procedure paralleling that
5. Subtraction of wholesalers9 exports.—The basic commodity
used in making the wholesale inventory adjustment. (2) Modificaata, representing production or sales for both exports and conSUmer use
tions of these estimates for certain years were made after com- > were adjusted at the producer level for domestic nonparing the relative movement of the commodity inventory totals
°nsumer use but not for exports. Exports were deducted in part
with that of the series on year-end book values of inventories in
™ manufacturers' sales of finished commodities. Remaining at
m
s
retail trade derived in the process of calculating the inventory
stage of tracing the commodity flow was the elimination of
component of the gross national product. (See section on Change
*«MesaIeiB' exports from their sales.
in business inventories.)
Wholesalers' exports were derived by deducting previously esti(1) Year-end inventories of consumer commodities for census
tot l m a n u f a c t l i r e r s ' exports from an independent estimate of
years were derived by (a) computing ratios of retailers' year^exports. The totals were obtained by a process of commodity
end inventories at cost to annual sales for the appropriate typecl eC-fiOn' . T h e selecti<>n was made from the detailed commodity
of-store classifications, (b) converting these ratios to ratios of
ssification of exports (valued at port of exportation) given
inventories to cost of goods sold by applying retailers' markup
lly in Foreign Commerce and 'Navigation of the United
ratios (described below), and (c) multiplying the inventory-cost
p
p
mJ
the export classification combined products included
of goods ratios by the estimated retailers' purchases of the various
o ' c o m m o ^ i t y groups with other products not included, the
m
lssion
commodities.
°* inclusion of the classification was based on rough
Inventory change estimates by commodity groups for other than
al of the relative errors involved,
census years were arrived at by differencing totals computed
exn f* p r o c e d u r e s f °r deriving wholesalers' and manufacturers'
either by interpolating: the census year inventory-cost of goods
P°rts may lead to error on several scores. The error involved,



104

1951 NATIONAL INCOME SUPPLEMENT

ratios and multiplying them by purchases, or by interpolating the
census year inventory figures directly. In the former procedure,
the most important source used was the Bureau of Internal Revenue tabulations of inventories and cost of goods sold from retail
corporations' income tax returns. The latter procedure of direct
inventory interpolation utilized mainly the department store data
published by the Controllers' Congress of the National Retail Dry
Goods Association in Departmental Merchandising and Operating
Results of Department Stores and Specialty Stores. The departmental breakdown of inventories given was detailed and adaptable
to the commodity groups. This source could be used only for the
11)29-34 period, as the inventory figures after 1934 were presented
as stock turns, unsuited to estimation of year-end inventories.
For the later years of the period, inventory series from a variety
of sources, chieily Bun and Bradstreet, were utilized.
(2) The relative movement of the total of commodity group
inventories derived by the foregoing procedure was similar to that
of the retail trade industry data in the 1929-33 period but diverged
in the subsequent period. The industry data were used to interpolate between the census-based commodity totals for 1933, 1935,
and 1939. The differences between the revised totals and those obtained in step (1) as the summation of commodity groups were prorated among the latter.
This over-all check and modification on the basis of the retail
industry estimates was indicated by the weakness of the available
data for interpolating census-based estimates for many of the
commodity groups. This type of check had not been feasible in
the case of the wholesale inventory adjustment because of the
large role of unfinished commodities in the operations of the
wholesale trade industry.
20 and 21. Addition of retailers' markups to arrive at retailers*
sales of finished commodities.—Retailers' markups are a very
sizable element of consumer commodity purchases estimated by
the commodity flow method. In 1939 retail markups formed 28
percent of the final consumer value.
The estimates of retailers' markups in the consumer commodity
series, like those of retailers' inventories, represented an integration of the results of two methods. (1) Estimates were first prepared for individual commodity groups, and (2) these were modified for the years 1930-38 on the basis of relevant retail trade
industry data.
(1) The first step involved the estimation of retailers' markups
in a manner similar to that employed for wholesalers' markups.
Census-based ratios of operating expenses to sales were interpolated by noncensus source materials, raised on the basis of these
materials to gross margin ratios by the addition of profit and
loss allowances, and then converted to markup ratios.
Operating expenses as a percentage of sates for comparable
types of stores most closely related to the various commodity
groups were derived for 1929, 1933, 1935, and 1939 from the retail
censuses. For 1939, the census reported only payrolls; allowances
for other operating expenses were based on the 1935 relationship
of total operating expenses to payrolls. Since only the 1933 census
included a satisfactory allowance for the services of proprietors
and firm members of unincorporated establishments, a similar adjustment to the expense data had to be made for the other census
years. This was done on a basis comparable with that for 1933.
Data from numerous sources were used to obtain, by interpolation, operating expense-sales ratios for intercensal years. An important source providing commodity data was the annual reports
on Departmental Merchandising and Operating Results of Department Stores and Speciality Stores published by the Controllers'
Congress of the National Retail Dry Goods Association. Studies
made by Dun and Bradstreet, the Federal Trade Commission, the
Harvard University Graduate School of Business Administration,
and various trade groups provided additional ratios for many types
of stores. These various sources also provided the basic information on profit-sales relationships necessary to translate the operating expense ratios into gross margin ratios.



Several factors bearing on the validity of these estimates may
be noted. First, it is likely that errors stemming from the use o
f
type of store data to estimate retailers' markups for commodities
have a tendency to be offsetting, or compensating, in the total—
a type of assumption which is much less valid when data on
manufacturing industry or wholesale line of trade are applied to
commodity data. This is because the preponderant part of retail
sales is made to consumers; that is, the nonconsumer element of
sales is less in retail trade than in wholesale trade or manufacturing.
Running counter to this consideration, however, is the fact that
for all years of the 1929-39 period the data for estimating the
volatile profit-and-loss component of retailers' markups for individual commodity groups were partial and generally inadequate.
Moreover, the available information for making the interpolations
of operating expense-sales ratios between census years was far
from comprehensive.
These several considerations were taken to indicate that the commodity totals of retailers' markups were probably not satisfactory
in cyclical movement over the period.
(2) This movement was checked against, and modified by, a
series which may be termed "adjusted income originating in retail
trade." It was derived by two types of adjustment of the National
Income Division's 1929-39 estimates of income originating in retail
trade and automobile services. The first consisted of subtracting
the inventory valuation adjustment and adding depreciation, gross
rental payments, and indirect business taxes.
The resulting series, while more nearly representing retail gross
margins, was too broad in scope for the purpose at hand. It included
certain lines of trade not covered by the commodity flow estimates
(such as motor vehicle dealers, service garages, and filling stations)
and certain others in which the nonconsumer element was large
(such as lumber dealers). Separate income data for these various
lines of trade were not available. Accordingly a correction to reduce
the scope of the adjusted income total was made by use of operating
expense data in the following manner.
For the census years 1929, 1933, 1935, and 1939 total operating
expenses for retail trade and automobile services were divided into
operating expenses exclusive of the various lines of trade noted
above. These ratios, with straight-line interpolations for intercensal years, were then multiplied by the adjusted income originating totals for retail trade and automobile services.
The income series obtained by this second adjustment was used
to interpolate between the 1929 and 1939 estimates of retailers'
markups obtained by summing the individual commodity groups.
The relationship of 1939 to 1929 was similar in the two series, but
the movement within the period differed appreciably, the income
series showing a wider amplitude. The absolute differences between
the revised estimates of total retailers' markups for the years 193D38 and the original estimates obtained as the summation of -individual commodity groups were prorated among them.
This adjustment, though rough, probably improved both the
estimates of retailers' markups in the consumer commodity series
and the statistical consistency between national income and gross
national product. A similar adjustment was not made for wholesalers' markups because of the greater importance of unfinished
products in the wholesale trade industry.
22. Consumer commodity purchases exclusive of general retau
sales taxes.—The final market value of consumer commodity expenditures, except for the addition of general retail sales taxes,
is arrived at by summing sales of finished commodities to consumers
by producers (8d), wholesalers (16b), and retailers (21).
23 and 24. Addition of general retail sales taxes to obtain V?1"
sonal consumption expenditures estimated by the commodity Pxc
method.—General retail sales taxes and part of the alcoholic beverage taxes levied by State and local governments were the main
taxes not covered by the trade markups in the 1933-39 peflWj
fiscal year data for that period were obtained from the surveys oi
State and local government finances by the Bureau of the Census

SURVEY OF CURRENT BUSINESS
and shifted to a calendar year basis. Adjustments of the tax totals
to make them conform in scope to the consumption expenditure
estimates were, made by using tax collection data, by type of store,
reported for a small number of sample States. The adjusted tax
totals then Were prorated by the expenditure estimates among applicable commodity groups, with allowance for the exemption of
food in certain jurisdictions.
After arrival at the final figures, inclusive of taxes, the individual
commodity groups were classified as durable or nondurable, as
shown in table 30 in Part V. Durable commodities were generally
defined as those having an average life of three years or longer.

Extrapolation of Commodity Flow 1939 Benchmarks
As indicated in the introductory remarks to this section of the
notes, the consumer commodity groups established for 1939 by the
commodity flow method have been projected to later years primarily on the basis of relative movements in retail sales. Retailers'
excise taxes and applicable general retail sales taxes have been
estimated separately and added, except in cases where the retail
pricing basis covered such taxes.
The principal retail sales series which have been used in the
consumer commodity extrapolations are (1) retail sales, by type of
store, prepared by the Office of Business Economics, and (2) department store sales, by type of department, compiled by the Board of
Governors of the Federal Reserve System. In addition, some specific
use has been made of unpublished compilations of State sales tax
data, sales data from trade associations and other private organizations, quantity and price data, and Federal retailers' excise tax
collections.
(1) The Office of Business Economics retail sales estimates represent extrapolations from sales totals by type-of-store groupings
given in the 1939 Census of Retail Trade. The annual extrapolations
are based primarily on sales tax reports from a group of 10-12
States accounting for about one-third of the Nation's retail sales.
Other data used include the Federal Reserve Board department
store sales estimates; data from samples of independent retailers
and chain stores reporting to the Bureau of the Census; estimates
of changes in the retail store population prepared in the Office of
Business Economics; sales tabulations for retail businesses by the
Bureau of Internal Revenue from income tax returns of corporations, sole proprietorships, and partnerships; and, of course, the
Census of Business benchmark sales totals. The Office of Business
Economics retail sales estimates have not yet been formally adjusted to the 1948 Census data, but, as mentioned earlier, check
closely with them in total and compare favorably for many of the
type-of-store groupings used for extrapolating consumer expenditures,
(2) The department store sales data, by major departments, of
the
Federal Reserve Board are based on departmental data reported by about 350 independent department stores located in
v
arious cities throughout the country and accounting for about 50
Percent of the estimated total department store sales. Not all stores
re
Port data for all of the departments asked; consequently, the
sample for individual departments is not so comprehensive as that
fo
* department groups.
Under the method of extrapolating 1939 consumer expenditures,
^titnates for a particular commodity group often have been exenaed
by sales of one or more relevant types of stores (on the
^sumption that sales of store groups tend to reflect the movement
°fsales of commodities). However, when a commodity group is not
fjwued almost exclusively by specialized stores, or data for these
**es were not available separately, the movement of total sales of
e
commodity has been estimated from the experience of depart"!ents handling that line in department stores or by use of comn
ed relevant data for specialized stores and department stores.
eights f
or combining these series were usually derived from the
°*modity distributions of sales by kinds of business in the 1939
«JBU8 of Retail Trade. Since departmental sales by type of denment
nearly represent commodity sales, they appear to be

J o




105

more appropriate extrapolators than those specialized stores whose
sales cover more than one commodity group. Consequently, the department store data have been given more than proportionate
weight in certain instances.
An important shortcoming of retail trade data in these applications is that, with the exception of department store sales, they
cannot be broken down by commodity groups. The type-of-store
classification found in the basic data assigns a store to a single
classification on the basis of the commodity accounting for the
principal part of its business. But food stores, for instance, sell
goods other than food, and food is sold also in other kinds of stores,
including drug and department stores. With diverse movements in
the sales of various commodities, use of sales data classified by
type of store to extrapolate commodity groups may give rise to
errors. There is a fair presumption, however, that these errors tend
to offset in the total.
Another limitation of retail sales data for the extrapolation of
consumer commodities arises from the fact that consumers buy
from producers and wholesalers as well as from retailers. In 1939
these direct purchases were 6 percent of all consumer commodity
purchases. In the general absence of data for estimating purchases
from producers and wholesalers separately, they have been assumed
to vary with retail sales. Except for a few items of which the large
food group is a primary example, errors stemming from this assumption would necessarily be minor because of the relatively small
volume of the non-retail purchases involved.
In the extrapolation of the commodity flow benchmarks by retail sales, it was necessary, but difficult, to make allowance for the
changing proportion of business purchases at retail. Downward
adjustments were made in the war period for some commodities,
such as purchased meals and beverages of the food and tobacco
group, to allow for the apparent increase in the relative magnitude
of business purchases. There was very little quantitative information on which to base the adjustments.
The revisions in the commodity expenditure estimates for the
years since 1942 published in the July 1948-50 issues of the Survey
of Current Business and in this report represent largely the result of
refinements in methods used and of revisions in the underlying
estimates of retail store sales. The new benchmark figures which will
be derived from the 1947 and 1948 Censuses will provide the first real
indication of necessary revisions in the post-1939 estimates.

Retail Valuation Method
The main alternative to the commodity flow procedure and the
retail sales extrapolation was to multiply by an appropriate average
retail price the estimated quantities of consumer commodities purchased. This approach—the retail valuation method—was used for
three major groups, comprising 12 percent of the remaining 16
percent of 1939 expenditures. These groups are passenger cars,
gasoline and oil, and household fuels.

Passenger cars
Preparation of the consumer expenditure series on "new cars
and net purchases of used cars" was carried out in three steps:
(1) multiplication of data on number of new cars by an average
retail price; (2) addition of gross margins on used car sales ("net
purchases of used cars"); and (3) allocation of the totals of new
passenger cars (after a deduction for government purchases) and
of gross margins between personal consumption expenditures and
producers' purchases of durable equipment.
(1) The Automobile Manufacturers Association reported for the
years 1929-41 the number of passenger cars sold at retail and an
average retail price at the factory. The latter was raised to cover
estimated transportation costs and also incidental charges by retail
dealers. State and local retail sales taxes were not included in the
price, but were added separately.
With the discontinuance by the Automobile Manufacturers Association of this retail sales series, the number of new passenger

106

1951 NATIONAL INCOME SUPPLEMENT

automobiles was estimated for the years 1942-45 from Office of
Price Administration rationing statistics. Average prices for this period were obtained by extrapolation of the 1941 price by use of
data based on 0. P. A. price regulations.
For 1946 and subsequent years, the number series was new
passenger car registrations compiled by the R. L. Polk Co. The
average price was based on the Bureau of Labor Statistics composite price for Ford, Chevrolet, and Plymouth, adjusted upward
to cover other makes of cars and factory installed extras.
(2) In the 1929-39 period the estimates of gross margins on
used car sales covered only used car dealers. Used car margins
of new car dealers were assumed to be covered by the average
price series used in estimating purchases of new cars. The price
series, being an average of list prices, was believed to have exceeded actual prices largely because it did not reflect excessive
allowances for trade-ins. Used car margins of new car dealers were
introduced in successively larger proportions in 1940 and 1941,
and have been included entirely, along with the margins of used
car dealers, since 1942, when the full retail list price for new
cars was assumed to have been realized.
Data for estimating gross margins on used car sales were, for
the most part, inadequate. For the 1929-39 period, gross margins
of used car dealers were estimated from retail census data on
operating expenses and proprietors7 compensation. For the period
since 1946, total sales of used cars (estimated largely from surveys
of sales finance companies and of consumer finances made by the
Federal Reserve Board) have been multiplied by gross margin
ratios that are largely arbitrary, the only statistical reference
point being the gross margins of used car dealers as indicated for
1948 by sample data from tax returns to the Bureau of Internal
Revenue for that year. The estimates for 1940-42 were obtained
by extrapolating used car sales from the 1939 census on the basis
of sales finance company data for those years and multiplying
sales by the 1939 gross margin ratio stepped up on the basis of
judgment. The estimates for 1943^45 were obtained by using as
an interpolating series passenger car registrations excluding new
car registrations.
(3) The totals of new passenger cars (after a small deduction
/or Federal, State, and local government purchases) and gross
margins on used cars were allocated 70 percent to personal consumption expenditures and 30 percent to producers' durable equipment except during the war period from January 1942 through
May 1945. These proportions were derived mainly from surveys
made by the Bureau of Public Roads in 1934-37 to determine road
use in terms of mileage. The 70-30 allocation was also applied
during the war period to gross margins on used cars, since the
distribution of used cars was not controlled by rationing. For the
new passenger car series, however, after consultation with specialists in the Office of Price Administration, the consumer allocation was reduced to 50 percent during the January 1942-May 1945
period, except that for April and May of 1945 all new cars were
counted as producers* durables.
The allocation of the passenger car estimates must be regarded
as an uncertain element. Errors in the allocation would affect both
consumption expenditures and producers' durables, but not the
gross national product total.

Gasoline and oil
For the period 1929-39, estimates of purchases of gasoline and
oil—prior to consumer allocation—represent the sum of separate
series for gasoline and oil, each obtained by multiplying quantities
by an average price.
The quantities of gasoline and lubricating oil used in passenger
cars were estimates published by the Bureau of Mines in its
Minerals Yearbook. The gasoline price was the 50-city service station average compiled by the American Petroleum Institute and
published in American Petroleum News. The 50-city price excluding taxes was used, and these were estimated separately and
added. Lubricating oil was valued at the Bureau of Agricultural



Economics average of prices paid by farmers for medium grade
motor oil
With the discontinuance of the Bureau of Mines quantity series,
the estimates of gasoline and oil purchases since 1940 represent
extrapolations from 1939. The extrapolating index has been obtained by multiplying data from the Bureau of Public Roads on
the quantity of passenger car motor fuel used by the average
price of gasoline (inclusive of taxes) in 50 cities compiled by the
American Petroleum Institute.
The figures so derived for expenditures on gasoline and oil were
allocated 70 percent to personal consumption expenditures in the
periods from 1929 through 1941 and beginning with 1946. During
the war period, the following percentages were used: 65 for 1942,
55 for 1943 and 1944, and 60 for 1945.
Errors stemming from this thinly based allocation, which was
generally the same as that used in the passenger car series, would
lead to error in the gross national product through their effect on
consumer expenditures. The business-use portion of gasoline and
oil expenditures, unlike that of passenger car purchases, is an
intermediate product not included in the gross national product,
and therefore cannot counterbalance any error in the consumeruse portion.

Household fuels
Expenditures for purchased fuels (except gas) and ice were estimated for the period 1929-39 chiefly by multiplying quantity data
provided by the Bureau of Mines by retail prices selected from
series maintained by the Bureau of Labor Statistics. Post-1939
figures represent extrapolations from that year on the basis of the
Office of Business Economics estimates of retail sales of fuel and
ice dealers—in turn developed from reported sales tax collections
in 11 States.
The quantity data underlying the 1929-39 estimates covered
light fuel oil, range oil, kerosene, coke for domestic use, fuel
briquets, packaged fuel, and anthracite and bituminous coal. The
necessary allocations to consumer use were made upon advice of
specialists in the Bureau of Mines. The retail prices used to
value the estimated quantities consumed by persons were obtained
from the Bureau of Labor Statistics except for kerosene (valued
at the average of prices paid by farmers, from the Bureau of
Agricultural Economics) and local sales of anthracite (valued at
average mine realization, as published in Minerals Yearbook). To
these component series derived as the product of quantity and price
were added estimates for ice and purchased firewood. These were
made by marking up by 50 percent (a rather arbitrary figure)
manufacturers' production of ice, after allowing 40 percent for
nonconsumer use at the suggestion of the industry association, and
producers' sales of firewood.
Other Methods

Imputations
Three imputed items, comprising 3 percent of consumption expenditures for commodities in 1939, are listed in Exhibit 2l> Food
produced and consumed on farms and fuel produced and consumed
on farms are discussed in the section on Income of unincorporated
enterprises. The third item, standard clothing issued to military
personnel, is covered in the section on Wages and salaries.
The consumer commodity estimates include one other imputation—"food furnished government (including military) and commercial employees, and withdrawn by nonfarm proprietors"^
which is not shown in the breakdown of the estimates for 1939 in
Exhibit n. An explanation of this omission may conveniently be
used also as a means of discussing an aspect of the commodity
estimates not covered in the notes to this point. That concerns the
nature of the breakdown of the large food and tobacco group
provided in table 30 in Part V.
Food furnished government (including military) and commerce
employees, and withdrawn by nonfarm proprietors ("food finished") is not shown as a separate item in Exhibit 81 because

SURVEY OF CURRENT BUSINESS
it was not an explicit component of the 1939 estimates. It was
included in the commodity flow measure covering the aggregate
of food expenditures except food produced and consumed on farms,
which was an independent imputation, and tips, which were added
separately.
In the 1929-39 period, total food except the imputed farm item
and tips was estimated by the commodity flow method. Purchased
meals and beverages (and the supporting detail) and "food furnished" were component elements estimated separately for purposes of the breakdown in table 30. Food purchased for off-premise
consumption was derived as a residual by subtracting those two
items from the food aggregate exclusive of tips and the imputation for farm food. The estimates of expenditures on tobacco and
smoking supplies were prepared by the commodity flow procedure.
For the period since 1940, total food and tobacco purchases
have been built up as the sum of separate estimates for the five
subgroups. With "food furnished" and food produced and consumed on farms constituting imputations, food purchased for offpremise consumption and purchased meals and beverages have
been estimated very largely by extrapolations from 1939 on the
basis of retail sales. Expenditures for tobacco and smoking supplies have been extrapolated by means of the retail valuation
(quantity times price) method.
Miscellaneous
The remaining, "miscellaneous** category, accounting for one
percent of consumer commodity expenditures in 1939, warrants only
brief comment.
Expenditures for flowers, seeds, and potted plants and for lighting supplies have been estimated primarily from retail censuses
and other sources of retail sales data, such as State tax collections. The tips series is described in the notes on Wages and salaries.
None of the other miscellaneous items has been of sizable magnitude in the period since 1929 except for expenditures by U. S.
Government personnel abroad, which rose sharply during the war
and reached a peak of $1.4 billion in 1945. This component is described in the section on Net foreign investment.

8.—PERSONAL CONSUMPTION EXPENDITURES
FOR SERVICES
In descriptions of national income methodology, resort is sometimes had to the phrase, "constructed from a great variety of
source materials." This easy generalization is probably nowhere
80
apt as in the case of personal consumption expenditures for
services. Expenditures for some 125 different service items are
shown in table 30 of Part V of this report; and these represent the
^corporation of numerous types of data from many different government and private sources, processed by procedures virtually
inning the gamut of those used in national income estimation.
A
Primary factor in the extent of detail, which is even greater in
terms of worksheet computations, has been the desire to take
advantage of available sources of information, however piecemeal,
ai
*<i to minimize errors stemming from the estimation of broad
components on the basis of data differing in scope or internal
composition.
Perhaps a meaningful way of classifying the service estimates
J° fac*Iitate a general explanation of methodology is according
j° the broad types of underlying statistical sources listed in
Exhibit 23. This shows that for 1947 items comprising 25 percent
of
the $49.1 billion total were founded on comprehensive annual
re
Ports by government agencies and private sources; that compor t s forming 54 percent of the total were benchmarked on pen
°dic comprehensive sources, mainly the Censuses of Business



107

and Population; that another 12 percent stemmed from sample
information; and that items accounting for 9 percent of all consumer service expenditures fell into a "Miscellaneous" category.
Exhibit 23.—Personal Consumption Expenditures for Services, 1947
No sul>-

Hub-

problem

Typo of sourer

problem

No

KU1>-

Sub-

Matitiul
.siiintiu!
stantial
staiuiul
Total allocution iiltocatioii Toiul allocation allocation
problem

problem

1'trcmt

H l7/tr»<* of <U
Comprehensive annual reports.

12.1

10.6

24.G

Government agencies
Private sources

4.7
7.4

3.2
7.4

,.,;
15 0

l.'t 0

comprehensive
>. -^. 26.2

24.9

53.5

50.8'

15.2

13.2

30. {)

30.9

Census of Business

8.4

7.1

17. 1

14.4

Census of Agriculture

1.2

2. i)

2..1

1.8

1.8

Periodic
sources

Census of Population

Census of
Bodies

Religious

Biennial Survey of Education
„__-.-_

.9

J..1

1.3

\)

21 .r»

.1.1
.1. 1

2.7

2.7

.0

A\

1.2

1.2

Sample information

G.I

5.1

1.0

12.5

10.5

2.0

Miscellaneous

4.6

3.3

1.3

9.4

G.K

2.6

Total

49.1

44.0

5.1

100.0

H9.fi

10.4

The exhibit affords some insight into aspects of both strength
and weakness of the estimates of consumer service expenditures.
Thus, it is evident that—contrary to an apparent general belief
that statistical source materials on consumer services are sparse
and inadequate—a substantial body of data exists for estimating
this segment of the gross national product. Even so, the reliability
of the series is impaired by the necessary heavy reliance on
periodic (and sometimes rather infrequent) source materials. This
consideration has particular relevance to the published estimates,
since the latest Censuses of Population and Business incorporated
into them are those taken in 1940 and the available materials for
extrapolation from that point are by no means ideal.
Another key factor bearing on the reliability of the consumer
service estimates is brought out in Exhibit 23—that components
adding to only 10 percent of the total in 1947 constituted a "substantial allocation problem". First to be noted in this connection is that
expenditures for consumer services, like those for consumer commodities, are generally estimated from data on producers' sales. In
the case of services, however, the estimating procedure is simplified
(and, hence, reliability is enhanced) by two facts: (1) There are
no intermediary enterprises between the producer and consumer;
and (2) in very large degree, consumer-type services are by nature
items normally purchased only by persons. The area of estimation
centering in the allocation of producers' total sales between consumers and others is relatively small.
To quantify this latter aspect of the consumer services series,
and to arrive at the information given in the exhibit, the 1947
estimates were classified according to those (1) representing items
purchased wholly, or very nearly so, by persons and thus not
requiring an allocation of sales between persons and business and
government; (2) representing items purchased in appreciable degree by other groups as well as consumers, but for which reliable
information on the nonconsumer element was available; and (3)
requiring a sizable allocation for which the available data, if
any, for making it were regarded as inadequate.
This classification—in some measure a matter of judgment—
resulted in the finding that in 1947 components amounting to 90
percent of consumer service expenditures did not involve any
substantial problem of allocating producers' sales to arrive at consumer purchases only. More specifically, components forming as

1951 NATIONAL INCOME SUPPLEMENT

108

much as 70 percent of the total were classified in the first category,
as being normally purchased only by persons and thus presenting
no problem in this regard. Items comprising another 20 percent
were assigned to the second category, for which the problem of
statistical allocation was taken care of adequately (although, for
the most part, only periodically) in the basic data. Individual
series constituting only 10 percent of consumer services fell into
the third category with the label of "substantial allocation problem", and may bo viewed as subject, on this score, to sizable error.
The following description of the estimates of personal consumption expenditures for services is outlined according to the four
types of statistical sources shown in the exhibit. Probably no
broad statistical classification of the numerous and heterogeneous
service items would be entirely appropriate, and the present one
is no exception. Some items, though relatively few, did not fall
readily into any one grouping. The difficulty was usually resolved
by assigning them to "Miscellaneous."
Comprehensive Annual Reports
Regular comprehensive reporting systems exist for most of the
services requiring large aggregations of capital to produce. In some
cases, generally where the producing industry is subject to government regulation, the basic data for estimating consumer service
expenditures are furnished by Federal or State agencies. In others,
the data are provided directly by private industries with excellent
facilities for the collection of statistical information.

Government agencies
The service items for which comprehensive annual data—before
deduction of any allowance for nonconsumer use—are collected
by Federal and State agencies are listed in Exhibit 24, together
with the 1947 consumer expenditure value for each.
Exhibit 24.—Consumer Expenditures for Services Based
on Comprehensive Annual Reports by
Government Agencies, 1947
Millions
of dollars
Scrvirea furni3hedtwithout payment by financial intermediaries except insurance companies
__

1,532

Telephone

1,366

_

Steam railway (including commutation and sleeping and parlor car fares)

647

Intercity bus

327

Airline

,

119

Pari-mutuel not receipU

248

Hank service charges (trust and other)..

215

Athletic and social clubs—dues and fees

149

Other »

--

Total

79
4,682

1
Includes eafe-deposit box rental, money-order fees, and ticket brokers' markup on
admissions

The estimates of services furnished without payment by financial intermediaries are developed mainly from data furnished by
the Federal Deposit Insurance Corporation, Board of Governors
of the Federal Reserve System, and Bureau of Internal Revenue
(from tabulations of corporations' income tax returns, as published in Statistics of Income—Part 2). This series is described
in the section on Interest. As pointed out there, the necessary
allocations of reported totals to derive measures covering only
consumers can be made on a generally satisfactory statistical
basis.
The annual reports of the Federal Communications Commission
contain statistics on telephone operating revenues and excise taxes.
Additional, supporting statistics in these reports are used to reduce total revenues to an estimate of consumer payments for



telephone service. This allocation, regarded as satisfactory, is
accomplished by means of a formula devised with the assistance
of the American Telephone and Telegraph Company.
Passenger revenues are compiled annually by the Interstate
Commerce Commission for railways and intercity bus lines and
by the Civil Aeronautics Administration for airlines. However,
the statistical basis for adjusting these comprehensive revenue
data to measures of consumer expenditures is limited.
For the railroad series, travel fares paid by the Federal Government are first excluded from passenger revenues. Little direct
information on Federal outlays for rail travel has been available
except for that regularly furnished the National Income Division
by the Pullman Co. For years since 1942, railroad coach passenger
revenues from sources other than the Federal Government have
been estimated by an indirect, though fairly adequate, method
utilizing data on collections by the Government from the tax levied
on the various types of transportation of persons. Of total railroad
revenues from sources other than the Federal Government, in all
years the allocation to consumer expenditures has been placed at
65 percent for railroad coach transportation (excluding commutation) and 40 percent for Pullman service (including both seat and
berth charges).
These percentages were drawn from a study made in 1942 by
the Office of Defense Transportation, which furnished similar
information also with respect to intercity bus transportation.
Passengers arriving at major railroad and bus terminals during
the survey week were interviewed to determine the purpose of
travel. The tabulated results of the study required some adjustment so as to reflect the source (consumer or business) rather
than the purpose of expenditure.
The Interstate Commerce Commission data on passenger revenues of intercity motor carriers have been reported since 1937.
These were extended to earlier years by data on total revenue
from operation of intercity motor bus companies compiled by Bus
Transportation magazine. Over the period since 1929, receipts
from Federal Government travel have been estimated at 2 to 5
percent of the total. Seventy percent of the remainder has been
apportioned as receipts from consumers, as indicated by the 1942
survey of the Office of Defense Transportation.
The reported passenger revenue data for the airlines, covering
the period since 1935, were extrapolated to 1929 by data on passenger mileage flown. For the years 1939-41, the consumer source
of passenger revenues was estimated as one-third on the basis oi
sample data presented at hearings before the Civil Aeronautics
Board and collected in questionnaire surveys conducted by several
of the airlines. This proportion has been modified for other years
as indicated by scattered information relating to business and
government use of airlines.
In addition to these several transportation components, estimates of bank service charges and of safe-deposit box rental and
money-order fees (both included in the "other" category) also
lack adequate data for making the sizable nonconsumer allocations involved in their derivation.
The series on pari-mutuel net receipts includes the tracks' and
States' shares of amounts wagered and of breakage. Data are
obtained from the Census Bureau, as summarized in State Finances, and from reports of the individual State racing commissions. The data are entered as consumer expenditures without
any nonconsumer allowance.
Estimates of dues and fees paid to athletic and social clubs
are based on Federal tax collections data. Only very minor estimation, for the nontaxable portion, is required.

Private sources
Comprehensive annual data are available from private sources
for estimating the types of consumer expenditures for services
shown in Exhibit 85.

SURVEY OF CURRENT BUSINESS
Exhibit 25.—Consumer Expenditures for Services Based on
Comprehensive Annual Reports by Private Sources, 1947
Millions of
dollars

Item
Expense of handling life insurance
Accident and health insurance—net payments

1,966

__

Mutual accident and sick benefit associations—net payments

362
60

Privately controlled hospitals and sanitariums

1,394

Electricity

1,406

_

Gas

869

Street and electric railways and local bus lines
Total

1,313

_______

7.37C

Virtually complete data relating to the first three items of
insurance in the above listing are collected annually by the
Spectator Company and published in its Insurance Yearbook.
Data on the income and expenditures of hospitals are collected
in annual censuses of these institutions by the American Hospital
Association and published in the American Hospital Directory.
These data, with minor adjustments, have supplied measures since
1946 of personal consumption expenditures on privately controlled
hospitals and sanitariums. This component consists of payments
by patients to proprietary hospitals and of current expenditures
(including depreciation) of nonprofit hospitals in providing care
of patients.
Prior to 1946, however, considerable estimation was required
in the absence of comprehensive annual data. Benchmark figures
were derived for 1930 from a study by the Committee on the Costs
of Medical Care and for 1935 from the Census of Hospitals. The
movement for other years was estimated, for the most part, as
the product of the average daily number of patients, published by
the American Medical Association, and the hospital price component of the Bureau of Labor Statistics Consumers' Price Index.
For the entire period covered by the estimates, the Edison
Electric Institute and the American Gas Association have reported
annual data relating, in effect, to sales to consumers separately
from sales to other customers. Thus, data of the Edison Electric
Institute on revenues from residential or domestic sales and from
rural sales at distinct rural rates have had to be adjusted only
to eliminate revenue from farm business use to furnish a measure
of consumer expenditures for electricity (inclusive of landlords'
sxpenditures). And a similar measure of expenditures for gas has
been secured annually from data reported by the American Gas
Association on revenues from sales to residential consumers.
The American Transit Association publishes annual data on
Passenger revenue receipts from operations of street and electric
railways and local bus lines. To them are added estimated taxes on
electric railway fares to obtain the consumer expenditures series.
The comprehensive annual data supplied by the several private
sources noted above are gathered through well-established reporting systems from relatively small numbers of large and responsible
business enterprises keeping adequate accounting records. The
estimates of consumer expenditures derived from them, involving
^ly minor problems of estimation, may be presumed to be subject
0 COm
Paratively little margin of error.
Periodic Comprehensive Sources
The Census of Population and Housing yields benchmark data
. i t e m s aggregating 31 percent of the consumer service total
m 1947
J the Census of Business, for components amounting to 17
Percent. Other periodic comprehensive sources furnish the underS?ng data for items forming 6 percent of the 1947 services total.
,. e expenditure components based on these various sources are
llste
<* in Exhibit U.



100

For most items classified in this category, periodic universe
values of consumer expenditures can be estimated with considerable
confidence. The accuracy of the benchmark estimates is somewhat
affected, however, by the fact that many of the reporting units are
individuals or small business enterprises and tend to have less
adequate accounting records. Also, estimating adjustments of the
reported data often are necessary.
Only to a small degree are the estimates in this grouping impaired by serious, difficulties of consumer allocation. Items amounting to less than 3 percent of the 1947 services total were classified
as constituting a "substantial allocation problem".
A major factor bearing on the reliability of the series in this
group is that the availability of comprehensive data only periodically necessitates the development of interpolating and extrapolating indexes. In many cases, these indexes must be based on
data that are partial and unrepresentative or of only indirect
relevance.
It is not unlikely that most series included in this grouping are
subject to appreciable error in relative movement, particularly for
years estimated by the projection of benchmark estimates over a
considerable span. There is no reason, however, to expect the
errors to be cumulative (or to undermine many uses of the figures
except in refined analysis). On the contrary, it may be presumed
on the basis of experience in estimating individual components
from masses of diverse data that the errors in individual series will
have a tendency to offset in the total.

Census of Population and Housing
The decennial Census of Population and Housing provides data
on the number of dwelling units in each tenure class, on the
average monthly rent of rented dwellings, and on the fair market
value of owner-occupied units. The census taken in 1940 also
included a question on the rental value of owner-occupied units.
These basic data (inclusive of certain preliminary tabulations from
the 1950 census) have been used to derive benchmark estimates of
the space rental value of owner-occupied nonfarm dwellings and of
Exhibit 26.—Personal Consumption Expenditures for Services
Based on Periodic Comprehensive Sources, 1947
Millions
of dollar*

Source and item
Census of Population and Mousing:
Space rental of owner-occupied nonfarrn dwellings.
___
Space rent of tenant-occupied nonfarm dwellings
Domestic service (including practical nurses and mid-wives)

,
,

8,324
4,618
2,210

Automobile repair, greasing, washing, parking, storage and rental
_
Motion picture theater admissions
Cleaning, dyeing, pressing, alteration, storage, and repair of garments,
n. e. c. (in shops).
Barber shop and beauty parlor services
_
Laundering in ertablishrnents
Funeral and burhl service
Photographic studio* and photo developing and printing
Repair of household items l
__
Shoe cleaning and repair
Transient hotels and tourist cabins
..
Commercial amusements, n. e. c.
.
Other*

1,087
1,407

Census of Business:

Census of Agriculture:
Rental value of farm houses-.
Census of Religious Bodies:
Religious bodies
Biennial Survey of Education:
Higher education (private).

1.244
1,036
850
571
306
303
278
230
196
891
1,220
891
606

i Consists of care of electrical equipment except radios and of stoves, upholstery and
furniture repair, and rug, drapery and mattress cleaning and repair.
1
1ncludes the following recreation items: billiard parlors and bowling allpys; legitimate
theaters and opera admissions; professional baseball admissions; dancing, riding, Bhooting,
skating, and swimming plates; amusement devices and parks; boat and bicycle rental,
storage and repair; book rental and repair; radio repair. Also Includes watch, clock, and
jewelry repairs: fur storage and repair; employment agency fees—theatrical and nontheatrical; miscellaneous household operation; miscellaneous personal services; baths and masseurs; and costume and dress suit remtal.

110

1951 NATIONAL INCOME SUPPLEMENT

space rental payments on tenant-occupied nonfarm dwellings. Their
derivation, along with the construction of estimates for intercensal
years, is explained in the section on Rental income of persons.
Expenditures for domestic service (cash payments and value
of meals furnished) are equal to wages paid in the Private households industry. These wage estimates, based very largely on benchmarks derived from population census data, are described in the
section on Wages and salaries.

Census of Business
Service establishments were canvassed in connection with the
1933 Census of American Business and the 1035, 1939, and 1948
Census of Business. (Results of the 1948 census, it may be noted
again, have not yet been processed and incorporated into the
consumer expenditure estimates.) In addition, hotels (both yearround and seasonal) of 25 rooms or more and most types of automobile servicing establishments were covered by censuses in 1929.
Power laundries and cleaning and dyeing plants, first included in
the Census of Business in 1939, were covered in conjunction with
the Census of Manufactures in odd years from 1929 through 1935.
Census coverage of service establishments was accepted as complete throughout in making estimates for automobile repairs and
for personal services (barber shops, beauty parlors, shoe repair
shops, funeral and burial service, etc.). The census data on amusements for 1935 and 1939 also were taken as reported and used,
with the exception of motion pictures in 1935. The 1933 census data
on amusements were used in only a few cases. Census coverage of
hotels was considered complete except for seasonal hotels in 1933, and
for seasonal hotels in the New England and Middle Atlantic States
in 1939. (However, for 1929 it was necessary to add estimates for
hotels with less than 25 rooms, not canvassed by the Census.) Data
on tourist courts were used as given by the Census in all years.
For the consumer expenditure estimates relating to laundering
and dry cleaning, census data were used as reported except for
1933. Upward adjustments of 8.7 percent and 17.1 percent, respectively, were applied to all data for that year utilized from the
Census of Power Laundries and the Census of Cleaning and Dyeing
Establishments. These adjustments were made on the basis of
information as to coverage reported by the Census Bureau.
For most consumer service items based on the Census of Business, it has been necessary to make some adjustments for differences in the definition and type of data reported in the various
years. These adjustments, based on census data themselves, generally have been of minor magnitude.
Where appropriate, the estimates of consumer service expenditures derived from the Census of Business generally represent the
service receipts of retailers (reported in the retail censuses) as
well as of service establishments. Sales data are tabulated by line
of business, with a general distinction between commodity sales
and service receipts in each line. In general, the classification by
line of business approximates the desired classification by type of
service. The instances in which the line-of-business receipts data
could not be taken to indicate expenditures by type of service
have been relatively few. The necessary allocations of receipts data
in such instances did not affect the consumer services total.
The series derived from Census of Business information that
involve substantial problems of consumer allocation are as follows: automobile repair, greasing, washing, parking, storage, and
rental; transient hotels and tourist cabins; and miscellaneous household operation services.
The following summary for a number of the larger series based
on the Census of Business may serve to indicate more specifically
the uses and adjustments made of census data and the nature
of the methods—sometimes diverse and indirect because of the
inadequacy of available source materials—that are employed for
interpolation and extrapolation.



Automobile repairs
Expenditures for automobile repair, greasing, washing, parking,
storage and rental were based for 1929 (partly estimated), 1933,
1935, and 1939 on Census of Business receipts data covering service, retail, and wholesale establishments. The interpolations for
this period were made prior to 1935 by the Motor and Equipment
Manufacturers' Association index of shipments of service parts
to wholesalers and after 1935 by an index of sales of parts and
accessories stores, based on sales tax receipts in Illinois, Iowa, and
Indiana. The estimates for years after 1939 represent extrapolations by the product of employment in automobile repair shops and
the Bureau of Labor Statistics automobile repair price index, with
adjustment of the resulting series to secondary benchmarks for
1945 and 1947. These latter were derived from Bureau of Internal
Revenue tabulations of the total sales of corporate and noncorporate concerns classified in the automobile repair services industry.
The estimates of total expenditures so derived have been allocated by the proportion of consumer to total highway use of gasoline. This proportion has been estimated as the product of ratios
of (1) consumer to total passenger-car use of gasoline and (2)
passenger car to total highway use of gasoline. The first ratio
is the same as that used in the allocation of expenditures for
gasoline and oil (see section on Personal consumption expenditures for commodities). The second has been derived from annual
data of the Bureau of Mines and Public Roads Administration.
Motion picture admissions
The 1939 consumer expenditure figure for admissions to motion
picture theaters was taken from the Census of Places of Amusement for that year. Bureau of Internal Revenue compilations of
operating receipts of corporate and noncorporate enterprises in the
motion picture theater industry provided the basis for independent
estimates for 1945 and 1947. Other years have been estimated
chiefly by using gross receipts from operation of motion picture
theater corporations for interpolation and extrapolation, with allowance for changes in the admissions tax, not reflected in the
data reported to the Bureau of Internal Revenue. For the two
most recent years of the series, when such data are not available,
an index is obtained by dividing the Federal admissions tax rate
into the total collections from this tax, adding the tax collections
to the quotient, and deducting the independently estimated amount
of receipts from taxable admissions to other spectator amusements.
Cleaning and dyeing
The consumer expenditure series on cleaning, dyeing, pressing,
alteration, and repair of garments is based on census values for
the years 1929, 1931, 1933 (adjusted for the undercoverage noted
above), 1935, and 1939. The census figures required numerous,
but minor, adjustments for comparability from year to year. The
problem of consumer allocation was obviated by the type of data
given in the census reports. Most important in this respect was
the provision of data on receipts from cleaning and dyeing at
retail (separately from wholesale) of cleaning and dyeing plants,
rug cleaning establishments, and power laundries. Estimates f°r
other years prior to 1935 were obtained by interpolation by the
American Institute of Laundering index of cleaning plant sales of
its member power laundries. The 1936-38 estimates were made by
using the Bureau of Labor Statistics index of payrolls of cleaning
and dyeing plants for interpolation.
Still another procedure has been followed for estimating consumer expenditures for cleaning and dyeing services for 1940 and
subsequent years. Provisional estimates were first made by summing (1) receipts from cleaning and dyeing at retail of power
laundries, obtained by extrapolating the 1939 figure (11 percent
of the total) by the American Institute of Laundering index; and
(2) the remainder of the item, obtained by extrapolating the 1939
ngure (89 percent of the total) by an indicator of sales computed

SURVEY OF CURRENT BUSINESS

111

by multiplying the dry cleaning price component of the Consumers'
price Index by an output index derived as the quotient of the
Bureau of Labor Statistics indexes of payrolls and average hourly
earnings for cleaning and dyeing establishments. These estimates
were then adjusted to independent values for 1945 and 1947 based
o the Bureau of Internal Revenue sales data for corporate and
n
noncorporate enterprises in the laundry, cleaning, and dyeing industry. Because the industry sales data covered laundries as well as
cleaning and dyeing plants and included a sizable element of
receipts from business for which it was difficult to allow, the recent
year estimates of consumer expenditures for cleaning and dyeing
services must be viewed as tenuous.

estimate of the funeral receipts of combination furniture and
undertaking establishments derived from the 1929 Census of Retail
Distribution. Odd-year estimates prior to 1935 were obtained by
extrapolating the 1935 figure by data on the value of coffins and
funeral supplies produced (from the biennial Census of Manufactures). These were interpolated for 1930, 1932, and 1934 by
billings of funeral directors and embalmers, as estimated by Rolf
Nugent, Consumer Credit and Economic Stability (Russell Sage
Foundation, New York, 1939). Estimates for other years (1936-38
and 1940 forward) are interpolations and extrapolations by data
on collections of sales taxes levied on funeral directors' receipts
in 6 States.

Barber shops and beauty parlors
Census data, with 5 percent added for tips, provided the basis
for estimating consumer expenditures for barber shop and beauty
parlor services for 1933, 1935, and 1939. Estimates for 1930 were
obtained by multiplying the number of employed persons in these
industries, as derived from the 1930 population census, by average
receipts per person estimated by reference to census data for later
years. For other years of the 1929-35 period, estimates were prepared by using for both the barber shop and beauty parlor series
consumer expenditures for laundering as an extrapolating and
interpolating index. To obtain interpolations for the two series
between 1935 and 1939, the barber shop and beauty parlor service
components, respectively, of the Consumers' Price Index were
multiplied by an output index for laundry services, computed by
dividing the Bureau of Labor Statistics index of payrolls in power
laundries by its index of average hourly earnings for the same
industry.
Estimates for years since 1940 represent projections of the 1939
census-based figures with adjustment to 1945 and 1947 values for
the two series combined based on Bureau of Internal Revenue
receipts tabulations from income tax returns. For the period 194042, the index used to project the 1939 estimates was constructed
b
multiplying the Bureau of Labor Statistics barber shop and
t parlor service price indexes by the quotient of estimated
payrolls in the "other personal service" industry group and average
hourly earnings in power laundries. For later years, the availa"rty of detailed unemployment insurance wage data has permitted the substitution of barber shop and beauty parlor payrolls
or o t h e r
"
Personal service" payrolls in this formula.

Census,of Agriculture

Laundering in establishments
hApderived

for the

years

1929

>

1931

»

1933

>

1936

»and

1939

from

Censuses of Power Laundries, Cleaning and Dyeing Establish&ts, and Service Establishments, the figures on consumer extUreS f r l a u n d e r i n
°
S in establishments include receipts from
work and family services of power laundries, laundry reipts of cleaning and dyeing plants, and 80 percent of the service
eipts of hand laundries. (Payments from hand laundries to
dries w e r e taken a t 20
crint\
Percent of the formers' regive . R e c e i P t s of hand laundries for 1929, 1931, and 1933, not
the ^ i " t h e c e n s u s re Ports, were estimated by the movement of
from p C o m p o n e n t s - Estimates for 1945 and 1947 were derived
dean- r e a U ° f I n t e r n a l Revenue sales tabulations for laundry,
and dyein
£ companies. As in the case of the similar
dyein
£ estimates, they are tenuous because of the
of a
breakdown between laundries and cleaning and dyet
^ t h t a x r e t u r n d a t a a n d t h e P^sence of a large non-

sumer X
G

e l e m e n t of t o t a l sales

-

F o r a11 o t h e r

years'

con

"

Polati £ et n dei t u r e s have been estimated by interpolation and extray
recmpT o f h American Institute of Laundering index of laundry
ts

Power laundries.
burial service
* e x p e n d i t u i > es for funeral and burial service were
.. 1 9 3 5 a n d 1 9 3 9 f r o m c e n s u s r e c e i P t s d a t a c o v e r i n S
directors' and embalmers1 services and coffins, plus an




Estimates of the rental value of farm houses, described briefly
in the section on Income of unincorporated enterprises, are based
on value data reported in the quinquennial Census of Agriculture.
The basis of estimation, however, is not a direct one. Census-based
figures on value are multiplied by an annual interest rate, and the
product is then converted to a gross measure of rental value by
adding an estimate of farm expenses allocable to the upkeep of
farm dwellings.

Census of Religious Bodies
The "religious bodies" component of consumer services represents all current expenditures by churches except for local cash relief
and charity, plus estimated depreciation of buildings.
Estimates of cash current expenditures were prepared for 1926
and 1936 from data reported in the Census of Religious Bodies,
with a small adjustment for churches not reporting. The value
of clergymen's imputed income (see section on Wages and salaries)
was added. For all other years of the period since 1929, estimates
of total current expenditures (cash and imputed) have been
obtained by interpolation and extrapolation on the basis of the
National Income Division series on total payroll of religious organizations, as described in the section on Wages and salaries.
Depreciation, estimated at about 1.5 percent of the value of church
edifices, was derived by a downward modification of hospital building depreciation rates (see section on Capital consumption allowances).

Biennial Survey of Education
Office of Education data reported in the Biennial Survey' of
Education, covering school years ending in even numbers, form the
principal basis of the consumer service series on "higher education" and "elementary and secondary schools." The estimated
depreciation of educational buildings and equipment (see section
on Capital consumption allowances) is added to figures on current
expenditures by these institutions for educational services, as
derived from the Biennial Survey.
Estimates of current expenditures for intervening school years
not covered by the Biennial Survey are obtained by straight-line
interpolation. For the recent years of the series before the Biennial
Survey becomes available, the latest reported data are projected
on the basis of partial information furnished by the Office of
Education. The resulting school-year figures are converted to calendar years by averaging. To obtain the estimate for calendar
year 1946, for example, the 1945-46 school-year data were weighted
by 2 and the 1946-47 school-year data by 1.
It should be noted that the series for elementary and secondary
schools is less firmly based than that for higher education. The
data published in the Biennial Survey of Education for private
elementary and secondary schools include capital outlays, and these
must be estimated and deducted. Moreover, the published data represent estimates based on reported enrollment in these private schools
multiplied by average expenditure per pupil in public elementary and
secondary schools. Accordingly, this series is not regarded as being
based on periodic comprehensive sources, as listed in Exhibit 26,
but is included in the miscellaneous category discussed below.

112

1951 NATIONAL INCOME SUPPLEMENT

Sample Information
Consumer service expenditures whose levels have been estimated
from sample data comprised 12 percent of the service total in
1947. These series include expenditures for professional services
(8.2 percent); interest on personal debt (1.7 percent); automobile
insurance, net payments to labor unions, postage, and telegraph,
cable, and wireless (combined, 1.8 percent); and foreign travel
and remittances (0.8 percent).
The professional services category noted above includes separate
expenditure estimates, as published in table 30 of Part V, for the
services of physicians, dentists, lawyers, osteopathic physicians,
chiropractors, chiropodists and podiatrists, private duty trained
nurses, miscellaneous curative and healing professions, and veterinarians. The sample information used in making these estimates
is obtained very largely from periodic questionnaire surveys by
the National Income Division, generally with the cooperation of
the professional associations. This information covers (1) average
gross income from independent practice, (2) percentage of persons
in the profession engaged in independent practice, and (3) the
percentage of gross income (in the case of physicians, dentists,
lawyers, and veterinarians) received from government or welfare
agencies or business organizations, as contrasted with individuals.
These data are used in conjunction with available information
on the total number of persons in each profession to secure the
consumer expenditure estimates. The main sources of information
on numbers in the various professions are the occupational data
of the Census of Population, compilations of the individual professional associations (such as the American Medical Association,
American Dental Association, and the American Osteopathic Association), and the Fisher-Stevens, Inc. lists.
The methods of estimating consumer expenditures for professional services are directly analogous to those used in deriving the
total net income of independent practitioners in the various professions. These professional income series are described at some
length in the section on Income of unincorporated enterprises.
Estimates of interest on personal debt, as noted in the section
on Interest, are based very largely on consumer credit data (compiled by the Federal Reserve Board from sample reports adjusted
periodically to more comprehensive sources), multiplied by fragmentary sample information on interest rates applicable to the
various types of credit.
Data from the 1935-36 Consumer Purchases Study (given in
reports by the National Resources Planning Board and the U. S.
Departments of Labor and Agriculture) provided benchmark materials for estimating the consumer service series on automobile
insurance (premiums minus claims paid), net payments to labor
unions (dues and fees paid minus cash benefits received), postage, and telegraph, cable and wireless. Little confidence can be
placed in these series. Apart from sampling or reporting errors
in the basic data, considerable estimation was required in utilizing
the data to obtain the benchmark consumer expenditure values;
and the available information for extrapolation is not adequate.
Except for the labor union item, the presence of large nonconsumer elements in the extrapolating data is an added difficulty.
The consumer service series relating to foreign travel and
remittances (net) are those shown under this caption in table 30,
group XII, with the exception of the commodity item of expenditures by U. S. Government personnel abroad. The estimation of
these series, which involves in substantial degree the problem of
consumer allocation, is based largely on questionnaire surveys.
(See section on Net foreign investment.)
Miscellaneous
Consumer service expenditures for items classified under "Miscellaneous" sources comprised about 9 percent of the 1947 total.
A less rigid basis of classification, as already indicated, might
have considerably reduced the proportion of expenditures in this
category.



Of the 50 items in the category, six accounted for more than
one-half of the 1947 total These six are social welfare and foreign
relief agencies (current expenditures plus depreciation), taxicab
fares and tips, household expenditures for water, elementary and
secondary schools, moving expenses and warehousing, and brokerage charges and interest and investment counseling.
For the most part, these six series incorporate a great deal o
f
relevant statistical information (notably in the cases of social
welfare and foreign relief agencies, elementary and secondary
schools, and brokerage charges and interest and investment counseling). Difficulty of consumer allocation is present for the series
on moving expenses and warehousing, brokerage charges, etc., and
taxicab fares and tips, as well as for the estimates of water
expenditures with respect to the data used for extrapolation of
the 1940 base-year figure.
Of the remaining 44 items in the "miscellaneous" category,
nearly all are relatively small, with 35 having magnitudes of less
than $75 million in 1947. Source materials vary widely in adequacy among this group of service items but are not satisfactory
for many of them. It often is necessary to use indirect estimating
methods, and to rely on occasional and incidental information obtained from public and private research studies, correspondence with
trade associations, and informal sources such as magazine and
newspaper accounts.

9.—NEW CONSTRUCTION
New private construction is an independent element in the sta*
tistical determination of gross private domestic investment. New
public construction is a component of government purchases of
goods and services, which, however, are estimated as a total
independently of the construction series. (See the section on
Government receipts and expenditures.)
These construction components of gross national product represent the value of progress made during the given year in the production of fixed works and structures. The value of progress made,
or "work put in place," is defined as equivalent to the value of
labor and materials used plus overhead costs and profits accrued
on operations during the given period. It includes the installed
value of equipment generally considered an integral part of &
structure and commonly included in the construction contract price.
Fixed works and structures include not only dwellings and other
buildings but also dams, bridges, roads, canals, and the like. Certain types of works, such as mine tunnels and farm ditches, which
might be classified as construction, are not included. They are
probably unimportant quantitatively, and a substantial portion of
them is likely to be charged to current expense. Hence it is believed that their omission from gross national product does not
result in any appreciable discrepancy in the national income and
product accounts.
The estimates of construction activity have been prepared jointly
by the Bureau of Labor Statistics and the Commerce Departing
Construction Division (now the Building Materials Division of the
National Production Authority). These estimates differ from the
totals used in the gross national product only because the letter
include petroleum and gas well drilling (in private construction)
and exclude work relief (from public construction), and because
revisions made for some years in the Commerce-Labor estimate*
have not yet been incorporated. (See the concluding paragraph
of this section.)
The factual content of the present notes is largely limited to *
summary of descriptions published in the Construction Division*
May 1950 Statistical Supplement to Construction and Constructs
Materials and in the October 1949 and February 1950 issues: oi
the Monthly Labor Review. No-attempt is made to indicate a»*

SURVEY OF CURRENT BUSINESS
ferences between the estimating methods underlying back-year
values and the methods currently in use; only the latter are
described below. Although the basic sources and methods have
been the same throughout the period since 1929, a number of important improvements have been made. It should be noted, however, that most of them did not cast light on back-year movements
in the series affected. Estimates for the more recent period, discussed in these notes, are therefore generally somewhat better
founded than those for earlier years.
Modern techniques of systematic reporting and sampling are
difficult to apply to the direct statistical measurement of construction activity. Many of the producers that should be covered are
hard to identify. Much construction work is done by firms only
intermittently attached to the industry; many construction firms
have no fixed and readily recognizable place of business; and any
firm in any industry may undertake force account projects. (The
several past censuses of construction, it may be noted, omitted
by intent the substantial volume of force account construction.)
The alternative of covering the purchasers of construction workis generally subject to the same sort of difficulties.
This problem of identifying the units to be covered affects both
the enumerative and the sampling approaches to data collection.
In particular, it makes enumeration expensive. Sampling, the theoretical validity of which rests on the homogeneity and continuity of
the universe sampled, must deal here with large, unstandardized,
nonrepeating projects, many arising out of a special local need.
Under these circumstances, estimation relies heavily on indirect
evidence of construction activity, as is explained below, and is subject
to considerable uncertainty as to coverage, valuation, and timing.
The construction estimates are developed from several different
types of statistical sources and methods. These may be summarized
very briefly as follows.
From certain special classes of buyers, regular current reports
are received on the actual progress of, or expenditure for, their
construction work. In general, Federal Government and Federallyaided projects are covered by current reports on progress, and
construction done by or for public utility companies is regularly
sported from accounting records.
Other nonfarm nonresidential construction is generally estimated
om m
°ftthly data on value of contract awards.
Other nonfarm residential building is estimated chiefly from
monthly reports of building permits issued.
or some types of construction, the foregoing kinds of informaOn a r e
^adequate or unavailable, and estimates must be made
f
^°*n a variety of data of varying appropriateness and reliability,
j . S m a 1 1 P a r t of nonfarm residential construction, all farm construeon, and oil and gas well drilling are included in this miscellaneous
category.
in J G. r . e * at * ve importance of these various sources and methods
17 b e ? V i n g t h e n e w construction estimates is illustrated in Exhibit
j / ° w ' Each component of new construction (as given in tables
ttrur a n d 2 6 ° f t h e M a y 1 9 5 0 s t a t i s t i c a l Supplement to Con^ won and Construction Materials) is here classified according
?alu G p r i n c * p a * t v P e of source material used in estimating its
t f ° U r c l a s s e s of source materials distinguished in Exhibit 27
j., e com Pared briefly with one another in terms of coverage,
1Ua
y
lty
l
ii
f
y of
of value data, and the indication given as to timing of
instruction work done.
report8
°f work done or paid for are obtained through
re
P°rting systems involving the regular and sometimes
nand
3ove ^ C O O I ) e r a t i o n o f parties to the construction contracts.
l uded a ? e o f w °rk done by or for the categories of purchasers ine s ystems is
ion r ^
.
generally excellent. The value informaeported
» being taken on a fairly standardized basis from ac0Unti
g
f
^cords appropriate to the purpose, is also quite satS
• Finally, the reported timing of contract construction
n




113

Exhibit 27.—Components of New Construction Activity, Classified
by Statistical Basis of Estimate, 1947
P u b ic

Private
Data source and
class of construction

Millions
of dollars

Percent

Million*
of tlollurs

2,338

17

2,r>n

Direct reports of work done or paid for^ .
Public utility
Highway
Military a n d naval facilities^
Public residential building
Public nonre.sidential building
(Federal and Federal-aid)
Other types of public construction
(Federal and Federal-aid)

2 338

Percent
72

1 r*M
204
°00
-

t')l
M)4

Contract awards

3,336

Private nonresidential, except farm and
public utility
_- ...
Private residential, except farm — nonhousekeeping _ _ „
"All other private"
Public nonresidential building (State and
local)
Other types of public construction (State
and local)

24

'J83

28

:i 142
!2.r)
408
575
it, 095

37

Private residential, except farm—new
dwellings in permit issuing areas ' and
.> 01*5
"

3,13.1

Other sources
Private residential, except farm—now
dwellings in nonpcrniit-isMiing areas' '
L_
Total

._..--

i

(
22

1,0**0
1 272
773
.' °
13,!)04

100

3,4!>6

100

1
Breakdown of new dwellings between permit issuing and iionpt'riiiit-i&Kiijng areas is
rough; based on unpublished data.

work is based largely on engineering inspections made to check
contractors' claims for progress payments, and therefore accords
very closely with the conceptual requirements of the estimates.
Contract award reports (which take into account subsequent
cancellations) provide reasonably good value information for projects covered, particularly in periods when escalator clauses or
other similar arrangements are not important. As will be seen,
however, the coverage of these data is far from complete, and
an estimate for the noncovered areas must be made. Furthermore,
there is a varying time lag between the reported date of a contract award and the start of actual construction, and there is
further variation in the rate of progress after the start. The allocation of contract values to the particular time periods during
which the work is presumed to have been done is based on past
activity patterns and cannot be precise.
Building permit data share with the contract award reports the
disadvantage of not indicating the time period during which the
work is done and undergo a similar timing adjustment in the
course of deriving the estimates. The valuations entered on building
permit applications are generally less reliable than are values to
which the parties are committed by contract. An adjustment for
undervaluation, based on sample studies, is made. Also, an allowance has to be made for lapsed permits, for which no current or
comprehensive information is available. However, the coverage of
the permit data is very high in the areas where building permits
are required.
The miscellaneous sources used in estimating the remainder
of construction activity vary widely in quality. In general, they
yield results less reliable than those derived by the use of the
other three types of source materials.

1951 NATIONAL INCOME SUPPLEMENT

114

Estimates Based on Direct Reports of Work Done
or Paid For
Direct reports are the chief basis of components accounting in
1947 for 17 percent of estimated private construction and 72
percent of estimated public construction. Exhibit 28 shows the
components estimated wholly or in large part from materials of
this sort. They consist primarily of projects in which the Federal
Government is involved—as a contracting party, as a source of aid
funds, or through agencies which regulate the purchaser's industry. However, private corporations and trade associations also
perform an important service in data collection, as is indicated
by the list of reporting systems included in the exhibit.
Exhibit 28.—Components of New Construction Activity Estimated
Chiefly from Direct Reports of Work Done or Paid for, 1947
Reporting agency

Component

Millions
of dollars
2,338

Public utility:
Federal Power Commission
Electric light and power
Manufactured and natural gas. American Gaa Association
American Telephone and TeleAsaociation of American RailLocal transit
Telegraph

" .

Interstate Commerce Commission..
„_ American Transit Association.
Western Union Telegraph Co
_.

Public Construction
Highway:
Federal-aid
- „-__.„
State and local..
Military and naval facilities '
Public residential building l
Public nonrcaidential building
(federal and I'ederal-aid)
Other types of public construction
(Iederal and Fcdcrai-aid) l

Bureau of Public Roads
Bureau of Public Roads (Through
State highway departments)
Department of Defense
Public Housing Authority; N. Y. C.
Housing Authority
Federal agencies responsible;
Bureau of the Budget
Federal agencies.responsible;
Bureau of the Budget
_

793
540
502
318
121
56
8
2,513
40
309
1,165
204
20C
191
404

1
Public residential construction by the Department of Defense is included under "Military and naval facilities." Housing at the sites of reclamation andflood control projects
is included in the "conservation and development" category among "Other types of public
construction."

The estimates for privately owned public utilities generally involve only minor problems with respect to coverage, valuation,
and timing. Totals from annual reports by railroads, electric utilities, oil companies, and members of the Bell Telephone System
are adjusted to reflect construction by or for small concerns which
do not report. The values reported for petroleum pipe lines and
electric and gas utilities include some expenditures for the purchase of existing facilities or producers' durable goods; statistical
adjustments are made to eliminate these. With respect to timing,
the annual reports for public utilities are somewhat less appropriate for these estimates than are the progress reports upon
which most of the other values shown in Exhibit 28 are based.
However, there is no reason to expect any important timing discrepancy on an annual basis.
For the most recent year, financial data on construction outlays
are generally not yet available for public utilities except the large
railroad systems. Preliminary estimates are based mainly on the
utility companies' previously announced plans for construction and
checked against current sample series on plant and equipment expenditures, such as the quarterly Commerce-Securities and Exchange Commission estimates. Construction plans are ascertained
from reports compiled either by trade sources or by the same
agencies which later tabulate the financial data.
About three-fifths of all public construction covered by reports
of work done or paid for consists of road-building. The Federalaid highway program accounts for roughly one-fifth of the total
value of streets and roads built. Monthly estimates of the value
of work accomplished under this program are prepared from
reports of the Bureau of Public Roads showing State "earnings,"



which are based primarily on reports by engineers of the progress
made on individual projects. The Bureau of Public Roads also
compiles annual reports of highway construction on Federal lands.
State, county, and municipal highway, road, and street construction
outside the Federal-aid program is estimated mainly from special
financial reports submitted annually through State highway departments to the Bureau of Public Roads.
For military and naval facilities, the expenditures reported
represent the volume of all construction, regardless of type, at
Federal military installations. The relatively small amounts of
military construction by the States (armories, rifle ranges, and
the like) are included with other public construction categories
according to type of construction. The data for the two construction agencies of the Department of Defense—the Office of the
Chief of Engineers and the Bureau of Yards and Docks—are
based on monthly progress reports for all construction projects by
service engineers.
Public housing construction progress reports are gathered for
Federal and Federal-aid housing by the Public Housing Authority
and are prepared for locally financed projects in New York City
by the local Housing Authority. The remainder of public residential
construction is estimated by more indirect methods involving the
application of activity patterns to local government estimates of
cost, duration, and starting date of projects reported to regional
offices of the Bureau of Labor Statistics. In 1947 the preponderant
share of the public residential building estimates was based upon
direct reports and they are therefore classified under this heading.
For some other years their classification under "other sources" (see
below) would have been more appropriate.
Direct Federal construction of housing as carried on during
the depression, defense, and war periods under the Lanham Act
was estimated from progress reports by the Public Housing Administration on the number and cost of units built. Construction
of low-rent units and slum clearance expenditures by State and
local agencies with Federal loans and grants under the Housing
Act of 1949 are estimated from progress reports made available
by the Public Housing Administration. Estimates of the value of
work accomplished on the locally financed New York City projects
have been based on the progress reports used to determine payments to contractors.
Of the 1947 total value of public nonresidential building, onethird was Federal or Federally aided; all but a small part of
this was covered by progress reports.
In hospital and institutional construction, a major item under
this heading, two large programs are involved: that of the Veterans Administration and the National Hospital program. Estimates
of the value of Veterans Hospital building are based on monthly
progress reports supplied to the Office of the Chief of Engineers and
to the Veterans Administration by project engineers in the field.
The National Hospital program is one of Federal aid. Estimates
of the value of work done under this program are prepared from
progress reports on individual projects submitted to the Hospital
Facilities Division of the Public Health Service by State agencies
administering the program. The rest of public hospital construction,
not aided by the Federal government (included in the total shown
in Exhibit 28, since its value is not published separately)» *s
evaluated by applying activity patterns to contract award values
compiled from F. W. Dodge corporation reports (see below) ana
other sources. The value of other construction included in public
nonresidential building, consisting chiefly of work done for the
Public Buildings Administration, is estimated from progress reports of the supervising agency.
A minor part of the total shown under public nonresidential
building in Exhibit 28 represents construction for the National
Advisory Committee for Aeronautics, the Bureau of Prisons, and
similar agencies which engage in construction only occasionally or
on a small scale. These agencies usually do not have sufficiently
large construction staffs to warrant setting up regular progress
reporting systems. Estimates for them are made by applying ac*

SURVEY OF CURRENT BUSINESS

115

tivity patterns to contract award data from the agencies, supplemented by annual statistics from the Budget of the 'United States

Most construction projects take several months to complete
after they are started. Through surveys of thousands of actual
projects, the Construction Division of the Department of Commerce
The "Other types of public construction" distinguished in
has established typical activity patterns for various types and
Exhibit %8 consist largely of outlays to conserve, develop, or con- sizes of projects, showing percentages of value "put in place*'
trol the Nation's water resources. The bulk of these expenditures
in successive months. These patterns are used to translate the
is estimated from monthly progress reports by Government envalue of starts into construction activity.
gineers on projects of the Bureau of Reclamation and the Civil
Modifications of these patterns were made during the war years
Works Division of the Office of the Chief of Engineers. The Ten- from data collected by the War Production Board, and also durnessee Valley Authority also provides monthly summaries of
ing the immediate postwar years, when materials shortages delayed
actual cost of its construction activities. The small balance of
construction, on the basis of data collected by the Commerce Deconservation and development work included in Exhibit 28 is carpartment for the Civilian Production Administration. The patterns
ried on by the International Boundary and Water Commission and .are subjected to constant revision as additional information besimilar agencies, and is evaluated from annual fiscal data shown
comes available and on the basis of judgment gained through ex'm the Budget Civil airport construction activity is estimated perience over a decade of investigation.
primarily from monthly progress reports to the Civil Aeronautics
A final adjustment in the resulting estimates of work put in
Administration; and Federal construction of a few other nonplace is made to eliminate offices, warehouses, and other buildings
conservation items of minor importance is approximated from
constructed by public utilities, all of which are classified as public
Budget data.
utility construction.
Government

Estimates Based on Contract Awards
Monthly reports of the value of contracts awarded are used
to evaluate construction projects which collectively account for
2 percent of the private construction and 28 percent of the public
4
construction included in the 1947 gross national product. (See
Exhibit 27.)

The chief source of data on contract awards (including information on subsequent cancellations) is the R W. Dodge Corp.,
whose local correspondents keep informed of new projects through
Personal contacts in the construction and related industries, press
eports, permit-issuing offices, and a variety of other sources.
aiues of projects thus located are generally ascertained directly
nnn the contracting parties. It is obviously difficult to avoid
e omission of a considerable amount of construction activity
_ en data are gathered in this way. The system is considerably
we effective than the difficulty of the task would suggest, hower
f
t, " * datively good coverage is due to the long experience of
e Dodgis organization, which initiated this work in 1901, and to
witTtT? . S u p p o r t f r o m contractors and suppliers who keep in touch
n their markets through such information.
DiviV V 6- e s t io a t e fs o f construction work done, the Construction
- m
construction work done, the Construction
jsion adjust the contract awards data for coverage and timing.
t
d i
j on adjusts th
rSt a d j u s t m e n t
f
Bd e n
o
° coverage is required because the F. W.
Mi f • S r P ' d sattear na pSpt layt e o n l y t o t h e 3 7 S t a t e s e a s t o f t h e R o c k y
o
° W
lationS a r e" ?
figures comparable to the Dodge tabuestimated ochiefly from building permit information and
repo^
iourn ^ ° n c o n s t r u c ^ n contract awards appearing in various trade
s

A •f

4-1*

c
o obt •
°verage adjustment is applied to the national totals
amedj
able f
demise neither the Dodge materials nor those availr
WeSt pur
? ^f
P ° r t t o cover all construction projects in
estimated from
contract awards. For private contyusV
^ ° k ° f t h e s e categories, a raising ratio is computed
estim
trade
ates based on the 1939 Census of Construction and
tion a S0U / ces * A1 Wances for undercoverage of public construc6 ase( o n
irov^ " *
extensive correspondence with State and local
wrnment officials.
vajUe erf ^ e s e adjustments, the data represent estimates of the
been 2°, construction work of each type for which contracts have
^thin t l T U r i l l g t h e month. Some projects undoubtedly are started
Same m o n t h i n whic
h contracts are awarded; others
frill n th
)f
starte(
defi . .
* tmtil two or three months later. In the absence
nlte
^formation on the patterns of these delays, it is more
)r less
y
^ v arl a rei l o f a s s u m e ( * ^ a t their average is one month; the
u
hoss gT
contracts let in the given month (excluding
otaf U e q u e n t l y cancelled) is accordingly taken to measure the
al
ue of projects which will be started in the following




Estimates Based on Building Permits
Building permits are the most important data source for private
nonfarm residential construction. This category of construction is
estimated in four parts: construction of dwelling (housekeeping)
units in areas in which building permits are required; construction
of dwelling units in other areas; construction of nonhousekeeping
units; and additions and alterations. The following tabulation illustrates the relative importance of each of these parts.
Exhibit 29.—Components of Private Nonfarm Residential
Construction, 1947
Item
Dwelling units built under permit
Other dwelling units l
Nonhousekeeping units.
Additions and alterations
Total.
1

Millions
of dollars

Percent

4,360
1,090
125
735

09
17
2
12

6,310

100

Breakdown of the total of these items 13 rough; based on unpublished data.

Estimates of the third item are based upon the contract awards
data which have already been discussed. Estimates of the second
item are based upon procedures explained below. Those of the
first and fourth items are based upon information on building permits, and will be described next.

Nonfarm dwelling units built under permit
Most nonfarm residential construction is carried on under building permits. The permit-issuing officers of the responsible local
governments compile totals for number of dwellings and estimated
value from the records of permits issued, and they report these
totals to the Bureau of Labor Statistics on a monthly questionnaire form.
Coverage of permit-issuing localities is not far from complete—
about 90 percent of all such localities report each month. To allow
for the remainder, the individual localities are first cross-classified
into cells according to type of jurisdiction, location, urbanization,
and population size. A raising ratio for each urban cell is then
computed by dividing the number of localities reporting for the
month into the total number of localities in the cell. For each
rural nonfarm cell, the raising ratio is computed from 1940 population census figures, as the ratio of dwellings in all localities to
dwellings in localities reporting.
Reported values raised by these ratios are next adjusted to allow
for permits lapsing, and then for the understatement of ultimate
construction values which is generally characteristic of estimates
entered on building permits. Periodic field studies are made by the
Bureau of Labor Statistics to determine the appropriate percentage
allowance for each of these factors.

1951 NATIONAL INCOME SUPPLEMENT

116

The timing adjustments next applied—of the same general nature as those of the contract awards data—utilize activity patterns based upon Bureau of Labor Statistics investigations. Specifically to be noted is that the estimates of the lags which occur
between the issuance of permits and the start of the projects are
based upon Bureau of Labor Statistics field studies instead of the
summary assumption used in the case of the contract awards data.

Additions and alterations to nonfarm dwellings
Most local jurisdictions with building-permit systems require
permits not only for new structures but also for additions and
alterations to existing structures. However, compliance with such
regulations is much less complete in the case of additions and
alterations, particularly in rural nonfarm areas. Special problems
are therefore met in translating the permit data on additions and
alterations into estimates of the value of work done. For the urban
United States, the procedure is substantially the same as for new
dwelling units except that no specific adjustment is made for lapsed
permits. The resulting estimates of value of work in place are then
expanded to cover rural nonfarm activity, using relationships between rural nonfarm and urban construction of new units. Studies
of family expenditures—notably the Consumer Purchases Study of
1935-36—provide the basis for a final adjustment which allows
both for understatement of value in permit applications and
for undercoverage of projects.
Estimates Based on Other Sources

Nonfarm dwelling units not built under permit
As is suggested by Exhibit 29, a significant fraction of residential construction occurs in rural nonfarm areas where no building
permit is required. Representatives of the Bureau of Labor Statistics cover a sample (currently, nonpermit-issuing parts of 96
counties) of such areas in much the same manner as representatives of the F. W. Dodge Corp., and report numbers of units
started as well as prevailing average construction costs. Reported
numbers are raised to full coverage by a method similar to that
applied to building permit data for rural nonfarm areas and multiplied by average construction cost. The results are then distributed forward over succeeding months by normal activity patterns.

compilations of reports to trade publications. These estimates
have been projected from 1939 by using figures on the number of
wells completed, as reported in trade sources, multiplied by the
average cost per well. The latter is determined by adjusting the
1939 average cost in each State to take approximate account o
f
changes in labor costs and efficiency, material costs, proportion o
f
wildcat ventures and average depth of wells.

Characteristics of Revisions
New data and methodological or conceptual changes have necessitated occasional major revisions in the estimates of certain
components of construction. For the most part, these revisions have
not been of such a nature as to cast light on the degree of reliability attained in the currently-published series.
There is one component, however, for which the preliminary
results of extrapolation from benchmarks may be compared with
revised estimates derived from later benchmark materials. Estimates for public utilities are generally based in the first instance
largely on reported plans, and are then revised after the financial
reports become available. For years when rapidly changing circumstances have made accurate forecasting difficult or impossible, the
amount of construction actually done may prove to be considerably
larger or smaller than had originally been expected.
As has already been noted, the estimates of new construction
included as components of the various national income and product
tables differ from the most recent estimates of new construction
prepared by the Departments of Labor and Commerce for two
reasons. First, expenditures for oil and gas well drilling are included (in new private construction), and work relief construction
is excluded (from new public construction). Secondly, certain recent revisions in the Labor-Cormneree estimates have not yet been
incorporated: revisions in the totals for nonfarm residential construction to include allowances for additions and alterations,
builders' profit margins, land development costs, and engineering
and architectural fees, for the years 1929-38; revisions^ both
the residential and the nonresidential series to extend their coverage specifically to certain minor types of structures, for the same
years; and routine revisions affecting various years prior to 1948.
The revised Labor-Commerce estimates are reproduced in table 31
in Part V.

Farm construction
Annual estimates of construction on farms are prepared by the
Bureau of Agricultural Economics, and described in Agricultural
Estimating and Reporting Services (Washington, December 1949).
They are based chiefly on data from sample surveys of construction expenditures of farm operators in 1934-37, 1939, and 1946.
Estimates fur other years are made by interpolation aiid extrapolation, based in part uri inferences from data un farm electric lighting systems, windmills, silos, etc., i-eported in the annual Census
of Manufacture arid Sale of Farm Machinery and Equipment. The
bulk of the dollar amounts involved, however, for other than benchmark years represents approximations based on changes in indices of
farm construction costs and in indicators such as estimated consumption of lumber, sales of building materials in rural areas, and nonfarm residential construction. The Commerce Department's farm
construction series represents the Bureau of Agricultural Economics'
expenditure series adjusted to exclude estimated expenditures for
building repairs.

Oil and gas well drilling
Oil and gas well drilling is not classified as new construction
in the classification system employed by the Construction Division
of the Department of Commerce, which prepares the estimates,
but is included as such in gross national product. All costs of
drilling are covered, including the cost of casings (but not the cost
of installed production equipment).
Estimates for the base year 1939 were derived for each State
from data gathered in the 1939 Census of Mineral Industries and



10.—PRODUCERS' DURABLE EQUIPMENT
The commodity flaw method, summarized in the section on Personal consumption expenditures for commodities, is the principa
erne used in estimating producers' purchases of durable equipmen •
H accounted for 69 percent of the total in 1939. (See Exhibit *°->
For the 1929-39 period, the availability of requisite data, mainly
from the manufactures and trade censuses, made it possible
carry out the method in detail. The numerous estimating step^
entailed segregating finished producers' durables from total manufacturing output and then tracing their flow and measuring tnei
distributive costs so as to arrive at the final costs to purchaser.
(See Exhibit 81.)
Lack of industrial census materials has prevented a detajie
application of the commodityflowmethed for the years since 194U>^
For the war years 1942-45, the method in abridged form was vs*
to establish "secondary" benchmarks, based mainly on informati >
arising out of production-control programs, on the comrt}°Z/B,
breakdown of manufacturers* sales in the metal fabricating i»d *
tries. Government purchases and exports were eliminated fr°m
sales data. It was not possible, however, to trace the flow of i»8
not

21
The results of the postwar Censuses of Marrafactiires and Business have »
et been incorporated into the estimates. New benchmark estimates for
now in preparation.

SURVEY OF CURRENT BUSINESS
ufacturers* domestic sales of finished equipment through the various
distributive channels. Adjustment for inventory change was ignored
and transportation allowances, wholesalers' markups, and retailers'
markups were added to manufacturers' domestic sales by application of 1939 percentages.
Exhibit 30.—Producers' Durable Equipment, 1939
Item

Percent

Estimated by commodity flow method

63.3

Eitimated by other methods:
Business motor vehicles.
.Railroad and transit equipment..
Ships and boats

24.9
4.4
1.9

Total producers* durable equipment-_

100.0

Estimates for the commodity flow segment of producers' durables
for 1940 and 1941 and for the postwar years represent interpolations and extrapolations of the 1939 and war-period benchmarks.
With some variation between the two periods, the interpolating and
extrapolating procedures accounted separately for manufacturers'
commodity sales, government purchases, transportation allowances,
exports, and wholesalers' and retailers' markups. Again, 1939 percentages formed the basis for estimating transportation charges
and distributors' markups.
As described in the notes on consumer commodities, the commodityflowportion of personal consumption expenditures has been
estimated for years since 1940 very largely by extrapolating the
1939 commodity group estimates by retail sales. This was feasible
because a very high proportion of consumer commodities is purchased at retail (and purchases by nonconsumers do not bulk large
in the retail sales totals).
For producers' durables, however, the procedure of utilizing a
single extrapolating series would not be valid. These goods are
purchased in large volume both from manufacturers and wholesalers. Also, substantial quantities of durable equipment are
channeled through manufacturing and wholesale trade for government use and export, and these (particularly government purchases) have fluctuated widely in relative importance since 1939.
Continuation of the commodity flow approach after 1939 was necessary to provide the basis for separate measurement of these major
elements.
For three of the producers' durable groups, as shown in Exhibit
30, it has been found preferable to prepare estimates by methods
other than the commodity flow. The largest such group is business
motor vehicles, which formed 25 percent of the 1939 total. For
each of the components of this group—passenger cars and trucks
and busses—the general method consists of multiplying the estim
*ted number of units purchased by producers by an appropriate
average price.
Expenditure data reported by the Interstate Commerce Com^ssion are the basic source for estimating producers' outlays
«* railroad and transit equipment. The ships and boats series,
of
minor quantitative importance, was estimated by the comm
<><iity flow method in the 1929-38 period. For subsequent years,
rthas been derived mainly from various data provided by the
maritime Administration and the Bureau of Customs.

Considerations regarding reliability
h the section describing the sources and methods of estimating
ion
g
dit
f
dities
consumption expenditures for commodities, the conclusion is
r
^ched that the totals for the large commodity flow segment
w consumer commodities for the years 1929-39 are "not mark«% in error". Analysis of the essential differences in the applica
*ion of this method to the consumer and the producer durables
^ e s Indicates that even higher reliability may be attached to the
at
*er. Two points, amplified later, are of main relevance.
*]rst, the problem of allocation was considerably less m the
Producer durable series. With relatively few exceptions, commod


117

ities listed in the Census of Manufactures could be selected in their
entirety for assignment to the producers' durable groups (apart
from the special problem of government purchases) • In the consumer commodity series, a much larger part of manufacturers'
estimated sales of finished commodities was derived from allocation of "mixed" groups. In general, estimation and judgment—
and hence possible error—are involved to a greater extent in allocation than in the selection of finished items.
Secondly, the successive estimating adjustments to manufacturers' sales required by the commodity flow method, as illustrated
in Exhibit 31, were relatively smaller for producers' durable
equipment than for consumption commodities. Such adjustments
were roughly offsetting in the producer durable series in the prewar period, and were not of substantial magnitude individually.
By contrast, retailers' markups alone formed 28 percent of the
1939 final value of consumer commodities estimated by the commodity flow method.
Pending the completion of the new 1947 benchmarks, any definitive appraisal of the 1940-50 estimates of producers' durable
groups derived by the commodity flow approach is not possible.
It is clear, however, that their reliability is significantly less than
that of the 1929-39 estimates.
For the war pericd, the estimates are known to be subject to
appreciable error from two specific sources: the elimination of
parts and other unfinished products from sales at the manufacturers' level, and the deduction of government purchases. For
most of the commodity groups, purchases of durable equipment
by government during the war exceeded those by business.
For the 1940-41 and postwar periods, manufacturers' commodity sales were interpolated and extrapolated largely by industry sales data, which have significant limitations in such use.
And for all years since 1940, the estimates are subject to error
through the use of 1939 relationships to determine the major
elements of distributive costs.
Concerning the commodity groups based on other methods, the
business motor vehicles series may, at best, be regarded as fairly
adequate. The passenger car equipment component, forming the
major portion of it, depends on an allocation between consumers and
business which is based on limited information. However, errors in
this allocation do not affect the gross national product total. The accuracy of the estimates for trucks and busses is impaired by the
necessity of making several sizable estimating adjustments on the
basis of partial information.
The series on railroad and transit equipment is believed to be
relatively accurate. The basis for deriving the ships and boats
series has not been satisfactory for the period since 1939.
A rough check on the postwar estimates of producers' durable
equipment is possible through comparison with the results of the
New Plant and Equipment Survey conducted jointly by the Office
of Business Economics and the Securities and Exchange Commission. This series differs in definition from the producers' durable
estimates (it is confined to nonagricultural industries, includes
plant as well as equipment, but excludes purchases of equipment
charged to current expense, to mention the major differences),
and adjustments to secure comparability cannot be made in a fully
satisfactory way. However, to the extent that comparisons are
possible, they have been broadly reassuring for most of the postwar
period, both as to level and as to annual movement.
The balance of this section describes the estimates of producers'
durable equipment prepared by the commodity flow approach—
separately for the 1929-39, 1940-45, and 1946-50 periods—and
by the other methods.

Commodity Flow Estimates, 1929-39
As already noted, the commodity flow method was used to derive estimates for the 1929-39 period for producer durable groups
comprising 69 percent of the 1939 total. The method was employed
extensively for this period also in the estimation of personal
consumption expenditures for commodities (yielding 84 percent of

118

1951 NATIONAL INCOME SUPPLEMENT

Exhibit 31. Derivation of Total Producers* Purchases of Durable
the 1939 total), and was explained at some length in the section
Equipment Estimated by the Commodity Flow Method, 1939
describing that series.
[Millions of dollars]
The application of the method in the estimation of producer
durables and consumer commodities was substantially similar,
Distribution of finished and mixed manufactured commodities, before
25,969
deduction of government purchases of durable equipment, _
so that no attempt has been made here to repeat the description
13,532
in the earlier section. However, there were several particular asa. Finished.
pects in which the methodology differed. Further, individual steps
2,873
1. Producers'durables—
9,245
2. Consumer commodities
in the estimating procedure varied widely in relative importance
1,414
3. Combined, allocated to
195
between the two series and have marked bearing on their statistical
a. Producers' durables. _--<
1,219
b. Consumer commodities..
reliability. These two types of differences may be summarized by
12,437
b. Mixed, allocated to_
reference to Exhibit 31, which outlines for 1939 the individual steps
334
in the derivation of total producers' durables estimated by the
1. Producers'durables
8,233
2. Consumer commodities—
3,870
commodity flow method.
3. Unfinished
Distribution of finished and mixed manufactured commodities,
, Manufacturers' production of finished producers' durables, before deduc3,402
tion of government purchases [la(l) + l a ( 3 a ) + l b ( l ) ] - •
before deduction of government purchases of durable equipment.—-24
(Line 1.) To a very large extent—much larger than in the case
Subtract: Change in manufacturers' inventories
of consumer commodities—it was possible, from the extensive
Equals: Manufacturers' sales of finished producers' dmables, before de3,426
commodity detail presented in the biennial Census of Manufacduction of government purchases
tures, to assign a given commodity to producers' durable equipment
294
Subtract: Government purchases of durable equipment
in its entirety or not at all. Direct selection and assignment of
3,132
Equals: Manufacturers' sales of finished producers' durables
reported values accounted for 84 percent of the 1939 total (line 2)
74
Add: Transportation charges
of manufacturers' production of finished producers' durables (beEquals: Manufacturers' sales inclusive of transportation charges, disfore deduction of government purchases). Six percent represented
3,206
tributed to
allocations from the combined group of finished commodities hav544
a. Exports
1,263
ing appreciable use both by producers and consumers. The reb. Wholesalers
197
c. Retailers
maining 10 percent was derived from allocations of the "mixed"
1,202
d. Businesses and nonprofit institutions, for own u s e .
category. This includes commodities which could not be classified
16
9. Imports.
directly as wholly finished or unfinished. They belonged in part
1,279
10. Total purchases by wholesalers [8b+9]
to the unfinished category and in part to producer durable and/or
6
consumer commodity categories, and required allocation among
11. Subtract: Change in wholesalers' inventories. _
1,273
them.
12. Equals: Cost of goods sold by wholesalers
Net errors of 20 percent in these two allocations—an unlikely
291
Add: Wholesalers* markups
extreme—would have meant an error of only 3 percent in the 1939
1,564
Equals: Wholesalers' sales, distributed to__
value of manufacturers' output of finished producers' durables
354
a. Retailers
(before deduction of government purchases), as contrasted with an
1,210
b . Businesses and nonprofit institutions, for own use.
error of 9 percent in the manufacturers' value of finished con551
sumer commodities.
Total purchases by retailers [8c+14a]_
Allocations from the combined finished grouping involved only
. Subtract: Change in retailers' inventories
543
three of the producers' durable commodity groups listed in table
, Equals: Cost of goods sold by retailers
193
32 of Part V. These are nonresidential furniture and equipment,
. Add: Retailers' markups .
tools, and miscellaneous subsidiary durable equipment. Allocations
735
from the mixed category affected only general and miscellaneous
. Equals: Retailers'sales
Producers' purchases of durable equipment estimated by the commodity
3,1*7
machinery and equipment, aircraft, and (to a very small extent)
fiow method [8d+14b+19]
_•
miscellaneous subsidiary durable equipment. For all of the other
twelve commodity groups for which the commodity flow method
was used, the values of manufacturers' production of finished progovernment purchases, the deduction was made after manufacducers' durables (before the government deduction) represented
turers' sales had been derived from manufacturers' production b
y
selections of detailed commodities given in the Census of Manuadjusting for changes in inventories.
m
factures.
Deduction of government purchases of durable equipment^
There were two related statistical differences between the pro(Line 5.) Comprehensive information on government purchases o
ducer durable and consumer commodity estimates with respect to
durable equipment was lacking. Federal purchases were estimate
the classification of finished and mixed manufactured commodities.
by drawing on a number of different sources, which S ener M
(1) In the allocation of consumer commodities primary use was
pertained to one or more of the years 1937-39 only, and re(*u"!
made of information on the distribution of sales by class of puradjustment for differences in definition or timing. For earii
chaser given in the Census of the Distribution of Manufacturers'
years, it was frequently necessary to employ indirect metho ^
Sales. Data reported under the designation of "Sales to industrial,
which for the most part were not satisfactory. Such methods we
commercial, professional, and institutional users" were taken to
necessary for estimating State and local purchases in all yea
indicate the unfinished part. This could not be done in the case
of the period.
of producers' durables since finished producers' durables as well
The annual (1929-39) information on Federal aircraft purchases
as unfinished commodities are included in sales to these user
supplied by the Department of the Navy and the Air Force was qu
groups. It was necessary, therefore, to allocate the mixed category
titatively the most important source of data on government P
for producer durables on the basis of various types of specific
chases of durable equipment. Aircraft purchases alone aC(;ounbl
commodity information, with some resort to judgment and outside
for two-fifths of the estimated government total and considers
expert advice.
enhanced its accuracy.
(2) Unlike the procedure that could be followed in the conThe source most generally used in estimating Federal
sumer commodity estimates, where the government deduction was
of other items was the tabulations by the Bureau of
made jointly with all other nonconsumer elements except exports,
tistics of orders under the Walsh-Healey Act, available on a qj*
qj*
this deduction was carried out as a subsequent, separate step.
terly basis beginning with 1937. These tabulations excluded41°nOo0.
Since the available data for making the adjustment related to
classified as secret or confidential or amounting to less than *iu.



SURVEY OF CURRENT BUSINESS
No adjustment for this incompleteness of scope was attempted.
The reported data were always shifted ahead, generally by one
quarter, to time them more nearly with actual deliveries. It frequently was necessary to estimate, and deduct, the amount of parts
included in the Walsh-Healey data, and also to adjust for differences in commodity definitions underlying these data and the
producer durable series.
For a number of the commodity groups, data on Federal purchases were available for 1938 from the report of the Temporary
National Economic Committee on Study of Government Purchasing.
These data, too, generally required adjustment for parts and
accessories or for differences in commodity definition.
Data on Federal purchases of durable equipment furnished by
the Treasury Procurement Division could be utilized for a few of
the commodity groups. For two groups—electrical apparatus and
equipment and office machinery—data obtained for part of the
period from several large manufacturing concerns formed the
basis for estimating Federal purchases.
The estimates of government purchases of durable equipment for
the 1929-39 period are probably conservative. Walsh-Healey data,
as mentioned, are not complete, and State and local purchases
were estimated for only those commodity groups in which such
purchases were presumed to be of appreciable magnitude.
In this period, however, government purchases were not large.
Even an error of 20 percent—which seems unlikely, particularly
in view of the relative accuracy of the aircraft item—would have
affected the 1939 estimate of manufacturers' sales of finished
producers' durables (line 6, Exhibit 31) by only 2 percent.
The estimated deduction for government purchases was negligible or less than 5 percent of manufacturers' sales before this
deduction (line 4) in special industry machinery, mining machinery,
general and miscellaneous machinery and equipment, pumps and
pumping equipment, metal working machinery, farm machinery
and equipment, tractors, durable containers, and professional and
scientific equipment. It exceeded 15 percent only in construction
machinery and aircraft.
Other steps of procedure.—Manufacturers' sales of finished
producers* durables (line 6) account for all producers' sales of
finished durable equipment estimated by the commodity flow method; there are no nonmanufactured producer durables. In the
derivation of consumer commodities by this method, the value of
nonmanufactured foods (agricultural and fishery products) had to
oe accounted for and added to manufacturers' sales.
It is evident from the foregoing discussion that, because of
the lesser problem of commodity allocation, manufacturers' sales
°* foished producers' durables may safely be presumed to be a
ttore accurate measure for the 1929-39 period than producers'
sales of finished consumer commodities. Of further relevance in
gauging the reliability of the producers' durable and consumer
commodity series is that the adjustments which had to be made
to convert producers' value to final market value were relatively
small for producers' durables. The central fact here is that only
a
comparatively small volume of producers' durables flows through
ttl
e retail channel, whereas retailers handle the large bulk of all
commodities purchased by consumers. In 1939, manufacturers' sales
°*finisheddurable equipment were virtually the same as the final
Value
of producers' durables. In broad outline, the deduction of
manufacturers' s a l e s fl°wing into exports was approximately offset
y the additions for wholesalers' and retailers' markups on comniodities flowing through trade channels. Only these three adjustj t s We re of any quantitative importance; even unexpectedly
ge
errors in them would not have had substantial effect on the
fl
fi
ftal total.
For consumer commodities, on the other hand, producers' sales
1 Q S h e d coinmodities represented only three-fifths of the final
QQ
of «.ValUe e s t i m a t e <* ^ the commodity flow method. Three-fourths
«ie large remainder was accounted for by retailers' markups.
liG tn
ese could be estimated in generally satisfactory manner,
th
d
gy
ere
w nevertheless room for appreciable error. Thi comparaaa
was
Their



119

tive unimportance in the producer durable series (6 percent of the
total) is an important additional element contributing to its statistical reliability.
Two further, minor differences in the application of the commodity flow method to producer durables and consumer commodities may be noted.
First, in the consumer commodity series exports were eliminated
partly at the producer level and partly at the wholesale level. In
the producers' durable estimates, exports were eliminated in their
entirety at the producer level. They were deducted (in step 8a)
as part of the distribution of manufacturers' sales, inclusive of
transportation charges.
The second difference is that the consumer commodity estimates, but not the producer durable estimates, required a final
adjustment for the addition of general retail sales taxes.
Commodity Flow Estimates, 1940-45
As noted in the introductory remarks, a modified commodity
flow method has been followed in estimating producers' durable
equipment after 1939 for those groups to which this method was
applied in detail for the 1929-39 period.
For the 1940-45 period, the main procedure, by commodity
groups, involved (1) derivation of manufacturers' sales of durable
equipment; (2) reduction of these sales estimates to cover sales
of finished producers' durables for private domestic use only; and
(3) addition of transportation charges and wholesalers' and retailers* markups.

Derivation of manufacturers9 sates
For most of the producer durable groups, comprehensive and
detailed commodity sales estimates (before deduction of government purchases and exports) could be derived for the years 194245. The primary source was the reports submitted on Form WPB732 by the largest private and government-owned plants engaged
in fabricating or assembling metal products beyond the primary
stages. These reports—made quarterly from the fourth quarter of
1943 through the second quarter of 1945 and then monthly through
the second quarter of 1946—were collected and tabulated by the
Bureau of the Census for the War Production Board, and published in the Census Facts for Industry releases. The "732" tabulations accounted for an estimated 90 percent of sales in the
metal-products industries covered. These were raised to full coverage on the basis of similar commodity information for the first
quarter of 1945 compiled by the Census Bureau for the Smaller
War Plants Corporation.
The detailed commodity data derived from the "732" reports,
as supplemented by the Smaller War Plants Corporation data,
were extrapolated from the fourth quarter of 1943 back through
the third quarter of 1942 on the basis of unpublished commodity
sales figures collected and compiled by the Census Bureau for
the War Production Board. These compilations covered about 3100
large metal-products plants accounting for four-fifths of all fabricated metal products in the first quarter of 1945.
The individual commodity data were then extended from the
third quarter of 1942 through the first quarter of that year by
less detailed commodity data compiled from an earlier and smaller
Census-War Production Board sample.
While the number of individual commodity items which could
be derived from the "732" and related data was substantially
less than that given in the 1939 Census of Manufactures, it
generally was unnecessary to make many more allocations from
mixed groupings than in the prewar estimates. These allocations
were made almost entirely on the basis of relationships developed
for 1939 from census materials, although in some instances the
availability of specific information from either Government or
private sources permitted a modification of the prewar ratios.
One major problem, however, was encountered in eliminating
unfinished commodities from the war-period commodity sales esti-

120

1951 NATIONAL INCOME SUPPLEMENT

mates. This related to parts, which generally were not segregated
in the basic sources from complete, or finished, equipment. For all
of the years 1942-45, parts were eliminated from the otherwise
"finished" sales estimates by application of 1039 census-based
ratios of the value of parts to the value of finished commodities
plus parts for each of the major producer durable groups. The
method for making this sizable adjustment—apart from failing
to account for changed composition of the commodity groups between 1939 and the war period—may have resulted in an understatement of the allowance for parts (and an overstatement of
finished commodity sales) because of their probably more widespread use during the war.
Estimates of manufacturers* sales of producers' durables (before deduction of government purchases and exports) were obtained for 1940 and 1941 by interpolation between the 1939 and
1942 estimates on a commodity group basis. For this purpose,
commodity data were almost wholly lacking.
As much information as possible was gathered from specifically
relevant sources. For example, the mining machinery series was
interpolated by an index based on capitalization of the Oklahoma
tax on sales of oil field equipment and of the California tax on
sales of oil well and refining supplies. As part basis for interpolation of the metal working machinery series, sample figures on
machine tool sales were obtained from the War Production Board.
For tractors, comprehensive sales data were available from the
Bureau of the Census. However, it was also necessary to make
considerable use of less direct indicators, such as industry payroll
and sales data, chiefly the annual corporate sales tabulations of
the Bureau of Internal Revenue.

Elimination of government purchases and exports
The methods by which government purchases and exports were
eliminated from the commodity sales estimates for the years
1940-45 varied among the producer durable groups and, because
of differences in the underlying data, within various parts of the
period. In general, however, there were two principal methods.
(a) For the period covering the third quarter of 1942 through
1945, "claimant agency" data from Census-War Production Board
reports generally were used as the basis for determining the ratio
of private domestic to total sales. However, these data, which
recorded the value of products allocable to military and export
claimants, were not strictly appropriate for this purpose. It is
believed that they might also have covered to some extent products
allocable to final users (such as privately owned manufacturing
plants engaged in war output). On the other hand, they did not
account for civilian government purchases. It is probable that, on
balance, the war-period government deductions implicit in the
ratios were overstated.
This limitation of the estimates may be viewed in conjunction
with the probable overstatement of the commodity sales estimates
because of inadequate elimination of parts and other unfinished
products. The two biases, though not at all necessarily of similar
magnitude, would tend to offset.
(b) For the period 1940 through the second quarter of 1942,
the principal source of data for computing the ratios of private
domestic to total sales was the Census-Civilian Production Administration report on Facilities Expansion, July 1940-June 1945,
From this report, ratios of non-Federally financed equipment put
in place to total equipment put in place were calculated for subperiods of the period extending from the third quarter of 1940
through the third quarter of 1942 for industries considered to be
the main purchasers of the commodities in each major producer
durable group. These ratios were used to interpolate between ratios
of private domestic sales to total sales for the third quarter of
1940 and the third quarter of 1942. Ratios for 1939 generally were
used for the third quarter of 1940 (as well as for the first two
quarters), and the third-quarter 1942 ratios were those derived
from the claimant agency data. In this process, explicit allowances



for exports and State and local government purchases were made
for some commodity groups in order to avoid evident bias.
The facility equipment data were not very appropriate for this
type of use. The matching of equipment values classified by industry of purchaser with producers' durable equipment purchased
was necessarily quite rough.
The foregoing methods of eliminating government purchases for
the years 1940-45 did not cover Defense Plant Corporation purchases, as these were not classified in the amounts allocable to
military and export claimants in the claimant agency data. Data
on these purchases were obtained directly from the Corporation.
They were not available by commodity groups and, after certain
adjustments such as to exclude parts and site-erected equipment,
were entered in table 32 in Part V in the line "Less: Government
purchases not allocable."

Addition of transportation charges and distributors9 markups
For each of the producer durable groups, the percentages that
transportation charges, wholesalers* markups, and retailers' markups were of manufacturers' domestic sales of finished producers'
durables in 1939 were applied to the corresponding sales estimates
for each of the years 1940-45. For all groups combined in 1939,
these three items of distributive cost amounted to one-fifth of
manufacturers' domestic sales of finished equipment to producers.
Consideration was given to extrapolating the markup ratios on
the basis of Bureau of Internal Revenue data on sales and cost
of goods sold from the tabulations of corporate income tax returns. However, these data—available not by commodities but only
for broad industry groups—would have been seriously inadequate
in this application.
Commodity Flow Estimates, 1 9 4 6 - 5 0
For the producers' durable groups estimated by the commodity
flow method, a somewhat different modification of the detailed
method has been employed for the years since 1946. Omitting a
number of quantitatively minor steps, the procedure entails the
following series of estimates: (1) Derivation of manufacturers'
sales of finished durable equipment for the major commodity
groups, prior to deduction of exports and government purchases;
(2) addition of transportation charges; (3) deduction of exports;
(4) subtraction of change in wholesalers' inventories; (5) addition
of wholesalers' and retailers' markups; and (6) deduction of government purchases.

Derivation of manufacturers9 sales
Estimates of manufacturers' sales were derived for the first and
second quarters of 1946, it will be recalled, from the War Production Board "732" data, supplemented hy the Smaller War
Plants Corporation data for small plants. Estimates for subsequent
periods have been made for eight of the commodity groups by
extrapolating the second-quarter 1946 estimates (before deduction
of government purchases and exports) by industry sales data from
the manufacturers' sales series of the Office of Business Economics.
Currently this series is based on a sample of reporting companies
which account for more than 45 percent of total manufacturing
sales. For three groups, data on wholesalers' sales, by line of
business, from the Census Bureau's monthly "identical firm
sample of about 3,000 service and limited-function wholesalers have
been used for extrapolation. For mining machinery, CommerceSecurities and Exchange Commission estimates of equipment expenditures by the mining industry are used. For the remaining
five groups estimated by the commodity flow method, Census current sample reports on manufacturers' commodity sales are available.
The use of industry data to extrapolate commodity sales has
serious drawbacks. The data include indeterminate amounts of
unfinished and consumer products; and they are also inappropriate
for any particular group to the extent of including secondary prod-

SURVEY OF CURRENT BUSINESS
ucts classified in other producer durable groups and of omitting
products in that group included in the sales of manufacturing
industries other than the one used for extrapolation. Moreover,
these limitations cannot be minimized by employment of finely
detailed industry data, because such detail is not available from
the sample sales series. Mainly because of the lack of commodity
data for extrapolating manufacturers' sales, the estimates of producers' durable equipment since 1946 have not been published for
the individual commodity groups.

Adjustments of manufacturers9 sales
Transportation charges have been added to the commodity-group
estimates of manufacturers' sales since 1946 by the application
of 1939 percentages.
Exports have been estimated (and deducted) on the basis of
commodity data tabulated by the Foreign Trade Division of the
Bureau of the Census. The method—similar to that used in the
1929-39 estimates, but applied in summary fashion because of
the comparative crudity of the postwar estimates—involves the
selection of commodities listed in the export classification to match
as closely as possible those included in the producer durable groups.
The adjustment for changes in wholesalers' inventories has been
based on sample inventory data collected by the Census Bureau
in its current identical-firm sample referred to above. The yearend 1939 inventory totals for the major commodity groups have
been projected to the recent period by the type-of-business figures
reported in this sample.
The addition of wholesalers' and retailers1 markups to manufacturers' sales since 1946 has been made through the continued
application of 1939 percentages.
The final adjustment is the deduction of government purchases.
Federal purchases have been estimated by commodity groups
largely on the basis of Bureau of Labor Statistics tabulations of
orders under the Walsh-Healey Act, as discussed earlier in this
section. State and local government purchases have been estimated
and deducted in total, not by commodity groups. The series used
has been developed in connection with the National Income Division's estimates of State and local government purchases. It is
obtained by extrapolating a 1942 benchmark, derived from the
Census of Governments, by State and selected city and county
data compiled by the Census Bureau in its annual Financial Statistics series.
Other Methods

Business motor vehicles
The producer durable series on business motor vehicles covers
Passenger cars and trucks, truck trailers, and busses (other than
those purchased by utilities).
The passenger car component has been discussed in the section
°n Personal consumption expenditures for commodities. It consists
°* the business share of the combined consumer-business total of
n
ew car purchases and gross margins on used car sales. The percentage allocation between consumers and business is based on
limited information for the 1934-37 period, and has been held
instant except for modifications in the war period to take account
of the probable effects of rationing.
^ e estimation of producers' purchases of trucks, truck trailers,
and
bosses, though differing somewhat for the prewar, war, and
Postwar periods, has involved the general method of multiplying
he
estimated number of units purchased by an appropriate average
price.
For the 1929-41 period, the number of trucks and busses purchased by producers at retail was derived by deducting estimated
government purchases from comprehensive totals reported an£ually by the Automobile Manufacturers Association in Automobile
acts and Figures. The number of units purchased by producers
jurectly fro m manufacturers was taken as 20 percent of the numer
Purchased at retail. This was a rough ©stimate based on data
n
the 1929, 1935, and 1939 Census of the Distribution of Man


121

ufacturers' Sales covering sales of trucks, busses, passenger cars,
bodies, parts, and accessories.
The number of trucks and busses purchased directly from manufacturers was multiplied by an annual average factory price as
computed from data in Automobile Facts and Figures and raised
to cover transportation charges. The latter were estimated on the
basis of information provided by the Office of Price Administration.
Producers' purchases at retail were multiplied by this average price
series after it had been further increased to allow for dealers'
markups, computed from data on passenger cars published in
Automobile Facts and Figures,
The estimated total value of trucks and busses purchased by
final users both directly and at retail was adjusted to include
bodies sold separately from chassis and to exclude busses purchased by transportation utilities (covered in the series on railroad
and transit equipment). These adjustments were small and of
approximately the same magnitude.
Purchases of truck trailers were estimated separately and added.
The value of truck trailers produced, benchmarked on Census of
Manufactures data for 1935, 1937, and 1939, was adjusted to
exclude exports and government purchases and to include transportation charges. A markup allowance was added to the estimated
portion of the total sold through dealers.
The methods employed for making the prewar estimates were
not suitable for the years 1942-45. The price series used in the
1929^1 estimates were greatly affected during the war by the
large volume of high priced military vehicles. Also, the methods
of estimating government purchases would not have been satisfactory for the war period, when such purchases were of substantial magnitude.
Data on the numbers of heavy, medium, and light trucks and
busses shipped to civilian domestic users—the approximate measure desired—were supplied for the years 1942-45 by the Office of
Defense Transportation. Separately for the three size classes of
vehicles, numbers shipped were multiplied by price series representing special estimates for 1939 extrapolated to 1942 by indexes of
the Bureau of Labor Statistics and to 1945 by unpublished data
of the Bureau of Agricultural Economics. The weights used were
for 1939 in order to exclude the effects of war-period military
purchases.
The Office of Defense Transportation also provided figures on
the number of truck trailers shipped for civilian domestic use during the years 1942^5. These totals were multiplied by an average
1939 factory value extrapolated to 1942 and then to 1945 by the
series for light trucks (noted above) used in estimating new truck
purchases.
Dealers' gross margins on sales of used vehicles, assumed to be
reflected in the average price data used for the 1929-41 estimates,
were explicitly added to the series beginning with the 1942 estimates. For the years 1942-45, such margins were taken as 15
percent of estimated purchases of new trucks and busses.
The estimates for years since 1946 have involved, first, derivation of the total factory value of domestic sales of trucks and
motor coaches, on the basis of data of the Automobile Manufacturers Association on the number of units sold and average factory
value. The Census Bureau has reported data on factory sales of
truck trailers. These series have been converted to final purchase
values by adding the same percentage allowances for transportation costs and dealers' markups as used for 1941, deducting estimated government purchases, and adding 10 percent (again largely
arbitrary) of the final value of new trucks and busses for dealers'
margins on sales of used vehicles.

Railroad and transit equipment
The most important component of this group, equipment expenditures of class I railroads, was obtained from the Bureau of
Railway Economics of the Association of American Railroads for
the prewar and war periods and from the Interstate Commerce

122

1951 NATIONAL INCOME SUPPLEMENT

Commission for subsequent years. This series has been raised
(about 6 percent) to allow for the estimated expenditures of class
II and class III railroads. Other components of the group total
include (1) equipment expenditures of transit corporations for
electric cars, trolley coaches, and busses, data for which have been
published annually by the American Transit Association in its
Transit Fact Book; (2) expenditures for Pullman Corporation cars,
as published in Statistics of Railways by the Interstate Commerce
Commission; and (3) the value of tank car purchases (not included in the railroad equipment figures), estimated by multiplying the number of tank cars as reported by the American Railway
Car Institute by the average value of tank cars as published annually in Statistics of Railways.

Ships and boats
For the years 11)29-38, business purchases of ships and boats
were derived by the commodity flow method. The estimates since
1039, which are subject to serious limitations, have been prepared
as the sum of separate series for subsidized ships, ships completed under private contract, and boats.
The Maritime Administration has provided data on sales of subsidized merchant vessels of 2,000 tons or more. Valuation is at cost
to the purchaser, exclusive of the Government subsidy. In order
to match the timing of entries in the government account, no
attempt has been made to convert sales to value of work in place.
The Maritime Administration also has provided lists of merchant vessels completed under private contract. These have been
valued at figures given by the same source for comparable vessels,
either subsidized or Government purchased, and for recent years
with the aid of specific price data furnished by the National
Federation of American Shipping. The resulting total values have
been averaged for successive years in order to obtain a better
measure of work performed during a given year.
The estimates of purchases of motor vessels and barges, lighters,
and other unrigged boats, which represented about two-fifths of
the ships and boats -total in 1939, are benchmarked on value of
output data given in the 1939 Census of Manufactures, adjusted
to exclude Navy expenditures on motor vessels built in private
shipyards. The base-year figure for 1939 has been extrapolated by
a series representing annual tonnages of private boats documented
for commercial use (after elimination of the estimated tonnage of
used vessels documented) as published by the Bureau of Customs,
adjusted for price changes by the Maritime Administration index of
construction costs.
Revisions
In the absence of new benchmark information such as the Census
of Manufactures and Business, revisions of the estimates of producers' purchases of durable equipment which have been made
since publication of the 1947 National Income Supplement have
been due chiefly to the inclusion of later data and to certain
changes in procedures. Therefore, the revisions to date, which have
been relatively small, are not to be construed as any sort of gauge
of the reliability of the estimates for the recent period.

11.—CHANGE IN BUSINESS INVENTORIES
This section deals with the change in nonfarm business inventories and the inventory valuation adjustment. Farm inventories are covered in the section on the Income of unincorporated
enterprises.
The basic sources of the nonfarm inventory estimates are reported accounting data on the value of inventories. These data
have a high degree of coverage. Bureau of Internal Revenue tabulations from annual corporation tax returns alone account for about
four-fifths of the estimated value of nonfarm inventories. Periodic



data on the value of noncorporate inventories are available from
Bureau of Internal Revenue and Census Bureau compilations.
The adequacy of the inventory estimates included in national
income statistics is, however, less than might be suggested by the
coverage of the book value data and the reliability of the basic
sources from which they are drawn. The extension of reported
values to full coverage introduces some uncertainty into the estimates, but their main source of error stems from the fact that
the accounting methods underlying the reported data are divergent
and inappropriate for national income purposes. Inventory calculation at the level of the individual business firm is a complex
problem, and existing accounting methods vary widely both with
respect to the scope of the cost elements (especially overhead costs)
included in the inventory account and with respect to the costing
procedures used to charge goods to cost of sales and to inventories,
respectively.
The scope-of-cost-limitation of the basic data reported by business
is accepted in estimating the inventory components of national
income and product. However, a uniform and appropriate costing
procedure is substituted for the divergent procedures used by
business firms (such as firston, first-out and last-in, first-out).
This results in a measure, for inclusion in the gross national product, of the physical volume change in inventories valued at average
prices during the period. The excess of this measure over the bookvalue change in inventories represents the *'inventory valuation
adjustment". This adjustment is added to the business-income components of national income and secures measures of earnings from
current production consistent with the treatment of inventories
in the gross national product.
This adjustment of the reported book value data is a quite difficult
procedure, involving the revaluation of the entire volume of nonfarm business inventories given only limited knowledge of the
prices reflected in them.
Also important is that the estimates of inventory change included
in national income and product are calculated as the difference
between large and usually volatile inventory totals at two points
of time. Even small errors in the data on total inventories can
lead to large relative errors in the estimates of inventory change.
Finally, it should be noted that the comprehensive accounting
data on inventories become available only after.a lag of several
years. Current estimates must be based upon less satisfactory
sources.
General Estimating Procedure
The procedure for deriving the current value of the physical
change in nonfarm business inventories and the associated inventory valuation adjustment is carried out separately by detailed
industry groups. The limitations already noted of the all-industry
estimates of the inventory valuation adjustment attach to the
individual industry estimates to an even greater degree.
The general procedure of estimation involves six principal steps,
as summarized below.
(1) Reported book values of year-end inventories are raised
to complete coverage.
(2) Estimates of the portion of total book value that is reported on a last-in, first-out (LIFO) basis are deducted from
the totals and separately processed. This step is necessary because
the valuation procedure underlying LIFO inventories requires an
adjustment procedure which differs from that applicable to the remainder of business inventories.
(3) The estimates of book value of non-LIFO inventories are
converted to a constant price basis by means of price deflation
procedures.
(4) The change in these inventories at constant prices is obtained by subtracting beginning from ending inventories at
constant prices.
(5) The current value of the physical change in inventories is
obtained by multiplying the change in inventories at constant
prices by the ratio of current prices to the constant price base.

SURVEY OF CURRENT BUSINESS
(6) The inventory valuation adjustment is obtained by subtracting the change in the book value of inventories from the current
value of the physical change in inventories.
Step (5) yields the inventory component (other than LIFO) of
gross national product. The result of step (6) constitutes the corresponding adjustment to corporate and noncorporate enterprise
incomes, which are calculated initially on the basis of the inventory
accounting methods underlying reported inventory data.
The estimating procedure is illustrated in Exhibit 32 by actual
data for a single industry. Calculations of a similar nature are made
for each of the industries shown in table 22 of Part V. In the alcoholic
beverages and tobacco manufacturing industries, however, direct
quantity data instead of deflation procedures are used to estimate
changes in inventories.
To simplify the exhibit, an industry was selected in which LIFO
inventories are negligible, and consequently step 2 is omitted. Also,
the exhibit is confined to the corporate sector of the industry. Similar
calculations are made for the noncorporate sector of each industry.
As will be seen, the derivation of book values differs for the two
sectors. However, the data and methods used in the revaluation of
these book values are the same within each industry.
Exhibit 32.—Derivation of Change in Business Inventories and
Inventory Valuation Adjustment for the Corporate Sector
of the Apparel Manufacturing Industry, 1947
1946
Item

* Book

val

ue of year-end inventories.-.-.

(Value data in
millions of dollars)
_

' §j Jn<Jex of cost valuation (1939=100) _
($ v x o f , m arket valuation (1939=100)
W Year-end inventories in 1939 dollars
(Line 1 divided by line 3a or 3b, whichever lower)
• Change in inventories in 1939 dollars (from line 3c)
' fM Sl

1947

dex o f c u r r e n

.
t valuation (1939* 100)_
Change m inventories in current dollars
(Line 4 times line 5a)
_
* fhl ? h a n g e in b o °k value of inventories (from line 1)_
W Inventory valuation adjustment
(Line 5b minus line 6a)

__,

834

1,066

188.7
194.5
..

208.2
211.3

442

512
70
202.1
141
232
-91

The following comments deal with those steps of the estimating
Procedure which need amplification.
€

P 1'

The book value aggregates

Sources and methods of estimating the book values differ for the
corporate and noncorporate sectors, and as between past periods
a
na the recent years for which final information is not yet available.
. e final source of data on the book value of corporate invennes is Statistics of Income—Part 2/the annual compilation
° corPorate income tax returns published by the Bureau of Inernal
Revenue. The reported totals are raised on the basis ofc°st of goods sold (by about 1 percent) to take account of corporations not reporting balance sheet data. Since corporations ac^ount for atout four-fifths of nonfarm inventory holdings, a subj a n t l a l Portion of the estimates of the total book value of nonfarm
yentories rests upon a source considered to have a high degree of
Pliability.
As can be seen from Exhibit 33, the bulk of estimated non^rPorate inventories is in wholesale and retail trade. Estimates
and ° . m a d e f o r mi ning, contract construction, manufacturing,
sur Services * Data on noncorporate inventories in finance, inPuhl*106' ^ r e a l estate >* transportation; and communications and
utili
tfes are lacking. The amounts involved must be insi .%
d i c a n t and are not included in the estimates,
e m a i n sources of
tr r?
the noncorporate inventory estimates for
O were the Censuses of Wholesale and Retail Trsde for 1929,
e
a n d 1939 a n d B u r e a u of
for i
Internal Revenue tabulations
19
39, 1945^ and 1947 from the income tax returns of sole pro


123

Exhibit 33.—Estimated Hook Value of Total Corporate and
Noncorporate Inventories and Industrial Breakdown
of Noncorporate Inventories, End of 1947
Millions
of dollars

Item
Total, all industries

56,207

Corporate

Percent
100.0

._

Noncorporate

»

44.C87

79.5

„_

11,520

20.5

03

.-__ .

.8
1.9

1,008
9,543

.__ „__

-.__

17.0

1,055
7,888

Wholesale trade
Services

.2

400

Contract construction _
Manufacturing
Wholesale and retail trade

2.9
14.0

350

.0

prietorships and partnerships. The procedures for estimating noncorporate inventories in trade vary considerably according to the
nature of the available information. For some years census data
on total inventories are available which can be accepted as benchmarks. For most years, however, the procedure involves the multiplication of noncorporate sales series derived in the estimation
of noncorporate business income by inventory-sales ratios. These
ratios are benchmarked on the tax returns of sole proprietorships
and partnerships and on industrial census data for unincorporated
business. Corresponding corporate inventory-sales ratios are used
widely for interpolation and extrapolation of the noncorporate
ratios.
A diversity of procedures is followed for estimating noncorporate inventories in industries other than trade. As can be seen
from Exhibit 33, the amounts involved are very small.
As already noted, the final sources for estimating the book
value of inventories, both corporate and noncorporate, become
available only with a considerable lag. Prior to the receipt of this
information, inventory book values are extrapolated on the basis
of interim data. The extrapolation for the large manufacturing
sector—accounting for 52 percent of the nonfarm total at the
end of 1947—is based upon the Industry Survey of the Office of
Business Economics. Reports of inventory holdings tabulated in
connection with this survey cover nearly one-half of the estimated
total and are weighted by industry group and asset size class.
The extrapolation of wholesale inventories (14 percent of the
1947 nonfarm total) is mainly on the basis of a sample of inventories of service and limited-function wholesalers reporting to the
Bureau of the Census, together with Department of Agriculture
data on warehouse-stocks of selected farm products. These two
sources cover about one-tenth of total stocks, and the data tabulated are weighted by kind of business.
The extrapolation of retail trade inventories (one-fourth of the
1947 nonfarm total) is based primarily on Bureau of the Census
samples for chain and large independent stores and on Federal
Reserve Board estimates of department store inventories. Reported
data cover about one-fifth of total retail stocks and are weighted
by kind of business. The main deficiency of the sample data is
the virtual absence of information relating to small firms, which
are of pai*ticular importance in retail trade.
Other nonfarm inventories are extrapolated into the current
period mainly by data collected by the Securities and Exchange
Commission for its reports on Working Capital of U. S. Corporations.

Step 2:

Adjustment for LIFO inventories

Estimates of LIFO inventories are deducted from total book
values and separately processed because the revaluation procedure for non-LIFO inventories is not applicable to them.
The estimates of LIFO inventories in manufacturing for 1947
were based on a special questionnaire submitted to firms in con-

1951 NATIONAL INCOME SUPPLEMENT

124

nection with the Industry Survey of the Office of Business Economics and on a study of the extent of the use of the LIFO
method by J. Keith Butters and Powell Niland. (Effects of Taxation—Inventory Accounting and Policies, Graduate School of
Business Administration, Harvard University, 1949.) Ratios of
LIFO to total inventories derived from these two inquiries were
applied to total corporate inventories by industry and asset size class
to estimate total LIFO inventories in manufacturing. Information
from Moody's Manual of Industrial Securities is used to extrapolate
these ratios and also to derive similar ratios for department stores,
the only other industrial sector in which LIFO inventories appear to
be important. Noncorporate LIFO inventories are neglected throughout. The concentration of the LIFO method among larger firms
indicates that the omission is insignificant.
The estimated value of LIFO inventories currently represents
roughly one-tenth of the total book value of nonfarm inventories.
In some individual industries the proportion is much higher.
To the extent that the physical volume of inventories increases,
changes in the book values of LIFO inventories already reflect
changes in the physical volume expressed at current prices and no
adjustment of these book values to national income definitions is
needed. To the extent that physical volumes decrease, changes in
LIFO book values reflect these decreases in prior-period prices and
a conversion to current prices is made. The price data used in
each industry are the same as those described below. To date,
price adjustments for declines in LIFO inventories have been negligible.
Gaps in the basic information may cause sizable errors in the
estimates of the change in LIFO inventories. However, in view
of the fact that LIFO inventories are a small fraction of the
total, the possible error introduced into the over-all figures is much
less significant.

Step 3:

Conversion of non-LIFO inventories to constant
prices

Separate composite price indexes are constructed to deflate the
book values of total non-LIFO inventories in each industry. For
this purpose it is necessary, first, to select commodity price indexes
that are representative of the commodities included in inventories;
second, to weight these price indexes in accordance with the relative importance in the book value of inventories of the commodities which they represent; and, third, to determine the periods to
which the unit prices reflected in the book value data pertain,
so that the price indexes to be used for deflating the book values
can be related to these same periods.
Construction of composite price indexes
The selection and weighting of the price series used in the
construction of the composite price indexes was for the most part
an interrelated operation, based upon the estimated commodity
composition of inventories in each industry.
The estimates of the commodity composition of inventories in
manufacturing were built up mainly from the 1939 Census of
Manufactures tabulations of inventories held by industry. Similar
estimates for trade were derived from the 1939 Censuses of Wholesale and Retail Trade, which showed the distribution of inventories
by kind of business. In most instances, the type of inventory
commodity involved could be identified on the basis of the census
designation of the industry or kind of business holding the inventory. The full industry and kind-of-business detail given in
the censuses, together with the further breakdown of manufacturing inventories into finished products and materials, supplies,
etc., was utilized in estimating the commodity composition of inventories. More summary metheds were used in instances in which
price information was lacking to match the full detail of the
commodity breakdown.



Other sources consulted for this purpose included the Census
of Manufactures tabulations of materials consumed in selected
industries; materials-consumed data published by private industrial
research groups; material requirements studies of the War Production Board; financial reports of certain large corporations in
the iron and steel industry giving information on the commodity
composition of their inventories; Bureau of Internal Revenue data
on industrial inventory holdings included in the "Source Book"
underlying Statistics of Income—Part 2; and sales and value-ofproduct data, when more pertinent information was not available.
With few exceptions the monthly price series used in the construction of the composite price indexes were taken from the
wholesale price index of the Bureau of Labor Statistics. This index consists of approximately 900 separately coded commodity
price series which are combined into 49 subgroups, 10 major
groups, and 5 economic groups.
For several reasons, BLS subgroups were used most frequently
in the construction of the composite price indexes. It was not possible, in general, to estimate the commodity composition of inventories in a detail sufficient to calculate weights for individual
price series comprising the subgroups. Also, in the cases in which
the available price information did not match the estimated commodity composition o'f inventories it was thought that the use of
subgroups rather than of individual price series would tend to
give the better representation of inventory price movements.
Two other considerations favored the use of subgroups. Because
of specification changes, the elimination of existing series, and the
introduction of new ones, it is frequently difficult to maintain the
continuity of the individual commodity price series. Also, in many
instances the portions of the inventories which could be related to
individual commodity price series were too fragmentary, from the
point of view of the total industry group, to warrant separate
treatment.
Further limitations of the composite price indexes may be noted.
The price series underlying them do not take full account of
quality change and of divergences between quoted prices and
prices actually charged in market transactions. In addition to
these shortcomings generally encountered in price deflation, two
others appear in connection with the deflation of inventories because the price series (1) do not consistently measure the prices
of purchased inventories at the transaction stage at which they
are acquired by the inventory holder and (2) do not measure
directly the costs that are reflected in the valuation of goods-inprocess and finished product inventories.
With respect to the weighting system employed, it should be
noted that it is not strictly appropriate for the purpose at hand.
Instead of using the relative commodity composition of inventories
in 1939 as fixed weights for combining the commodity subgroups
of the BLS index, and fixed BLS weights as internal weights for
these subgroups, a shifting weighting system reflecting the changing annual commodity composition of inventories should have been
used in the construction of price indexes designed to convert the
book value of inventories to a 1939 basis. This could not be done
for lack of information. Tests of the error that may have been
introduced by the use of a fixed weighting system will be made
on the basis of the information contained in the 1947 Census of
Manufactures and the 1948 Censuses of Wholesale and Retail
Trade. Preliminary calculations have indicated that this error is
not likely to be significant.
Synchronization of composite price indexes with year-end
book values
To take account of the widespread practice of valuing inventories at the lower of "cost" or "market", separate deflating indexes are constructed to represent each of these valuations at the
year-end, and the lower of the two is used to deflate year-end inventories. Indexes of market valuation are derived by averaging
the composite price indexes for December and the following 'Tan'
uary in order to approximate year-end prices. Market indexes

SURVEY OF CURRENT BUSINESS
are not calculated for the transportation, communications, public
utilities, and construction industries, where inventories consist
largely of purchased materials customarily valued on a straight
cost basis.
The construction of indexes of cost valuation is difficult. The particular accounting method used by business firms to charge goods
out of inventory to cost of sales determines the period whose
prices are reflected in the year-end inventories valued on a cost
basis. The construction of the cost valuation indexes applicable to
year-end inventories is adapted in the first instance to the first-in,
first-out (FIFO) method, which is the basis of valuation of the
bulk of non-LIFO inventories. Owing to lack of information, no
separate procedure is developed for other methods of inventory
accounting except LIFO—such as the specific identification and
average cost methods—-which underlie some of the book value data.
It is believed that the implicit allowance for them described below
gives generally satisfactory results.
The prices reflected in year-end inventories valued on a FIFOcost basis are the prices of a period immediately preceding the
year end, the length of which depends on the rate of turnover of
inventories. The period for which the composite monthly price
indexes for each industry had to be averaged in order to reflect
the cost prices implicit in year-end inventories was based on the
estimated inventory "turnover period" in the industry. Initial calculations of turnover periods for industries other than trade were
made by dividing year-end inventories in each industry into the
total cost of goods sold, as reported in Statistics of Income—Part
% for 1939, and then dividing the resulting turnover rate into 12,
the number of calendar months.
The turnover periods so calculated were then lengthened for
three reasons: first, to take account of non-FIFO inventories
(other than LIFO), whose general effect is to extend the length
of the prior periods whose prices are reflected in year-end inventories; second, to give effect to the lapse of time between the
Purchase and delivery dates of inventory goods; and third, to allow
for the fact that the use of a single turnover rate for each industry,
instead of separate rates for inventories having a different turnover,
overweights inventories that have a relatively quick turnover. These
three factors cannot be accurately measured, but they were believed
to be of sufficient importance to warrant increasing by 50 percent
the turnover periods as initially calculated.
The calculation of inventory turnover periods for trade was
based upon the 1939 Censuses of Wholesale and Retail Trade. Septate calculations were made by kind of business. Census data
^ere used because they covered noncorporate establishments, which
are of particular importance in trade, as well as corporations.
Si
nce the cost of goods sold was not reported in these censuses,
sa
les had to be used as the numerator of the turnover rates. This
tends to understate the turnover period, since sales include a
Sross profit margin whereas inventories are valued at cost. To
off
set this bias, as well as the three factors already mentioned,
tne turnover periods initially calculated were increased by 75
Percent.
Tne cost valuation indexes applicable to year-end inventories
ere obtained by averaging the composite price indexes for a
^mber of months prior to the year-end equal to the estimated
turnover periods.
*n addition to the uncertainties that have already become apParent, it may be noted that the calculations involve the assumpt]
°ns that the size of the 1939 year-end inventories was an approximation to the average of the inventory holdings during that
ye
^r, and also that the turnover periods estimated on the basis
cf 19
&) data are applicable to the entire period 1929 to date. With
^esPect to the latter assumption, experimentation with alternate turnover periods has indicated that even considerable modication in their assumed length does not in general greatly affect
the
statistical result.
w




Step 5;

125

Conversion of deflated change to current prices

The indexes used to convert the deflated value change of inventories to current prices represent the annual average of the
monthly composite price indexes already described. Thus, to recapitulate, the same composite price-index series are used for
computing the "market", "cost", and "current" indexes. The
three differ only with respect to the time period to which they
refer—that is, to the span over which the monthly price indexes are
averaged.

Characteristics of Revisions
The annual inventory estimates published each July are based
upon preliminary data for at least the two most recent years.
Under the present schedule, the Bureau of Internal Revenue corporate income tax return tabulations, on which the book value of
corporate inventories is based, are not available for the two latest
years. Revisions may affect earlier years also, mainly because
the noncorporate book value estimates are based on less regular
benchmarks. Introduction of new benchmarks, such as periodic
industrial census tabulations, may change prior year estimates
through the substitution of interpolation for previous extrapolation procedures.
Revisions of the inventory change estimates for recent years
occasioned by the incorporation of comprehensive data are sometimes quite sizable. As noted earlier, even small percentage revisions in the book value aggregates can cause substantial revisions in the increments computed from them.
Revisions are usually much larger in the "change in business
inventories" item than in the "inventory valuation adjustment".
Revisions in the latter typically are not large. The bulk of revisions in the underlying book value estimates is generally reflected in the change in business inventories rather than in the
inventory valuation adjustment. Also, the price information used
to revalue business inventories becomes available fairly promptly,
and subsequent routine revisions of it are usually minor.
The smallness of the revisions in the inventory valuation adjustment should not be taken to mean that this item, or the underlying revaluation of book values, is firmly based. Quite to the
contrary, as already has been emphasized, this is the most difficult
step in the estimating procedure. The absence of major revisions in
these estimates signifies only that the final sources of price information do not differ significantly from the preliminary information on
which the estimates are initially based.

12.—NET FOREIGN INVESTMENT
The net foreign investment component of gross national product
measures the net export balance on goods and services (less the
net outflow of gifts), which is necessarily financed by international investment. It is taken 22 from the official balance of payments of the United States, where it appears as the "Balance
on goods and services and unilateral transfers." Accordingly, the
statistical sources and methods discussed below are those of the
Balance of Payments Division of the Office of Business Economics.
The balance of payments of the United States is published quar22
With an adjustment for geographical coverage, since United States territories
and possessions are considered part of the United States for balance-of-payments
purposes but are included with the rest of the world for national income purposes. (Statistically, the adjustment was confined to 19-U-46 when ita quantitative
importance called for a rough order-of-magnitude calculation in spite of the
absence of solid data.) It should be noted also that in the official balance-of*
payments statement account is taken of unilateral transfers in kind, which are
ignored in table 11, Part V of this report. Exclusion of these transfers affecta
debits and credits equally, and does not alter the net balance of transactions.
Other differences between table 11 and the balance-of-payments statement are
matters of classification and will come to note as the derivation of the entries in
table 11 is described.

126

1951 NATIONAL INCOME SUPPLEMENT

terly in the Survey of Current Business, and in occasional bulle-

Wages and salaries

tins, the latest of which is The Balance of International Payments

This item (included in "private miscellaneous services" in the
official balance-of-payments classification) represents wages and
salaries received by United States residents ia this country from
(1) foreign governments and (2) international organizations.
Component (1) is estimated from fragmentary information supplied by certain foreign missions. Component (2) is reported by
the international organizations.
It will be noted that, unlike the property income items, which
are reported net of out-payments, the entry .for wages and salaries
represents gross receipts of United States residents. Wages paid
to foreign residents employed abroad by the United States Government are counted as purchases from abroad (below, under
Net purchases of miscellaneous services) rather than under the
heading of factor income. This procedure has been adopted because it leads to a more useful breakdown of the tables on payrolls, employment, and average earnings of employees in Part V
of this report.

of the United States, 19W-48 (Washington, Government Printing
Office, 1950). A more detailed description of the methods of estimating the international transactions of the United States appears
in that volume, appendix B, pp. 215 ft*.
These methods also produce an alternative estimate of net
foreign investment in terms of the change in international assets
and liabilities. Usually there is a statistical discrepancy (labeled
"errors and omissions" in the balance-of-payments statement)
between the two estimates. As has been noted, it is the former
estimate which is included as a component of gross national
product, although for most years it cannot be assumed to be more
exact than the one based on changes in assets and liabilities.
Official estimates of the United States balance of payments
have been prepared for all years beginning with 1919. Over this
period, the sources and methods underlying the estimates have
changed significantly. This section is devoted primarily to a description of the current methodology.
A substantial increase in the accuracy of the estimates, especially in the last decade, has followed from the inauguration of
new techniques and data sources discussed below.
It may be noted in this connection that a new census of American direct investments abroad, taken in mid-1951 by the Office of
Business Economics, will provide 1950 benchmarks for the series
relating to direct-investment income.
In spite of the improvement of the data, it should be recognized
that net foreign investment is subject to possibly large percentage
errors of estimation because it is calculated as the difference
between gross outflows and gross inflows which are usually large
in relation to the net balance.
The following discussion deals in turn with net factor payments to the United States and with net purchases from the
United States (including gifts), which together compose the
"Balance on goods and services and unilateral transfers". The
balance is obtained as gross receipts of the United States less
gross payments by the United States. In the following discussion,
the gross receipts and payments are described separately, with
no further reference to the fact that they are differenced to obtain the net entries for net foreign investment.
The balance on goods and services and unilateral transfers reflects all current transactions of the United States with the rest
of the world. Hence, a large number of the flows differenced to
obtain net foreign investment also become explicit elements (with
appropriate sign) of various other components of national income
and national product. Thus, net factor incomes received from
abroad become elements of the wages and salaries, interest, and
corporate profit components of national income and personal income, and net purchases made abroad (including gifts) become
elements of personal consumption expenditures for commodities
and services and of government purchases of goods and services.
The estimation of these elements is described below. However,
only in the sections dealing with the national income and product
components in which they are included are they explicitly identified as constituting such elements. For instance, net interest received from abroad is described in the present section under the
heading Net payments of factor income, but the fact that this
item is included in the interest component of national income and
personal income is stated explicitly only in the section on Interest.
Net Payments of Factor Income to the United States
Factor income transactions consist of wage and salary receipts
and the international flows of property income. The latter represent interest, dividends, and branch profits. Undistributed profits
of foreign subsidiaries are not included. All property incomes
are measured net of taxes levied by the paying country.



Interest
United States receipts of interest from abroad are estimated in
four parts.
(1) Interest from foreign branches and affiliates (including
subsidiaries) of American corporations is estimated from a 1942
benchmark provided by the Treasury Department's Census of
American-Owned Assets in Foreign Countries (Form TFR 500),
which is believed to have provided virtually complete coverage. The
benchmark figures are extrapolated on the basis of quarterly
sample reports from about 300 companies accounting for around
70 percent of total direct investment, supplemented by information .taken from income tax returns, annual reports to the Securities and Exchange Commission (Form 10K), and annual corporate
reports to stockholders. Ninety percent of total investment income
(interest, dividends, and branch profits) earned in 1947 from
foreign branches and affiliates was actually reported in one or
more of the above-mentioned sources.
(2) Interest received by the United States Government is reported by the recipient agencies.
(3) Interest on foreign dollar bonds is estimated chiefly from
regular questionnaire surveys of the debtors' fiscal and paying
agents in the United States, corrected for basic coverage by reference to holdings disclosed in the 1942 Treasury Census.
(4) Other foreign interest received by the United States is
calculated by applying average bond yields, as reported from
the principal issuing countries, to holdings series benchmarked
on the 1942 Treasury Census and extrapolated by reference to
foreign bond purchases and sales reported on Foreign Exchange
Forms S-l/3. These statistics of purchases and sales, it should
be noted, do not distinguish the bonds by country of debtor or
by currency in which payable. The extrapolation, therefore, is a
relatively rough process. However, the receipts from Canada,
which account for most of the total in this fourth category, are
checked against official Canadian estimates based on exchange
control data.
United States payments of interest are estimated as the sum of
(1) taxable and (2) tax-free interest.
(1) Taxable interest paid by the United States to foreigners
is reported to the Bureau of Internal Revenue on withholding
tax return Forms 1012 and 1013, for corporate bonds, and Form
1042, for other obligations. Net income payments by fiduciaries
are allocated somewhat arbitrarily between interest and dividends.
The tax return data are not available in time for use in the estimate for the latest year, which is therefore made by extrapolation
with reference to reported changes in foreign holdings.
(2) Tax-free interest—about 40 percent of the total in 1947-is estimated by applying an average-yield series to amounts of
foreign holdings, the latter being benchmarked on the Treasury's 1941 Census of Foreign-Owned Assets in the United States.

SURVEY OF CURRENT BUSINESS
(The basic Form TFR 300 was filed chiefly by banks, brokers,
corporations with foreign security-holders or creditors, and individuals.) The benchmark estimate of holdings is extrapolated on the
basis of known transactions in Federal issues.
Dividends
United States receipts of dividends are estimated using sources
and methods analogous to those applied in estimating components
(1) and (4) of interest receipts. United States dividend payments
to the rest of the world are estimated in general like taxable
interest payments. For the latest year, payments by subsidiaries
of foreign corporations are extrapolated by reported payments of
about 90 sample foreign-controlled enterprises, and other payments
are extrapolated by the product of appropriate sample dividend
rates times estimated holdings.
Branch profits
The sources and methods used in estimating the inflow of branch
profits are the same as those for interest received from foreign
branches and affiliates. The outflow of branch profits is estimated
from tax returns (Form 1120) on which such profits must be
reported to the Bureau of Internal Revenue. Pending the availability of the tax return data, preliminary estimates are made
by extrapolation using data from the sample of 90 foreign-controlled enterprises mentioned above.
Net Purchases from the United States
It is convenient to discuss sales and purchases by the United
States in terms of the components distinguished in the official
balance-of-payments statement—merchandise trade, transportation,
travel, etc. The method of separating transactions of United States
business, Government, and persons, in the manner of table 11, will
be indicated in the discussion of each of the components. In table
U sales include cash gifts received, and purchases include cash
donations made. In the balance-of-payments statement these unilateral transfers are shown separately. The exclusion of unilateral
transfers in kind from table 11 has been noted.
Merchandise trade accounts for the vast bulk of the transactions summarized under the heading of net purchases. The estimates represent chiefly exports and imports shown on declaration
forms filed with the Collectors of Customs and tabulated by the
Foreign Trade Division of the Census Bureau, and transactions
carried out and reported by agencies of the Federal Government.
The major limitation on the accuracy of these estimates is the
"kelihocd that the stated values may differ in some cases from
fte actual prices paid for the gocds.
Transportation service receipts and payments consist largely of
^ean freight charges, estimated either from financial statements
led by the carriers or as the sums of products of reported tonages multiplied by appropriate scheduled rates; and port expens e s of ocean carriers, estimated as sample-based percentages
°tthe carriers' gross revenues.
iravel receipts and payments are estimated from expenditure
v
b erages k a s e d Qn q u e s t i o n n a i r e r e t u r n s f ror n travelers, multiplied
k the adjusted numbers of such travelers reported (in most cases)
>
Th U n i . t e d S t a t e s Immigration and Naturalization Service.
Tna r
J° components of the Miscellaneous services category
ar p
e Government payments (reported by the agencies), film rentals
| ^chmarked'on the Treasury Census), and insurance charges
^tirnated from financial statements). Unilateral transfers by
parties are
WAT 6
estimated chiefly from data provided by forc i n g banks, the Post Office Department, and charitable instilo
ns; government transfers are reported by the Federal agenc
*s involved.
Merchandise
United States business receipts from merchandise exports are
*<J*ated as follows.
. A
u
> The chief data sources are the official tabulations of United



127

States exports; these, together with the corresponding tabulations
of imports, are described in some detail in Foreign Commerce and
Navigation of the United States for the calendar year 1946.
Merchandise trade is valued f. a. s. ("free alongside ship") port
of shipment.
(2) Recorded merchandise exports, including reexports, are adjusted to eliminate certain components not giving rise to businesssector claims on the rest of the world: shipments abroad by general government and persons; business exports known not to represent merchandise sales—for example, motion picture films shipped
abroad for rental and the movement of United States-owned grain
to Canada for storage; and exports to the Panama Canal Zone.
The data for most of these adjustments are taken directly from
the export statistics; the government shipments to be excluded,
however, are evaluated from the records of the responsible Federal agencies.
(3) To the residual are added several items not covered which
do give rise to business-sector claims: sales by government enterprises from their stocks abroad, as reported by these enterprises;
exports of silver, which the Census Bureau reports separately from
merchandise exports; and the increase in official gold holdings
less net purchases of gold from abroad.
United States business purchases from foreigners are estimated
from the statistics of general imports, with adjustments analogous
to those described above. Adjustments have also been made for a
few known instances of differences between declared import valuations and the actual dollar payments made to foreigners.
United States general government purchases from and sales to
foreigners are estimated from reports filed by the Government
agencies involved. Such important items as United States Government sales of surplus and other property located abroad, and
purchases for the use of the armed forces stationed abroad, not
shown in the trade statistics, are included.
It may be noted that all of the large wartime purchases of
foreign raw materials by the United States have been classified
as business-sector purchases, since the public purchasing agencies
were Government enterprises rather than executive departments or
other administrative agencies of general government.
Purchases of foreign merchandise by United States persons are
generally made through business middlemen, and are covered by
the estimates of purchases by United States business described
above. United States persons' shipments to foreigners consist almost entirely of gifts and, like foreign-aid shipments of Government-procured items, are excluded as unilateral transfers in kind
giving rise to no claims for payment.
It is difficult to make any categorical statement about the reliability of the foreign trade statistics. For exports and for nondutiable or specific duty imports, where the Customs Service does
not have a pecuniary interest in securing a correct valuation, it
is probably safe to say that many instances of incorrect valuation
go undetected, although certain checks are made. The reported
values theoretically include inland freight and other services performed in the country of export; one of the likeliest sources of
error is the omission of some of these service costs in valuing
United States exports. However, even imports subject to ad valorem
duties are frequently assessable (and entered in the statistics) at
values which may differ from the prices actually paid. Again, in
the case of imports from foreign branches or subsidiaries, there
are probably differences between the values entered for customs
purposes and the prices at which the articles are taken up on the
domestic companies' books for income tax purposes. On balance,
it is not clear whether the net effect of all the possible sources
of error would be to overstate or to understate net exports.

Transportation
International transportation transactions involving the United
States are treated as United States business-sector transactions,
except that passenger fare payments to foreign carriers are allo-

128

1951 NATIONAL INCOME SUPPLEMENT

cated between the business and personal sectors. This allocation
is described below under Travel.
Ocean freight
Ocean freight revenues of United States ship-operators from
abroad consist of freight on United States exports and on shipments between foreign ports. (Freight on United States imports
carried by United States lines is classified as a domestic transaction, being defined as paid by the importer because the value
placed on merchandise trade includes no allowance for ocean transportation cost.)
United States ocean freight revenues from foreigners are now
estimated from financial statements filed by the carriers with the
United States Maritime Administration or from data furnished
directly to the Ofiice of Business Economics.
For 1947 and earlier years, estimates of revenues from the
carriage of United States exports have been based on Census Bureau
or Maritime Administration data on tonnages of various commodities or commodity groups carried by American ships to various
destinations abroad, multiplied by appropriate freight rates. The
rates used have been taken chiefly from rate schedules of the
various steamship conferences filed with the Maritime Administration (at that time, the Maritime Commission). Benchmark revenues
were derived in this way for 1940, 1944, and 1946, and interpolated
by tonnage totals with allowance for changes in general freight
rates and in the commodity composition of the trade. The 1946
benchmark has been extrapolated forward through 1947 in four
parts—coal, grain, other dry cargo, and tanker shipments—by use
of tonnage and rate data applicable in each case.
Revenue received for carrying freight between foreign ports in
years prior to 1948 has been estimated as a percentage (varying
up to around 5 percent, and based on rather fragmentary information) of the combined revenues from carriage of United States
exports and imports. Freight on imports has been estimated for
this purpose by methods similar to those described above for
freight on exports.
Payments to foreign ship-operators consist of freight charges
for the carriage of United States imports. The estimates are derived by much the same methods and types of data used prior to
1948 in estimating American carriers' revenue from freight on
exports.
Ocean passenger traffic
Passenger revenues of United States carriers consist of receipts
from foreigners travelling to and from the United States. United
States payments for ocean passage are those made by United
States residents to foreign carriers.
Average fares plus shipboard outlays per passenger are ascertained through systematic sampling of passengers, and are multiplied by estimates of numbers based on United States Immigration and Naturalization Service records of arrivals and departures.
Expenditure information is secured from United States residents
returning and from nonresidents departing, as described below in
connection with the travel account. Since fares and shipboard
expenses vary widely according to type of accomodation and route
and purpose of travel, etc., the averages are weighted to take
account of such variations, the relative importance of each category being estimated from Immigration Service records and passenger manifests supplied by carriers.
The Immigration and Naturalization Service records the number
of arrivals and departures, classified by residence of traveler and
also by flag of carrier. However, the data must be adjusted somewhat to fit exactly the categories appropriate for balance-ofpaym^nts estimation. These adjustments are summarized below
under Travel.
Port service
United States port receipts from foreign vessels are estimated
as fixed percentages of the vessels' gross revenues from the car


riage of United States trade, the sources and methods for which
are indicated above. Ratios are based on fragmentary information
from foreign lines.
Foreign port expenditures of United States lines are similarly
calculated. Ratios of port expenditures to gross earnings (for
cells cross-classified by type of cargo and whether direct or wayport trade) are based on the carriers' financial statements mentioned above as filed with the Maritime Administration and the
Office of Business Economics, and on supplementary details supplied by some of the largest American dry cargo operators.
Air traffic
Receipts and payments on account of air traffic include freight,
passenger, and port cost components generally analogous to those
described above for ocean shipping, and are estimated by similar
methods. For United States receipts, financial reports filed by
the carriers with the Civil Aeronautics Board and the Office of
Business Economics now provide the essential data. For United
States payments, and for receipts in the years 1940-47, estimates
have been calculated from tonnages of freight (benchmarked on
official trade statistics for certain years), numbers of passengers
(based on the Immigration Service records), and published rates
or sample-based average expenditures. No estimates for air transportation were made prior to 1940.
Rail traffic
Rail traffic receipts by the United States from the rest of the
world consist of (1) freight earnings of United States railroads
operating in Canada and (2) freight on foreign merchandise
carried in transit through the United States. Component (1) represents freight on United States exports and intra-Canadian shipments. It is evaluated from information furnished by the railroad
companies to the Office of Business Economics. Component (2)
arises largely from Canadian and Mexican export and import
trade with countries other than the United States. It is estimated
by applying general average freight rates to data on the weight
or value of such shipments. The rate averages used are compiled
by the Interstate Commerce Commission. The shipments data are
derived from official trade statistics recorded by the Dominion of
Canada and, for Mexican trade, from the official trade statistics
of the United States.
Rail traffic payments by the United States comprise operating
expenses in Canada of the United States railroads operating in
that country, as well as payments to Canadian railroads for hauling United States freight in transit through Canada. The item
of operating expenses, like the corresponding revenue considered
under (1) above, is reported directly by the carriers. A rough
allowance for Canadian railroad freight revenues from the United
States is based on railroad enterprise data reported to the Canadian
Government.
Other transportation
Ship charter transactions between United States and foreign
shipping lines are evaluated on the basis of financial statements
filed by the United States lines with the Maritime Administration
and reports to the Office of Business Economics. The estimates for
Great Lakes shipping represent freight revenues and expenditures
only; passenger fares on the Lakes are included with travel^ receipts and payments, which are described below. Average freight
rates on the principal commodities, furnished by the Lake Carriers
Association of Cleveland, are multiplied by commodity tonnage
data taken from the official statistics of the United States and
the Dominion of Canada. Foreign mail earnings accruing to Unite
States air carriers are determined from data reported by the
carriers to the Civil Aeronautics Board, and estimates of ocean
mail receipts are benchmarked on data reported to the Maritime
Administration.

SURVEY OF CURRENT BUSINESS
Travel
Inbound and outbound ocean and airplane fares and expenditures
on board ship have been considered above under the heading of
transportation. All other payments made by nonresidents in connection with travel in the United States, or made by United States
residents in connection with travel abroad, are included under the
heading of travel.
All foreign visitors* travel expenses in the United States are
considered to be foreign purchases from United States business
enterprises. American travel expenditures abroad, as well as the
passage payments discussed above under Transportation, are allocated between business and personal outlays. For overseas travel,
this allocation has been based on occasional sample studies of
passport applications (on which the purpose of travel is stated).
Information as to the purpose of travel to Canada or Mexico is
obtained from the expenditure questionnaires.
The basic estimating formula, as in the case of passenger transportation, involves the multiplication of numbers of travelers by
sample-based average expenditures per traveler. For these calculations, data on foreign visitors are cross-classified into cells by purpose of visit and country of last permanent residence, while data on
United States travelers abroad are cross-classified according to
means of transportation and region of the world visited. Further
stratification is used where it is appropriate and feasible, as illustrated above in the discussion of ocean passenger transportation.
Numbers of travelers are derived in general by adjusting data from
immigration and emigration records. Expenditure averages are computed from questionnaires completed and returned by travelers upon
or after completion of their trips. For estimating purposes, foreign
travel is divided into three major segments: overseas, Canadian,
and Mexican. Each of these will be considered in turn.
Overseas

Overseas travel by United States residents accounted for about
35 percent of United States payments for travel in 1947, and
United States travel by visitors from overseas accounted for about
4 percent of United States receipts under this heading.
2
Ssic data on numbers of travelers from the records of the
States Immigration and Naturalization Service are adto exclude travel between the United States and Mexico
and Canada (other than travel through Canada enroute between
^e United States and overseas areas). In addition, the data for
citizens1 travel are adjusted to exclude estimated travel by Government employees and by residents working abroad for foreign
employers or for foreign branches or subsidiaries of American
fi
ttns; and the alien resident travel data are adjusted to reflect
jhe de facto breakdown between temporary visits and migration,
immigrants are considered United States residents from the time
of
their admission into this country, while emigrants are treated
as
United States residents until they are admitted into a foreign
country.
^ e data from which average expenditures of United States
tra
velers are calculated are received by mail from a sample of
burning residents, to whom questionnaires are distributed by
ai
* l or through Immigration Service officers at the port of entry.
*** possibility of bias due to failure of some travelers to complete
a
n
<J return their questionnaires was checked in 1948 and 1949, by
c
°mparing questionnaire results with conceptually comparable remt
* obtained from interviews with a random sample of residents
giving at the Port of New York; this check disclosed no statically significant bias in the results of the questionnaire samHowever, expenditures do vary widely among individual
rs and the possibility of significant sampling error must
^
be recognized when conclusions are d r a w from the travel
estl
mates.
Average expenditures of overseas visitors to the United States
r
f likewise estimated from questionnaire data. Alien visitors reeiVe
questionnaire mailing cards (printed in English, Spanish,



129

and French) from inspectors of the Immigration and Naturalization
Service at the time of their arrival in the United States. They are
asked to complete and mail the questionnaires shortly before their
departure from this country.
Canada
Travel in the United States by Canadian residents accounted for
about 45 percent of United States receipts from foreign travelers
in 1947. The estimates are made by the Dominion Government,
using methods similar to those described above in connection with
overseas travel of United States residents.
United States residents' average expenditures for travel in
Canada are determined from sample questionnaire data gathered
by the United States Department of Commerce from United States
residents returning from Canada by rail, boat, plane, or longdistance bus, and sample questionnaire data gathered by the
Dominion Government from visitors entering by other means of
transportation, chiefly automobiles. The data on numbers of travelers, which are collected by the Canadian authorities, are adjusted
in several respects. In particular, a deduction is made for passengers in direct transit through Canada from one point in the
United States to another.
Mexico
The Bank of Mexico and the Office of Business Economics cooperate in estimating the expenditures of travelers between the
United States and Mexico. Border travel and travel to the interior of
each country are estimated separately. Border travel payments by
the United States are made partly in pesos, partly in dollars which
subsequently return to this country via nonbanking channels, and
partly in dollars subsequently deposited with United States banks
by their Mexican correspondents and others. Current data on the
third type of transaction are raised to full coverage by use of ratios
derived from a 1945 survey of banks, exchange dealers, businessmen,
and customs officials in border towns. Border travel receipts by the
United States are estimated by parallel methods.
United States receipts from Mexicans traveling to the interior
of this country are estimated from questionnaire data. Each Mexican resident legally entering the United States for a stay of more
than 24 hours or for a destination beyond the border area is handed
a questionnaire by the United States immigration inspector, to be
filled in shortly before the Mexican resident leaves this country.
The number of questionnaires distributed provides a basis for estimating the number of persons entering, and average expenditures
are calculated from the completed questionnaires returned.
Data on the number of United States citizens traveling to the
interior of Mexico are collected by the Mexican Government. Average expenditures per traveler in recent years have been determined
largely on the basis of occasional questionnaire sample surveys by
the Mexican Government or by the Bank of Mexico.

Miscellaneous services
Estimates of the miscellaneous service transactions to which the
United States Government is a party are based on information
supplied to the Office of Business Economics by the responsible
Federal agencies. These transactions include (1) purchases and
sales by the Department of Defense and other administrative agencies, (2) purchases and sales by the Post Office Department and
other government enterprises classified, for national income purposes, in the business sector of the United States economy, and
(3) personal expenditures of military and civilian employees of the
United States Government abroad, which are treated as sales to
United States persons. Purchases under (1) include certain items
not obviously classifiable under this head: real property bought
abroad for government use, and expenditures connected with official
travel, as well as United States current payments to international
organizations (such as the United Nations) of a character other
than purely humanitarian. Item (3) is derived from the total re-

130

1951 NATIONAL INCOME SUPPLEMENT

ported disbursements to employees in foreign countries by deducting such employees* personal remittances through Army Post
Offices and Army Finance Offices, their cash purchases of war
bonds, and net proceeds of Army Post Exchanges and Navy ship
stores.
Miscellaneous service receipts and payments not involving the
United States Government are estimated from a variety of materials. They include: (1) Insurance; (2) royalties, home office expenses and related items; (3) motion picture rentals; (4) electric
power transactions; (5) international communication charges; and
((>) foreign representation in the United States. Except for the
labor cost element in (G) which has been discussed above under the
heading of factor income, all of these are treated as purchases from
or sales to United States business.
(1) Insurance receipts by the United States consist chiefly of
reinsurance claims paid by foreign companies, and payments consist chiefly of premiums for such reinsurance. The estimates are
based partly on a 1949 questionnaire survey of United States companies and partly on annual reports filed by these companies with
their State governments.
(2) United States receipts of royalties and related items are
estimated largely from questionnaire returns showing United States
companies* receipts from their foreign branches and subsidiaries,
which are expanded by the ratio of total direct investment income
from abroad to the sample companies' direct investment income
from abroad. Royalties from independent licencees in most foreign
countries are necessarily omitted, in the absence of data on these.
United States payments of royalties and related items to foreign
countries are estimated from tax return and questionnaire data by
methods generally analogous to those described above for taxable
interest
(3) Motion picture rentals received by United States companies
are estimated by reference to the 1942 benchmark provided by the
Treasury Department's Census of American-Owned Assets in
Foreign Countries, which has been extrapolated chiefly by questionnaire data from the companies.
(4) United States exports and imports of electric power are reported annually to the Federal Power Commission by United
States electric utility corporations.
(5) International cable, radio and telephone companies furnish
the Office of Business Economics with data on their receipts and
payments.
(G) The item of foreign representation covers the administrative
expenditures of foreign governments and international organizations in the United States. Disbursements for real property are included. The estimates for foreign governments are based on rather
inadequate sample information, as is indicated above. The figures
for international organizations, which since 1945 have made up an
important part of the total, are derived from published fiscal reports or obtained directly from the fiscal officers of these organizations.

Unilateral transfers
Cash gifts to foreign countries by United States persons and the
United States Government are included in table 11 of Part V with
sales by the rest of the world to persons and government respectively.
Personal remittances from the United States (included in table
11 of Part V in sales to United States persons) are estimated on
the basis of reports from a very large proportion of the banks and
other institutions handling such remittances. The bank-reported
figures are expanded by use of ratios based on Treasury experience
with wartime Foreign Funds Control, and added to totals for postal
money order business reported by the Post Office Department.
Since no allowance is made for currency sent out through the mails,
or remittances in the form of personal checks or other domestic
instruments which may be cashed abroad, the estimates may well
be too low. On the other hand, some of the postal money orders



and some of the transactions reported by the banks as personal
remittances may actually represent commercial payments.
During the war and postwar years, deductions from the wages of
imported alien workers for remittance to their banks or relatives
at home have also been included, using data or estimates from
the Departments of Agriculture and Labor and other agencies.
Institutional remittances, which are also treated as sales to the
personal sector of the United States economy, are estimated chiefly
from replies to an annual questionnaire, response to which has been
substantially complete in recent years.
Foreign purchases from United States persons as shown in table
11 include personal remittances from abroad. These are estimated
from data on post office money orders from each foreign area, by
use of raising ratios based on the proportion of money orders in
total remittances sent to that area.
Unilateral cash transfers from the United States Government
to foreign countries are entered in table 11 as sales to the Government; transfers to the United States Government from abroad,
as purchases from the Government. Both are determined from the
official records of the Federal agencies involved. Such transfers
to abroad include United States contributions to international organizations of a purely humanitarian character and pensions and
claim payments to nonresidents of the United States, as well as disbursements under foreign aid programs. The transfers from abroad
include cash lend-lease settlements and special currency supplied
to United States Government agencies by occupied countries without cost to the United States Treasury.

13.—GOVERNMENT RECEIPTS AND
EXPENDITURES
The annual estimates of the government receipt and expenditure
components of the income and product flow are based primarily
upon budgetary statistics of the various governmental entities in
the United States. The availability of such statistics permits a
generally high standard of reliability of the estimates. (See tables
8 and 9 in Part V for a presentation of them in the form of a
comprehensive statement of government receipts and expenditures.)
However, accuracy is impaired to some extent by two broad limitations of the basic budgetary data. They are incomplete for most
years with respect to governmental units covered; and they are
inadequate for all years—from the standpoint of national income
accounting—with respect to types of transactions identified. Appreciable possibilities of error are inherent in the techniques employed to overcome these shortcomings.
Even in the case of the Federal Government, where financial
reporting of most (but not all) activities is channeled through
a central set of accounts maintained by the Treasury, the adaptation of budgetary data to the conceptual mold of the national
income statistics presents numerous problems requiring the use of
corollary information not susceptible to precise integration with
the basic Treasury accounts and often less reliable than the
latter.
For the 48 State governments, a somewhat less uniform, but still
substantially complete, budgetary record is available for most years
since 1929 from the compilations of the Governments Division of
the Bureau of the Census. Modifications to fit the data into the
national income framework are necessary in all years, however,
and alternative sources and methods are required for the interval
1933-36, when the Census reports on State finances were suspended.
The Census Bureau also provides summary financial statistics
with respect to some 150,000 units of local government. Comprehensive summary records for all levels of local government are
i^of b !S i r ° m t h e d e c e n n i a l Censuses of government (1932 and
U4Z). Only for cities with populations of 100,000 or more, how-

SURVEY OF CURRENT BUSINESS
ever, are data available annually throughout the period since 1929
(although the lower size limit extends to 25,000 for years since
1942 and to 30,000 prior to 1932). County finance data are available for the period 1943-46, and for years since 1945 the Census
Bureau has been publishing a report covering all local government revenues. But, with these exceptions, there are no intercensal
compilations for the smaller cities, counties, school districts, or
other minor local units.
In view of the incompleteness of the basic data, the entire
range of local estimates for the intercensal years prior to 1942 is
subject to the hazards of broad interpolation and extrapolation
procedures, described below, which rely in part on supplementary
information regarding the movements of major components of local
government receipts and expenditures.' For years subsequent to
1942, available Census reports are fully utilized insofar as they
provide coverage, but there remain several gaps to be filled by
extrapolations or interpolations based upon supplementary information or upon assumed analogies to trends in the units for which
annual tabulations are available. In terms of dollar aggregates, the
types of governments for which these improvisations are necessary (in all years after 1942 for expenditures, but only in 1943 and
1944 for receipts) account for well under half of the State and
local totals and for a relatively inconsequential share of the grand
totals for all levels of government.

Adjustments for classification

and

timing

With regard to the Federal Government, to State governments
except in the period 1933-36, to all local governments in decennial
census years, and to certain types of local units or phases of local
operations since 1942, the development of appropriate estimates
for inclusion in the national income accounts is essentially a matter
of classification and timing.
The classification problems are twofold. In the first place, since
*hat is desired is in the nature of a consolidated current operating
account, it is necessary to distinguish and exclude all government
loans and other financial investments, repayments thereof, borrowing and debt retirement, and purchases or sales of land and
existing1 depreciable assets, as well as certain charges and credits
^hich represent mere intragovernmental transfers. Large amounts
j f receipts and expenditures in these categories are included in the
>
oasic budgetary statistics (especially for the Federal Government),
bu
t are not germane to the present United States national income
^counts. It should be noted that the process of consolidation inv
°lves, besides the exclusion of intragovernmental transfers, the
combination with the basic budgetary accounts of transactions of
certain government trust and other funds not ordinarily reported
a
s an integral part thereof.
Secondly, revenues and outlays must be subdivided among the
rec
eipt and expenditure classifications employed for national income purposes. Primary'subdivision in each case is in terms of
°ur major categories cutting to a large extent across the usual
Jdgetary classifications. These are, for receipts: direct personal
x
and nontax receipts, direct taxes on corporate income, indirect
Usiness
.
tax and nontax accruals, and contributions for social
rane; and, for expenditures: purchases of goods and services,
fer payments, net interest paid, and subsidies less the current
J u s of government enterprises,
sh'fl ^ p h a s e o f t h e classification, certain budgetary items are
"tea, with appropriate change of algebraic sign, from the receipt
ijitp e x P e n d i t u r e side of the account (or vice versa). For example,
r s t in
? come, operating revenues of government enterprises, and
c
ain
general government sales are netted out of various classes
ref eX j? enditure ' rather than recorded as receipts. Conversely, tax
W h i c h u n t i l recei
urv
*tly were reported by the Federal Treas. g e t a r y expenditures, are netted out of tax receipts in the
na t* ^
tional income series.
To

acco a r c o n s i d e r a ^ e extent, both phases of classification can be
ed b y referenc
bud f
e to detailed components of the basic
getar
y statistics. The latter, however, are inadequate at many



131

points. With regard to receipts, the principal difficulty is that of
distinguishing, among classes of revenue which are homogeneous
for budgetary purposes, the respective amounts paid by businesses
and by individuals as such. In connection with expenditures, trouble
arises mainly because of the fact that budgetary statistics are
almost invariably compiled on a functional or organizational basis,
without utilizable object classification. For these and related reasons, many pertinent details must be gleaned from secondary
sources—usually specialized individual agency records—which are
not always fully compatible with the basic over-all accounting records. While a degree of error is undoubtedly introduced through
this necessary reliance upon unintegrated source materials, the
resultant impairment of accuracy is not believed, generally speaking, to be serious.
The timing problems involved in adapting standard budgetary
data to national income purposes arise chiefly from the necessity
of articulating government transactions with corresponding payments and receipts recorded for other sectors of the economy.
Since the budgetary accounts are very largely on a cash basis,
they must be modified whenever this record diverges widely from
accrual records of the same transactions maintained by private
business. Similarly, foreign transactions of the Government must
be adjusted in some instances to conform to the timing reflected
in the United States balance of international payments, and certain other budgetary charges have to be synchronized with corresponding components of the personal sector account.
With reference to receipts, the most important divergences of
accrual from cash timing appear in connection with business taxes
—especially those on corporate profits. On the expenditure side of
the account, analogous divergences have arisen chiefly in wartime,
from the lag between deliveries of goods to the Federal Government
and Treasury checks in payment therefor, from Federal Government advances and prepayments on purchases, and from retroactive
allowances for renegotiation of war contracts. These and other
less significant reasons for modification of budgetary timing are
discussed more fully later in this section.
A minor, but pervasive, timing problem is that of converting fiscal year data to a calendar year basis. For nearly all of the States,
utilizable budgetary statistics are available only in terms of fiscal
years, and calendar year estimates must be derived by interpolations of varying reliability. The same situation exists with respect
to some detailed components of the Federal account. Except in
the case of unusually spasmodic transactions, however, the errors
resulting from even the crudest conversions of fiscal year data
can scarcely be significant,, and they tend, moreover, to cancel
out over fairly short intervals. In many instances, relevant information (e. g., on the movement of a tax base or of a correlated
expenditure series) is available to guide the interpolations; but in
others, the expedient of allocations yielding smooth progressions is
employed.
The dates upon which the fiscal years of local governments end
are extremely diverse, and no attempt is made, either in the basic
Census reports or in the national income estimates, to adjust
them to a uniform basis. Since the average of these fiscal yearends is closer to December 31 than to June 30, the data are
treated as if they covered calendar years. In general, the latter
correspond to the nominal years of the Census reports, but the
1932 decennial census data, which differed in time reference from
subsequent Census compilations, are allocated to calendar 1931.
More specific discussions of the estimates of government receipts
and expenditures follow.
G o v e r n m e n t Receipts
For the Federal Government, complete accounting records covering all the relevant receipts except corporate profits tax accruals in the two most recent years are readily available. With
that one exception (discussed in the section on Corporate profits),
difficulties arise only with respect to minor problems of classification.

132

1951 NATIONAL INCOME SUPPLEMENT

For State governments, the Census financial reports (State
FinanceH and predecessors) provide the basic data for all years
except l!):>3-3(>, when the Census reports were suspended. For
this interval, chief reliance was placed upon Tax Yields, a publication of the Tax Institute of the University of Pennsylvania, compiled mainly from questionnaires sent to State tax officials.
With respect to local governments, there is a rather sharp
dichotomy between the estimates for years prior to 1042 and those
for subsequent years.
For the former period, the basic Census reports are extremely
fragmentary, being confined in most years other than that of the
decennial census to cities with populations of 100,000 or over.
The only comprehensive coverage of local revenues in these intereensal years is provided by the estimates of the National Industrial
Conference Board, which are based upon the available Census
material, reports of tax commissions or similar agencies, correspondence with public officials, samples obtained by questionnaires, and a miscellany of other sources. While the National Industrial Conference Board data are not presented in suitable detail for national income purposes, they can be used in conjunction
with the decennial census breakdowns to establish generally adequate interpolations from 1032 through 1941, as well as extrapolations back to 1020,
Since 1045, the Census Bureau has undertaken comprehensive
annual estimates of local revenues, based upon complete reporting
for cities over 25,000, upon local tax data obtained from State
agencies, and upon sampling of numerous minor local units. Inasmuch as Census reports for 1043 and 1044 covered all counties,
as well as cities having populations over 25,000, the only serious
gaps in the data since 1042 are for cities under 25,000, school
districts, special districts, and certain types of townships in the
years 1043 and 1044. These gaps are readily filled through interpolations guided by trends in the smaller of the reported cities.
The classification of aggregate local revenues as estimated by the
Census Bureau for recent years still derives in part from detailed
breakdowns available only in the last decennial census; but the
provision of control totals through sampling of minor types of
governmental units now precludes any likelihood of serious error
in the national income estimates of government receipts (except
perhaps for the latest year, before the Census figures are compiled).
While the State and local estimates (and particularly the latter)
are much less certain than the Federal, they are believed to be
adequate in general, both as to level and as to movement.

Personal tax and nontax payments
By far the preponderant element of personal taxes for the last
decade has been the Federal individual income tax. The monthly
collections reports of the Bureau of Internal Revenue provide a
direct record of these levies with the desired timing, except that
the withholding tax component must be shifted back one quarter
in order to reflect it as paid by individuals rather than as deposited
by employers with the Treasury.
Federal estate and gift taxes are recorded directly as reported
by the Bureau of Internal Revenue in its monthly collections
statistics, as were the dividends tax and a proportion of the automobile use tax (representing the estimated share paid by individuals in a nonbusiness capacity) when operative. Personal nontax
payments to the Federal Government, which include fines, penalties,
forfeitures, and a variety of incidental charges, are based upon
detailed analyses of miscellaneous receipts of the Treasury and
of minor trust fund receipts, as reported in the annual Budget of
the United States Government; fiscal year data on these items are
converted to calendar year estimates Ly interpolations yielding
smooth progressions.
Personal tax refunds—netted out of receipts in the national
income accounts at the time of payment—are based essentially on
the Daily Treasury Statement. The latter reports them only in
combination with other types of refunds (mostly of corporate



profits taxes), but the availability of detailed fiscal year breakdowns in Annual Reports of the Commissioner of Internal Revenue,
in conjunction with the distinctive timing pattern for the preponderant individual income tax component, permits reasonably
accurate estimates for all calendar years. For recent years, quarterly administrative records of the Bureau of Internal Revenue
have virtually eliminated all uncertainty from these estimates.
State and local personal tax and nontax receipts are based primarily upon detailed analysis of available Census and other data
on governmental finances. Difficulties in allocating given types of
revenue as between persons and businesses, however, are frequently solved by reference to available corollary information; for
example, Public Roads Administration statistics on registrations by
type of vehicle are employed in allocating motor vehicle license
taxes. Such corollary data are also employed in some cases as
extrapolators in estimating yields for recent periods in advance of
Census tabulations.
With respect to local governments, the necessity for sweeping
interpolations—based upon National Industrial Conference Board
data—of the pre-1942 revenue estimates has already been mentioned. The respective personal and business shares of several
broad revenue categories so interpolated are based throughout the
period upon allocations derived from decennial census breakdowns.
Such allocations are also applied, although in somewhat greater
detail, to local revenue estimates for years after 1942.

Corporate profits tax accruals
These estimates are described in the section on Corporate profits.

Indirect business tax and nontax accruals
For the Federal Government, these consist primarily of excise
taxes, collections of which are reported monthly by the Bureau
of Internal Revenue. An approximate conversion of the Bureau
of Internal Revenue figures to an accrual basis is accomplished
by shifting all excise tax collections except those on alcoholic
beverages and tobacco (where revenue stamps must be purchased
and affixed before sale) back by one month. Customs duties, as
reported in the Daily Treasury Statement are similarly shifted,
while collections of the capital stock tax (as reported by the
Bureau of Internal Revenue) were moved back by 6 months during
the period when it was effective. Federal indirect business nontaxes are based upon the same detailed analysis of Treasury miscellaneous receipts and minor trust fund receipts from which the
personal nontax estimates are drawn. The classification here may be
somewhat inexact, since exhaustive investigation of the dozens of
petty items involved is not feasible; and the timing is somewhat
arbitrary, since basic data are readily available only forfiscalyears.
Nevertheless, the general order of magnitude of the estimates is not
believed to be seriously in doubt.
Refunds of indirect business taxes are netted out of the latter
at the estimated time of initial overpayment, in accordance with
the net accrual concept underlying the series. These refunds are
derived as part of the more general refund analysis described
above in connection with personal taxes.
The basic Census reports, supplemented primarily by Tax Yields
statistics for the years 1933-36, provide substantially full coverage of State indirect business taxes.
The major sales taxes which account for the bulk of State revenues are readily distinguishable, and involve no serious classification problems. In principle, these taxes should be recorded on an
accrual basis for present purposes. Prior to 1942, however, the
distinction between accruals and collections is ignored as inconsequential, and calendar year estimates represent simply two-year
moving averages of fiscal year collections. For later years, partial
cognizance is taken of the accrual principle through interpolation
of calendar year estimates from fiscal-year collections totals by
reference to independent series indicating the movement of the
respective tax bases. The retail sales estimates of the Office of
Business Economics (or appropriate components thereof) are used

SURVEY OF CURRENT BUSINESS
for this purpose with respect to general, gasoline, and liquor sales
taxes, as well as for extrapolating them beyond the latest period
reported by Census. Monthly data from the Bureau of Internal
Revenue on tax-paid withdrawals of tobacco products from registered factories or bonded warehouses are similarly utilized in
connection with State sales taxes on tobacco.
Estimates of other State taxes and nontaxes are somewhat less
satisfactorily founded. Some of them involve more or less dubious
allocations as between persons and businesses, and most of them
are arbitrarily timed (within the fixed fiscal-year totals) to yield
smooth progressions. These circumstances, however, are not believed
to preclude a generally satisfactory degree of reliability in the
published estimates, since errors in the detailed calculations are
likely to be at least partially offsetting.
The local indirect business tax estimates are still less,solidly
based. They are subject to the hazards arising from fragmentary
reporting by the Census Bureau prior to 1945 (except in decennial
census years) and from possible sampling error thereafter with
respect to all local units except cities over 25,000. Particularly
to be noted is the somewhat dubious nature of estimates for intercensal years prior to 1942, when they hinge in large measure upon
the local revenue data compiled by the National Industrial Conference Board, which are not sufficiently detailed for this usage.
The classification of local revenues as between business and persons, even in recent years, depends to a considerable extent upon
the use of ratios derivable only from the detailed decennial census
breakdowns, or upon unverified assumptions about changes in
such ratios. These classification problems, however, are minimized
by the predominance in the local revenue structure of real property taxes, all of which are allocable to the indirect business category because of the treatment of home ownership as a business.
This predominance of property taxes has a special bearing upon
the reliability of the local indirect business tax estimates for the
most recent year (published before the Census reports become
available). Since no current economic series closely correlated with
property tax yields is known, the latest estimate usually represents
merely a judgmental extension of the previous "trend, with rough
allowance for the volume of new construction and the prevalence
of rate revisions.

Contributions for social insurance
These estimates are discussed in the sections on Supplements
to wages and salaries and on Wages and salaries.
Federal grants-in-aid
These do not appear in the consolidated government account,
pt become an element of Federal expenditures and of State and
local receipts if the accounts are segregated. The series is described in general terms below, in connection with the derivation
. estimates of Federal purchases, and its components are listed
* footnote 15 to table 8 in Part V.
Government Expenditures
. Tlle derivation of government expenditure data for the national
^come accounts centers upon the estimation of government purases
°f goods and services. The method, in general, is to start
**th budgetary totals drawn in summary fashion from broad fiscal
sports, tJien to make various additions to and deductions from
ese to
*als so as to achieve as residuals the desired purchases
series. The alternative method of building up such a series item
y item would be much more informative; but it is not statistically
jasible, owing to the absence of satisfactory comprehensive sources
basic data classified by object of expenditure.
With purchases of goods and services established, other outlays
hin
the national income framework—transfer payments, int
rest, grants-in-aid (for the separate Federal account), and sub*6S Oess the current surplus of government enterprises)—are
<ied to complete the government expenditure account. In the
m
» these additions represent restoration (not necessarily with



133

the same timing) of many of the budgetary items deducted in estimating purchases. They also include, however, certain outlays
from non-budgetary funds consolidated with the budgetary accounts
for national income purposes.
The general approach sketched above is employed in deriving
Federal expenditures throughout the period of the estimates, and
is applied to State expenditures in all years except 1933-36,
and except also in the most recent year (when Census tabulations
are not yet available). These gaps are filled mainly by interpolations (discussed more fully below) based upon independent statistics covering major types of outlay.
With respect to local governments, the general method is fully
applicable only to decennial census years. Estimates for all other
years before 1942 represent interpolations or extrapolations similar
to those utilized for State expenditures from 1933 through 193G.
The City Finances data available for those years are discarded,
since they cannot readily be integrated with estimates based on
interpolating series covering all local units (although not all types
of expenditure). Subsequent to 1942, available Census data on local
expenditures are utilized, but the estimates for local units other
than cities with populations of 25,000 or over (and also counties,
prior to 1947) represent rough extrapolations from 1942 benchmarks.

Purchases of goods and services—Federal
Exhibit 34 summarizes the derivation of estimates of Federal
purchases for selected years. Attention may be called to the fact
that the magnitude of the items entering the derivation varies
widely from year to year, depending to a considerable extent upon
the changing content of the initial budgetary expenditures. A brief
description of sources and methods may conveniently be given in
the form of annotations to this exhibit.
1. Total budgetary expenditures.—At least three major Federal
fiscal reports—the annual Budget document, the Treasury's Combined Statement of Receipts, Expenditures, and Balances, and the
Daily Statement of the United States Trcastiry—might be considered in choosing a point of departure for the estimates of
Federal purchases. These three documents represent essentially the
same accounting record (varying, from an over-all standpoint,
only because of slightly divergent closing dates), but differ widely
with regard to the type and arrangement of details reported.
Although the Daily Treasury Statement is the least informative
of the three in many respects, it is the only one available on other
than a fiscal year basis, and has accordingly been adopted as the
basic source of initial summary totals.
2* Transfers to trust acccunts are reported directly in the Daily
Statement, and do not have to be estimated. Some of them are
purely bookkeeping transfers, to be eliminated from budgetary
expenditures in the process of consolidating the various Treasury
accounts, while others, although viewed as substantive expenditures, are given a different timing for national income purposes
(see note to line 13, below).
3. Tax refunds, which are netted out of tax receipts in the
national income accounts, must be eliminated from budgetary expenditures in those years when they were so classified by the Treasury. The Daily Statement provides a record of the amounts refunded.
4. General government loans, investments, and capital transfers
are compiled partly from the Daily Statement itself (where separately identifiable in that document) and partly from the Budget
document and from reports of individual lending agencies. In the
two latter cases, the estimates doubtless diverge to some extent
from the amounts implicit in the initial budgetary expenditure
totals, but close approximation can usually be assured. Loans and
investments of government enterprises are not included under the
present heading, being treated separately in line 11.
5. Purchases of land and existing capital assets are estimated
for some years on the basis of title clearance records of the Department of Justice, and for other years on the basis of obliga-

134

1951 NATIONAL INCOME SUPPLEMENT

tions (not expenditure) data provided by the annual Budget documctit In neither case do the estimates represent more than a
rough order of magnitude (relatively small) for government acquisitions of goods neither currently produced nor coming out of
business inventories or imports.
< . Budgetary transfer payment*, except for certain veterans'
»
benefits are not distinguishable in the Daily Statement from other
outlays'of the agencies involved. From administrative records of
these agencies, however, most items under this heading can be
ascertained with only minor timing discrepancies; in a few instances of reliance upon the Budget document, proportionately
larger timing errors are probably present.

11. Budgetary expenditures relating to government enterprises
represent a combination of contributions by the general government to the capital of the enterprises and expenditures by the
enterprises themselves (to the extent included in the budgetary totals). Most components of this series are reported directly in the
Daily Statement, but several important segments are drawn, with
varying degrees of precision, either from annual financial reports
of individual government enterprises or from the Budget document.
With the present adjustment designed to eliminate all budgetary
charges relating to government enterprises, there is then substituted (in line 12, below) an estimate of such of their transactions as are relevant to the measurement of government purKxl.ihit 3.1—Summary Derivation of Federal Government Purchases
chases of goods and services.
_
12
of Goods mid Services, Selected Calendar Years
- Capital formation, of government enterprises consists of the
IMiiUcina of dollar*]
gross acquisition of newly-produced fixed a s s e t s b y these agencies,
"
plus t h e n e t change in their inventories. B o t h components are
10 J3
1047
based largely upon t h e business-type financial s t a t e m e n t s maintained by most government enterprises. I n cases w h e r e such state1. Total tiiirlKftnry expruditure.s, us reported in Daily
88,OS I 00,552
Trraaurj/ Statement
..
41,543
ments a r e lacking, t h e g a p is filled somewhat less satisfactorily,
through resort to relevant budgetary or administrative data.
Transfers to trust accounts
_1,787
474
5«*jJJ
In combination, t h e two adjustments listed in lines 11 and 12
2,133
Tax refunds
.
-_.
74
3.
:
General government loans, investments, and capital
I.
^
have these principal effects: (1) To exclude from government pur31
transfers
chases, in accordance with national income concepts, t h e lending
87
t'urehase-* of land and existing capital assets
74 _.'.*!-_
*)!)()
anc S U D S
liudgs'tarv transfer p ly men ts
-__
2,074
i|738
*
idy activities of government enterprises, a s well as their
042
Gr.mts-in-aid to State and local governments
870
net current
Interest payments pother than by government enter5 ooo
operating expenses; a n d (2) t o convert t h e record
prise^) . .*
4,107
2,194
Subsiilie;* (oth-r than those paid by government
of their purchases of fixed assets a n d inventories ( n e t ) to an
enterprises)
•
382
338
007
accrual basis.
Overpayments established by renegotiation of war
10.
eon tracts
771
13. Government contributions
for social insurance, which are
Hudg'-tary expenditures relating to government
enterprises.,. „ ..
........
--- ^ 1,149
759
1,832
viewed a s supplementary compensation of government employees,
are equivalent to t h e shares of Federal civilian employee retirePlus:
Capital formation of government enterprises
2,087
-GS6
ment funds and veterans' life insurance funds in transfers to trust
7^7
13.
(iovcrni»t>nt contributions forsoenl n-stirancc
128
1,434
14.
800 -1,100 " - 0 5 7
Clmngo in not pivables to private business
accounts (line 2, above), except t h a t t h e timing is modified and a
-74
lo.
Miscellaneous other adjustments
~,
202
deduction is made for a portion of t h e retirement fund contribu(»ovrrtiinoiit
of good* and
tion
17,070
ascribable to covered government enterprise employees. (See
81,804 70,1154
section on Supplements t o wages a n d salaries.) The latter item
1(205
nmerit t*:ilfs_
17. IA'SS: '
2,158
041
becomes an imputed operating expense of t h e enterprises in the
IS. Kquals: Federal Government purchases of goods and
services (net).
15,784
calculation of their current surplus.
81,223 74,790
14. Change in net payables to private business, a n adjustment
7. Granls-in-aid
to State and local governments
a r e firmly a * m , ed f a r t i c u l a t i n g t h e record of government purchases with
that
founded, for fiscal years, upon special tabulations appearing in
° . c o r r e s P<>nding business sales, represents t h e net inAnnual Reports of the Secretary of the Treasury or in the Budget.
°J" e a s e m . F e d e r a l Government accounts payable to business, less
t e net lncrease
The calendar year timing of some of the largest g r a n t s (e. g., for
?J
in outstanding advances a n d prepayments by
the Federal
Social Security and for highways) is specified either precisely or
.
Government. Both sets of d a t a a r e taken from Sewithin very n a r r o w limits (where reported in combination with
purities and Exchange Commission surveys of working capital of
Umted
relatively small associated administrative expenses) by t h e Daily
States corporations, a n d a r e available only for t h e years
1940 t h r o u h 19
Statement.
A r b i t r a r y interpolation is employed, however, in con£
4 6 (although collection of similar data was resumed as
nection with a number of minor g r a n t programs for which releof the end of 1950). The adjustment is ignored for other
v a n t monthly or quarterly data a r e not readily available.
years, a s is the failure of the data to cover noncorporate businesses.
8. Interest payment*, except for trivial amounts not associated
^5* Miscellaneous other adjustments
embrace a wide variety of
with the public debt, a r e precisely reported in the Daily Statement
items. In general, they relate either to peculiarities of Treasury
9. Subsidies paid by general government agencies consist chiefly
accounting practices or to t h e maintenance of consistency with
otner
of soil conservation and other similar payments to farmers, which
segments of t h e national income accounts. F o r example,
a r e reported monthly by the Bureau of Agricultural Economics
certain sizable payments to United States personnel in Germany
and
on a basis not likely to diverge significantly from corresponding
J a p a n after World W a r I I were made in t h e form of "military
charges implicit in t h e Daily Statement.
With respect to several
payments certificates". These were expensed b y t h e Treasury on
small nonfarm subsidy programs, estimates a r e derived through
t h e basis of t h e issuance of t h e certificates to disbursing officers,
but
interpolation of obligations data given in t h e Budget. I t should be
*t is the timing (substantially different) of payments by the
noted t h a t all of t h e major wartime subsidies were paid by governlatter to employees which is relevant f o r p r e s e n t purposes. Or
ment enterprises, and hence are treated in line 11, rather than here.
again, acquisitions of silver are debited by the Treasury directly
10. Overpayments established by renegotiation of tear contracts
to the general fund, rather than charged to budgetary expendiare deducted from budgetary expenditures in order to bring govtures; accordingly, an explicit addition to the latter is required to
emment purchases into line with related data on corporate profits
include silver in Government purchases
and business sales, which are computed for purposes of national
The requisite data for items under' the present heading are
income measurement with retroactive allowance for renegotiation
drawn from diverse sources, including the Daily Statement, the
of war contracts. The estimates of gross recover.es from renege
Budget document, the United States balance-of-payments statistics,
tiation, timed as of the dates of initial overpayments, are based
and individual agency records
UPon data compiled by the War Contracts Price Adjustment Board.
1 7 . Goverttment sales, which include all sales by general gov-




SURVEY OF CURRENT BUSINESS
ernment agencies except those of fixed assets to domestic business,
are estimated in two groups. Domestic sales are derived from the
detailed breakdowns of miscellaneous receipts given in the Budget
document, except for the peak years of World War II surplus
property disposal, when data compiled by the War Assets Administration are the primary source. Because of classification difficulties, the reliability of these estimates is relatively low. Foreign
sales, which include cash unilateral receipts from abroad, are taken
directly from the official balance-of-payments statistics, thus assuring proper integration of the accounts regardless of accuracy
in an absolute sense (although this, too, is probably much higher
than in the case of domestic sales).

Purchases of goods and services—State and local
The method of estimating State and local government purchases
parallels, in years of full Census coverage, that employed for the
Federal Government. Again, budgetary statistics constitute the
foundation of the estimates and numerous adjustments in the
direction of national income classification are required.
While these adjustments are less complex with respect to types
of transactions covered, the derivation is in other ways more
difficult because of the several types of governmental units to be
dealt with and because of the necessity for rather tenuous statistical improvisations to fill in the gaps for intercensal periods.
For segments of the estimates depending directly upon the basic
Census data (involving all non-Federal governmental units in
decennial census years, States in most other years, cities of 25,000
or more since 1942, and counties from 1943 through 1946), the
principal items to be excluded from total governmental expenditures as reported by the Census Bureau are debt service charges,
intergovernmental transfers of various types, and transfer payments. The capital outlays of government enterprises, on the other
hand, must usually be added, since public service enterprises are
separately reported (for most years) in the Census tabulations.
This is also true of a few other outlays from nonbudgetary funds.
Data for most of the necessary adjustments are obtained from
the same Census tabulations (or from unpublished details thereof)
from which the control totals are drawn.
In interpolating or extrapolating from benchmark totals (as
well as in establishing, since 1942, the calendar year timing of
series reported only by fiscal years), chief reliance has been
placed upon the government payroll estimates of the National
Income Division and upon the public construction estimates of
the Construction Division (now Building Materials Division) of
the Department of Commerce. Such outlays account in most years
for about 75 percent of all State and local purchases.
Interpolations (or extrapolations) geared chiefly to these series
(or components of them) are employed in estimating purchases
f
or the following types of governmental units: States for the years
1933-36 (and for the most recent year, before compilation of the
Census data); all local units during the interval between the 1932
and 1942 Censuses and prior to the former (as well as for the most
recent year); counties after 1946; and cities with populations
^der 25,000, townships, towns, school districts, and special districts after 1942.
In the pre-1942 interpolations, it is assumed that, except for new
construction and a few other items, all purchases followed trends
between the benchmark years (and back to 1929 in the case of
local governments) corresponding to those of the respective State
an
d local payroll series. With the estimates of payrolls and of
Purchases related to them, there are then combined the estimates
°f construction and other expenditures not assumed to have been
So
related. Among the latter, by far the most important were
^ario types of purchases under programs supervised by the
Emergency Relief Administration. Estimates of these purare based upon the Final Statistical Report of the Federal
ency Relief Administration: 1942, with due allowance for
^purchase items there included.



135

Extrapolations of local purchases after 1942 are undertaken
separately for several groups of unreported governmental units,
utilizing in each case the most nearly appropriate detailed components of the available payroll and construction series.

Breakdoivns of government purchases
In table 9 of Part V, government purchases are subdivided into
compensation of employees, new construction, and other purchases
from business (with a further distinction, for the Federal Government only, between net purchases from abroad and those from
domestic business). The data used in effecting these breakdowns
are to a considerable degree independent of those from which the
estimates of total purchases of goods and services are derived.
The employee compensation figures—which cover only general
government employees, since government enterprise payrolls are
treated not as government purchases, but as operating expenses
of the enterprises—are described in the section on Wages and
salaries. The estimates of new public construction are those published by the Construction Division. (See section on New construction.) Net purchases from abroad, which include cash gifts
of the Government to (and from) foreign countries, are taken
from the official United States balance-of-payments statistics, as
described in the section on Net foreign investment.
Deduction of the three series discussed in the foregoing paragraph from estimated total government purchases gives other
purchases from business as a residual. Although clearly defined
in principle, this item is peculiarly subject to statistical imperfections, owing to its absorption of whatever errors or inconsistencies
may be present in the other series.
In table 2 of Part V, a different breakdown of Federal Government purchases—between war and nonwar activities—4s given for
the years 1939-46. This classification conforms, in general, to the
Daily Treasury Statement classification of general and special account expenditures for this period. War purchases include also that
part of the capital formation of government enterprises which is
attributable to their war activities. Government contributions to the
National Service Life Insurance Fund are classified as war; all other
government contributions for social insurance as nonwar.

Transfer payments
The derivation of these figures, for all levels of government,
is described in the section on Transfer payments* It should be
noted that the totals carried under this heading substantially
exceed the amounts of transfer payments deducted from budgetary
expenditures in estimating purchases, since transfer payments
charged against non-budgetary trust funds (and in two cases
against the Federal public debt accounts) are included.

Net interest paid by government
This series is explained in the section on Interest.

Subsidies less current surplus of government enterprises
This item consists of the Federal general government subsidies
described in the discussion of Exhibit SU above, plus the operating
deficit or minus the operating surplus of both Federal and State
and local government enterprises.
For the Federal Government, the enterprise surplus is based
primarily upon the business-type profit and loss statements of
Federal corporations, modified to exclude capital gains or losses,
interest income or expense (which is consolidated with general
goverment interest), and depreciation charges (which are not
recognized for national income purposes in connection with government-owned assets), and to include as an expense an imputed
share of the government contribution to employee retirement funds.
For a few Federal enterprises not actually organized as corporations, it is necessary to construct business-type financial statements
from available budgetary data.
It may be noted that direct subsidies paid by Government cor-

1951 NATIONAL INCOME SUPPLEMENT

136

porations are included as operating expenses in their profit and
loss statements. The combination of operating deficits of enterprises with direct subsidies thus has the merit of statistical expediency, in addition to its more basic purpose of achieving parallel
treatment for all subsidy programs, whether accomplished through
direct payments or through the deliberate incurrence of losses on
purchase and sale operations.
The State and local enterprise surplus is calculated (with similar
modifications) from the summary operating statements of public
service enterprises compiled by the Census Bureau as a supplementary feature of its Government Finances series. Since the
census tabulations cover some types of enterprises only in decennial census years, the estimates for other periods represent rough
interpolations or extrapolations based upon the most relevant data
available.
For a list of Federal Government enterprises and major types
of State and local enterprises, see footnotes to the table on industrial classification in the Introduction to this Part.
i

il grants-in-aid to State and local governments

. discussion of "Government receipts" above.)
Characteristics of Revisions
••-"..''> jl

Government

all of the basic data underlying the Federal Government
\ estimates become available within a few weeks or months after
the close of any calendar year. The only important exception is
in the case of corporate profits tax accruals, which for the two
most recent years are extrapolated from the latest Statistics of
Income year, as explained in the section on Corporate profits.
For a number of minor items, such as nontax revenues and
numerous detailed elements in the derivation of Federal purchases,
reliance upon the Budget document and other fiscal year reports
has the effect of leaving the figures for the latter half of the
latest calendar year on a tentative basis at the time full annual
estimates are first prepared. By and large, however, the revisions
eventually arising from substitution of more definitive data in
these areas tend to be trivial.

State governm ents
The Census reports from which State government receipts and
expenditures are chiefly derived are ordinarily available for a
fiscal year ending (for most States) on June 30 of the latest
calendar year covered by the national income estimates. Only for
the latter half of that year, therefore, are the estimates completely dependent upon rough extrapolating procedures. Moreover,
the proportions of expenditures covered by currently available
payroll and construction series, and of receipts fairly closely correlated with current retail sales data, are such as to insure against
errors of large magnitude.

Local governments
It is at the local level that divergences between preliminary
and final results are likely to be widest. Fundamentally, of course,
all of the local estimates are preliminary for all years after 1942,
and will not be solidly pegged again until the results of the decennial Census of Governments planned for 1952 become available.
There is a considerable difference in the probable margins of
error, however, as between the estimates of receipts and those
of expenditures. The former are currently based upon much more
nearly comprehensive coverage than the latter, and may be expected to change correspondingly less, at least in the aggregate,
when linked to the new decennial census benchmarks.
There is also a distinction, as to degree of tentativeness, between the local estimates for the most recent year and those for
other years after 1942. Because of delays in reporting, the latest
year's figures must be prepared without benefit of any of the



basic Census compilations. This is perhaps more hazardous in the
case of receipts than in that of expenditures, since current payroll
and construction data provide a guide for the latter, while no
current economic indicator closely correlated with the preponderant
property tax component of local revenues is known to exist.

14.—TRANSFER PAYMENTS
Accurate information on nearly all types of government transfer
payments has been available for years since 1933 from the fiscal
records of agencies administering the payments or from such
summary sources as the Daily Treasury Statement and Budget
of the United States Government, For years prior to 1933, the
State and local series are not so precise and the government totals
for this period are accordingly less accurate.
Business transfer payments, on the other hand, are comprised
largely of items for which statistical sources are weak. Considerable
estimation is necessary to derive approximate orders of magnitude.
Business transfers constituted only 6 percent of total transfers in
1947, but as much as 40 percent in 1929.
Government Transfer' Payments
Federal Government
Except for several components of the "Other" category, as
shown in table 36 in Part V of this report, requisite data on Federal transfer payments have been available from Government
sources. The data have required but little adjustment for use by
the National Income Division. In some instances, data were reported for fiscal years and had to be converted to a calendar year
basis; in others, payments to nonresidents of the continental United
States had to be eliminated from available totals. In several component series, minor adjustments for timing discrepancies were
required.
Reported, direct data have not been available for several items
included in the "Other" grouping. This is true of the series on
profits of ships' service stores for years prior to 1948. Magnitudes
for these years were obtained by extrapolating the 1948 figure by
strength of the naval forces. The series on Federal payments to
nonprofit institutions may not, because of unavailability of data,
be quite complete. Also, a few types of such payments must be derived by indirect methods. An example is furnished by payments
to nonprofit educational institutions under veterans' training programs. Such payments are estimated by making an allocation of
data on total expenditures, as reported by the Veterans Administration, to nonprofit schools, State and local government schools,
and commercial schools. This is based on two types of periodic
data for the several types of schools: Enrollment of veterans (from
the Veterans Administration) and average tuition costs (from the
Office of Education and the President's Committee on Higher Education).

State and local government
For components forming in recent years over four-fifths of State
and local transfer payments, data based on the fiscal records of
disbursing agencies are available for years since 1933. The amounts
of direct relief (special types of public assistance and general
assistance) and of cash sickness compensation are provided by the
Social Security Administration from reports made to it by State
government agencies. The figures on bonuses to veterans of World
War II are secured directly from the individual States making such
disbursements.
State and local direct relief for the years 1939-32 was estimated by
the National Income Division from the available partial data contained in the following publications: Summary of Relief and Federal Work Program Statistics, 1933-l>0t by T. E. Whiting and

SURVEY OF CURRENT BUSINESS
T. J. Woofter; and Trends in Different Types of Public and Private Relief in Urban Areas, 1929-35, by E. A. Winslow. The
estimates, at best, are approximate orders of magnitude.
The remaining types of State and local government transfers—
pensions, veterans' aid, payments for the care of foster children
in private family homes, and payments to nonprofit institutions—
have required estimation for the entire period since 1929.
Estimates of State and local government pension payments for
years subsequent to . 1935 have been prepared' by the Social Security Administration by procedures described in the section on
Supplements to wages and salaries in connection with employer
contributions to State and local employee retirement systems.
The total for 1936 from this source was extended back to 1929
by an extrapolating series utilizing available data (converted to a
calendar year basis) on State and local pension payments. Data
for States were reported for the fiscal years 1929-31 and 1937
in the Census Bureau's Financial Statistics of States and obtained
for intervening years by straight-line interpolation. Data for local
units were derived by extrapolating the 1941 value given in the
Census Bureau's publication on Retirement Systems for State and
Local Government Employees: 19 Ul by pension payments in cities
of 100,000 and over, as provided in the annual Census reports on
Financial Statistics of Cities.
State and local government aid to veterans (not including State
bonuses to World War II veterans) has been estimated largely
from data reported by the Census Bureau in its government financial statistics series. Consisting in large part of pensions paid in
the Southern States to veterans of the Confederacy, the item
amounted to $24 million in 1929 and $11 million in 1949.
The small amount of payments by State and local governments
for the care of foster children in private homes has been estimated
from periodic data of the Bureau of the Census, the Children's
Bureau of the Department of Labor, and a few State welfare
departments on the number of children cared for, and from data
of the Children's Bureau on the average cost of foster home boarding in 10 urban areas in 1938, extrapolated to other years by the
Bureau of Labor Statistics Consumers' Price Index.
Estimates of State and local government contributions to nonprofit institutions are derived by multiplying total contributions
to such institutions (by individuals, corporations, and governments,
as estimated from scattered, piecemeal data) by the estimated
Proportion of total receipts of nonprofit institutions obtained from
State and local governments. This proportion is based on studies
f
°r a group of urban areas for 1938, 1940, and 1942 made by the
Children's Bureau.

Business Transfer Payments
The only component of business transfer payments for which
direct information is available is corporate gifts to nonprofit institutions. The estimates of the other components—consumer bad
^bts, personal injury payments by business other than to emPloyees, unrecovered thefts from business of cash and capital
a
ssets, and cash prizes—must be derived from indirect and partial
data.
Data on corporate gifts to nonprofit institutions (forming 36
Percent of total business transfers in 1947) have been reported
b
y the Bureau of Internal Revenue, beginning with 1936, in its
Statistics of Income tabulations of corporate income tax returns*
peding the availability of Bureau of Internal Revenue data, the
Bureau figure is held constant for the two most recent
^
of the published series. To obtain estimates for 1929-35,
^e 1936 figure was extrapolated by corporate gifts to social and
^elfare agencies, derived from rather fragmentary sample information.
9 Consumer bad debts (38 percent of business transfer payments
"i 1947) are estimated through an allocation of total bad debts
Consumer and intra-business) by industry, as reported in Bureau
°f Internal Revenue tabulations of corporate and noncorporate
1J
*come tax statistics. This allocation is a twofold one: (1) elimina


137

tion, by assumption, of those industries in which consumer bad
debts do not arise (or are very small), and (2) apportionment of
the remaining total of bad debts, by industry, between consumers
and business on the basis of sales, with sales to consumers being
approximated from groupings of the personal consumption expenditure estimates, and business sales being derived as the difference between reported total sales and estimated consumer sales.
As in the case of corporate gifts to nonprofit institutions, the
most recent estimate is held constant pending receipt of Bureau
of Internal Revenue data. For the numerous years for which noncorporate bad debt data were not available from Bureau of Internal
Revenue tabulations, estimates were made by industry by extrapolating the noncorporate ratio of bad debts to sales by the similar
corporate ratio, and then applying the resulting ratios to estimated
noncorporate sales.
Personal injury payments by business to persons other than
employees ($139 million in 1947) are estimated as the sum of
automobile liability payments for personal injury, payments by
railroads, and miscellaneous liability payments.
The procedure of deriving automobile liability payments is to
allocate total losses paid on automobile policies (reported by the
Spectator Company) between business and individuals, and then
to allocate estimated business losses between personal injury and
property damage. The first allocation (30 percent to business in
all years except 1942-45, when it was 50 percent) is the same
as the one used in the apportionment of consumer and business
expenditures for gasoline and oil. As described in the consumer
expenditure notes, it is "thinly based". The basis for the second
allocation was provided by the American Management Association's
Insurance Series, Compulsory Automobile Insurance (#24). The 80
percent allocation of business losses to personal injury payments
derived for 1935 has been held constant over the whole period of
the estimates.
Railroad personal injury payments to persons other than employees
represent total payments to all persons, as reported by the Interstate
Commerce Commission, minus the estimated amount of employees'
benefit compensation (see notes on Supplements to wages and
salaries). Miscellaneous liability payments—with virtually no data
as a basis—are entered at $10 million each year.
Unrecovered thefts from business of cash and capital assets are
estimated from data on the value of currency and goods stolen
and recovered contained in the annual publication Uniform Crime
Reports of the United States of the Federal Bureau of Investigation. The business allocation is made on the basis of data on
thefts by place of commission.
The figures on cash prizes included in the published data represent a token estimate of $25 million annually.

15.—PERSONAL SAVING
Personal saving is obtained by subtracting personal consumption
expenditures from disposable personal income. As the difference
of these much larger totals, it is subject to large percentage errors
in level as well as in movement, and it is necessary, therefore, to
check the series for reasonableness against other available estimates. There are three other series that can be used for comparison.
The first of these is another residual estimate of personal saving
that can be derived within the framework of the national income
accounts, by deducting the various types of nonpersonal saving
from investment and the government deficit. This alternative esti;
mate of personal saving equals "personal saving" (obtained as the
difference between disposable income and consumption) plus the
"statistical discrepancy", as can be seen from table 5, Part V.
It is not possible to say which of the two residual estimates is
likely to be more reliable. However, they are to a considerable

1951 NATIONAL INCOME SUPPLEMENT

138

extent statistically independent, and clo.se correspondence between
them—in other words, a small statistical discrepancy—constitutes
strong, although by no means conclusive, evidence of their validity.
A second independent estimate of personal saving is provided
by the Securities and Exchange Commission through direct estimates of changes of the assets and liabilities of persons. This
estimate is published in table G, Part V of this report. It may
be noted that data deficiencies make the direct estimate of personal
saving a hazardous procedure also. However, the availability of
a series which is to a very large extent statistically independent
of the two residual estimates of personal saving provides a useful
check.
Finally, reference may be made to the saving data which become available as a part of the Federal Reserve Board's Survey
of Consumer Finances. A conceptual and statistical reconciliation of
this series with the Office of Business Economics estimates will be
available shortly.

16.—CAPITAL CONSUMPTION ALLOWANCES
The bulk of capital consumption allowances in the national income and product tables represents charges for the depreciation,
including obsolescence, of business fixed capital and for accidental
damage to such capital, deducted in arriving at business net income.
An insignificant amount represents the depreciation of fixed assets
held by nonprofit institutions. Depletion is not included.
In general, the valuation of these charges reflects the type of
accounting practices pursued under Bureau of Internal Revenue
regulations. Estimates of farm depreciation are an exception to
this rule. The Bureau of Agricultural Economics, the source of
the farm income estimates, measures depreciation on the basis of
replacement cost rather than original cost.
About one-third of total capital consumption allowances is taken
directly from corporate accounting records for all but the two
most recent years. With the improvement in coverage of income
tax return data for partnerships and sole proprietorships, and
with more frequent tabulation of such data, it has recently become
possible to derive noncorporate components making up an additional 10 percent of the total from these materials. The remainder of the allowances is estimated on the basis of a wide variety of sources and methods, and some of them are subject to a
wide margin of error.
Exhibit .75 gives a breakdown of capital consumption allowances
in which segments based on distinct types of estimating methods
are listed separately.
Depreciation Charges
Estimates under this heading comprised more than 80 percent
of all capital consumption allowances in 1947.
Exhibit 35.—Capital Consumption Allowances, 1947
Item

Percent

Depreciation:
Depreciation chargesCorporate business
Noncorporate business:
Nonfarm, except real estate industry.,
Farms
Real estate industry
Institutional
Capital outlays charged to current expense..
Oil and gas well drilling
Producers' durable equipment.,
Accidental damage to fixed capital.
Total




100.0

Corporate business
Nearly half of all depreciation is on corporate property and is
reported annually by the corporations. Federal income tax returns
are the chief source of data. The totals compiled from the tax
returns are increased by the acMition of depreciation charged by
Federal Reserve Banks, which is reported to the Federal Reserve
Board.
A variation in the use of the tax return data was necessary in
wartime, because of legislation affecting the length of useful life
to be assumed in calculating depreciation of certain capital assets
for tax purposes. The assets involved were facilities acquired after
1939 which had been certified to be necessary in the interest of
national defense. Taxpayers were allowed, until the end of the war,
to amortize their investments in such facilities over an assumed
useful life of 60 months. Such emergency amortization allowances
were reported in the tax return tabulations, and were included
with depreciation for national income purposes.
However, subsequent legislation modified the assumption as to
useful life, by permitting the taxpayers to recompute their amortization charges on such facilities retroactively in such a way that
the cost of the facilities would all be charged off by September
30, 1945. The effect of such recomputation on emergency amortization allowances was estimated, and the adjusted allowances were then
added to ordinary depreciation and deducted from profits.
The estimates were made by capitalizing the original emergency
amortization allowances as reported, and decumulating to determine the amount of emergency investment made annually; each
year's investment was then prorated forward over a period extending from the middle of that year through the third quarter
of 1945. (The corresponding estimates for noncorporate business, made by applying to the corporate manufacturing adjustment
a 1939 Manufactures Census ratio of noncorporate to corporate
value of product, were extremely small.)
Pending the availability of tax return data for the latest two
years, preliminary estimates of corporate depreciation are prepared by using data from various other sources as extrapolators.
The main sources are the Federal Trade Commission—Securities
and Exchange Commission figures for depreciation and depletion
combined reported in the Quarterly Industrial Financial Report
Series for manufacturing corporations; combined depreciation and
depletion totals for large corporations in selected industries, compiled
by the Federal Reserve Board from financial returns and used generally for nonmanufacturing other than public utilities and banks;
Interstate Commerce Commission figures on depreciation charges for
Class I railroads, interstate motor carriers, and oil pipeline companies; and similar compilations by the Federal Communications
Commission, the Federal Power Commission, the Civil Aeronautics
Board, and the Federal Deposit Insurance Corporation for the
industries reporting to these agencies.

Noncorporate nonfarm business, except real estate industry
For most noncorporate enterprises in each industry other than
farming and real estate, depreciation is estimated as the amount
reported on income tax returns, raised by the ratio of total gross
receipts from business to gross receipts from business reported to
the Bureau of Internal Revenue. The estimates of total gross receipts of noncorporate businesses are discussed in the section on
the Income of unincorporated enterprises. The reported depreciation and receipts figures were taken from mandatory informational returns filed with the Bureau of Internal Revenue by business partnerships for 1939, 1945, and 1947 and from individual
income tax returns filed by sole proprietors for 1945.
• In the absence of information on depreciation for nonprofit
organizations serving business, depreciation was assumed to bear
the same relationship to operating receipts for these organizations
as for partnerships or corporations in industries carrying on similar operations. Total operating receipts of nonprofit organizations
serving business were estimated chiefly from informational re-

SURVEY OF CURRENT BUSINESS
turnsfiledby such organizations with the Bureau of Internal Revenue in 1943. The coverage of this source is known to have been
incomplete in some categories; the amounts involved are generally
small, however, and data for expanding them are generally not
available.
Interpolation and extrapolation of the benchmark depreciation
estimates have generally been accomplished for each industry or
group of industries by use of the corporate depreciation series for
that industry or group. In instances in which significant shifts
in the legal form of organization occurred, the corporate depreciation series used as extrapolators were multiplied by the ratio
of noncorporate to corporate sales.
The estimates for mutual savings banks and savings and loan
associations represent minor exceptions to the general procedure
just outlined. In these cases, annual compilations from financial
reports to government regulatory agencies provide asset values
and indicate the applicable depreciation rates.
Far/715
The estimates of depreciation on all farm property are prepared by the Bureau of Agricultural Economics, by methods outlined in the discussion of Income of unincorporated enterprises.
Exhibit 35 shows under this heading only the portion chargeable
to farm property owned by persons living on farms, which accounts for about one-third of all noncorporate depreciation.
The portion chargeable to farm property owned by landlords living
off farms is classified for national income purposes in the real
estate industry. The farm estimates, unlike the other depreciation
figures, represent depreciation of estimated stocks of capital valued
at current prices rather than at original cost,

Noncorporate real estate industry
In addition to the farm property component mentioned above,
the item of noncorporate real estate depreciation shown in Exhibit
$5 covers nonfarm real estate owned by persons and nonfarm
property of unincorporated real estate firms. This nonfarm portion is estimated as the sum of two components: for owneroccupied nonfarm dwellings, as described in the section on Rental
income of persons; and for other property, as the product of rentals
°n nonfarm noncorporate business and personal real estate holdmgs multiplied by ratios of depreciation to contract rent. The depreciation ratios used were computed from data on rental housing,
and were accepted as applicable to nonresidential real estate after
they had been compared with ratios based on tax return data for
real
estate partnerships in selected years. The basic series used
are
Ascribed in the section on Rental income of persons.

Institutional depreciati
ion
The minor item of institutional depreciation charges relates to
Nonprofit organizations furnishing services primarily to individuals
-•nonprofit hospitals, nonprofit schools, religious organizations,
and a
. variety of other organizations such as social and welfare
agencies, fraternal societies, charitable organizations, labor unions,
oundations and funds, civic leagues, and social and athletic clubs.
i J *Ot.a* *s derived by summing component estimates, and is injjuded in the amounts shown in Part V of this report under the
6 ln
^ ^ °^ depreciation allowances by private business,
fhe largest components are for nonprofit hospitals, nonprofit
° ools> a*id religious organizations. In each of these cases, depreation rates are applied to estimates of the value of depreciable
Property. Such value estimates were based, for hospital buildings
"a equipment, on the 1935 Census of Hospitals and a 1944 tabbu*rpn b y the Journal of the American Medical Association; for
^ilamgs and equipment of educational institutions, on reports
in t h e Biennial
ed^fiP
Survey of Education; and for religious
on the 1926
for '
and 1936 Censuses of Religious Bodies. Values
for e
r
*ch group for the missing years are obtained by straight-line



139

interpolation and extrapolation. The depreciation rates for hospital buildings and equipment were estimates for the Committee
on the Costs of Medical Care (C. R. Rorem, The Public's Investment in Hospitals, University of Chicago Press, 1930). That for
buildings was applied also to the value of educational buildings,
and the hospital building and equipment depreciation rates were
modified downward for application to religious buildings and educational institution equipment, respectively.
Estimates for the other types of nonprofit institutions were
generally based on informational returns filed for 1943 with the
Bureau of Internal Revenue. These returns indicated the nonprofit organizations' gross receipts from business, which were multiplied by the ratios of depreciation charges to gross receipts
reported by partnerships in industries carrying on similar operations. Most of the resulting totals are extrapolated either by total
corporate depreciation in similar industries or by such indicators
as consumer expenditures for related services, although in a few
minor cases it has been necessary to move them arbitrarily.

Capital Outlays Charged to Current Expense
Business purchases of certain types of capital goods, instead
of being amortized through depreciation allowances in the purchasers' books, are customarily charged off as current expense.
The estimated amounts of such purchases are included in capital
consumption in lieu of an allowance for depreciation on these
types of capital equipment. This treatment is consistent with the
inclusion, in the gross private domestic investment component of
gross national product, of all types of producers' goods having a
normal useful life of three years or more, irrespective of the manner of accounting for their purchase.
The estimates of capital outlays charged to current expense are
prepared in two sections: drilling and development costs of oil
and gas wells, which are included in the new construction component of gross private domestic investment; and purchases of
producers' durable goods charged to current account, including
tools, dies, durable containers, etc.

Oil and gas well drilling
It is believed that, except for the cost of casings, expenditures
for oil and gas well drilling are charged to current expense by
almost all companies* These expenditures are described in the section on New construction.

Producers9 durable equipment
Business accounting practice with respect to charges for tools
and similar items of small unit cost varies from item to item and
from firm to firm. Data on the actual distribution of charges between current and capital account are not available. It may be
supposed, however, that most firms charge most such items to
current account, simply for reasons of bookkeeping economy. In
preparing the estimates, the further assumption is made that the
occasional cases of depreciation accounting for small items are
offset by occasional cases in which larger items are charged off to
expense. The total charged to current expense is thus estimated
in terms of the total value of certain selected items believed to be
customarily accounted for in this fashion. The results should be
considered merely as rough approximations.
In general, the estimating procedure has been to select from
the detailed commodity groups given in the Census of Manufactures those producers' durable goods which appear likely, from a
general knowledge of accounting pi-actice. to be charged to current expense. For each major group of producers1 durable equipment, the census value of all commodities selected was divided
by the total census value of all products in the major group. The
ratios so derived for odd-numbered years of the 1929-39 period
were interpolated to secure intercensal figures, and have been held
constant at 1939 values for all succeeding years. The ratio series
for each major group is applied to the annual estimates of the
final value of business purchases of producers' durable goods in

1951 NATIONAL INCOME SUPPLEMENT

140

that group, to derive annual estimates of such purchases charged
to current expense.
Exhibit S(i shows the value of product allocated to the "current
expense" category within each major group of producers' durables
for 11)31) and the ratios calculated for that year..
Exhibit 36.—Producers' Durable Equipment Charged to Current
Expense, by Major Commodity Group, at
Manufacturer^ Values, 1939
Major tfroup of
producers' durable equipment

Spociul industry machinery
Metal working machinery
I*umps atnl pumping equipment
Professional and Hcientiiu: equipment
Tools
Durable containers
_Miscellaneous subsidiary durable equipment.-

Total value
)f product it
Millions of
dollars
40J
108
80
6.5
13<J
282

Value of p r o d u c t s c h a r g e d
to current expense
Millions of
dollars
10
78
10
22
i\o
S4
2i>7

Percent of
group totals
3
34
9
28
100
G2
91

Accidental Damage To Fixed Capital
The estimates of accidental damage represent the value of fixed
capital of private business lost annually due to fire, natural events,
and other accidents not provided for by depreciation allowances.
The coverage of this series corresponds generally to that of gross
private domestic investment, particularly in its exclusion of public
works and government and consumer durables. Since the investment series is net of loss due to accidental damage to inventories
and also excludes repair work, inventory losses and reparable damage are excluded from the estimates of accidental damage.
Losses by fire account for about 60 percent of the total. The
estimates are based chiefly on loss reports to insurance companies
tabulated by the National Board of Fire Underwriters and the
National Fire Protection Association, with an addition for losses
not covered by insurance. Forest fire losses are estimated from
damage reports filed by State Foresters and local representatives
of the United States Forest Service.




The value of business motor vehicles destroyed by accident is
estimated mainly from State and city police reports compiled by
the National Safety Council; the value of ship losses, from mandatory reports by marine carriers to the United States Coast Guard
and the United States Maritime Administration; and losses (excluding crop losses) from tornadoes, windstorms, and floods, from
damage investigation reports by field offices of the Weather Bureau.
Accident investigation reports to the Interstate Commerce Commission and to the Civil Aeronautics Administration and the Civil
Aeronautics Board have been used in estimating the value of damage to railway equipment and the value of business aircraft
destroyed.
In most of these cases, the accuracy of the estimates is impaired
by the necessity either of adjusting reported values to exclude
reparable or nonbusiness losses or of multiplying reported physical
unit losses by value averages from other sources to obtain the final
aggregates.

Characteristics of Revisions
Estimates of corporate depreciation are based on interim data
for the two most recent years, and have been subject to substantial
revisions as corporate income tax tabulations became available.
Revisions in some of the nonfarm business components of noncorporate depreciation have been even larger, percentagewise, reflecting heavier reliance upon extrapolation procedures as well as
a lack of appropriate extrapolating series. Revisions in farm
depreciation were also substantial in some years. It is hoped that
recent improvements in the corporate extrapolating series and
in the availability of the basic noncorporate tax return data will
enhance the reliability of the nonfarm depreciation estimates.
It may be noted that the absence of major revisions in the
largest component of noncorporate depreciation shown in Exhibit
35—noncorporate real estate—reflects a lack of benchmark data,
and cannot be taken as evidence of reliability. A similar comment
applies to capital outlays charged to current expense and to the
series on accidental damage.

PART IV

Gross National Product in
Constant Dollars, 192950
This part of the report presents annual estimates of
the gross national product in constant (1939) dollars
for the period 1929-50. These estimates are the results
of an Office of Business Economics study in which constant-dollar gross national product totals are being built
up through price deflation of the detailed components of
the published current dollar series. To obtain the estimates presented here, the completed portions of this study
were drawn together and shortcut estimating procedures
were adopted for segments on which work is still in
progress.

Need for constant-dollar gross national product
Until recently, the estimates of gross national product
published by the Office of Business Economics were stated
only in terms of current dollars. In times of changing
prices, however, many uses of the statistics require the
separation of the price and volume factors underlying
the current dollar estimates. For some purposes, the
current dollar data cease to be relevant, as in studies of
real output and of productivity. For others, they need
to be supplemented by constant dollar data, as in analyses
of inflationary processes. In the current economic situation, in which questions relating both to the production
potential and to inflation loom large, constant dollar data
on the volume of production are of unusual relevance and
value.
This consideration, together with the fact that the basic
deflation study was sufficiently advanced to permit the
derivation of reasonably reliable estimates, underlay the
decision to publish summary totals.1 The final estimates
•°f gross national product in constant dollars will include
additional statistical detail and will be accompanied by
a full explanation of their conceptual and statistical
bases. The present report is limited mainly to a discussion
of the considerations that are most essential to the use
^ the interim data.

connection reference will be made to the general characteristics of volume series based upon the direct measurement of physical units, with which the deflated gross
national product is likely to be compared.

GROSS NATIONAL PRODUCT
Billion Dollars
300

250 -

200 -

1501939
DOLLARS

I

1

1

I

I

1

1

I

I

I

1

t

f

t

t

t

I

1

)

I

I

PRICES
Index, 1939=100
250

Characteristics of Constant-Dollar Gross National
Product
The constant dollar data have the same scope as the
current-dollar gross national product described in earlier
Parts of this report. Moreover, the two magnitudes are
closely related in statistical estimation. In general, the
constant dollar series are derived by dividing the current dollar estimates, in as fine a product breakdown as
Possible, by appropriate price indexes based on 1939 as
!00, in order to eliminate from the current dollar estimates all price change as compared with 1939. The statistical sources and methods used in this price deflation
Procedure are explained below. Certain major features of
toe deflated dollar data will be summarized first. In this
j ' T h e constant-dollar gross national product series was first published in the
January 1951 Survey of Current Business. The present report provides revised
nnual
estimates for the 1948-50 period.



200 —

150-

GROSS NATIONAL
PRODUCT PRICE
INDEX

/

WHOLESALE
PRICE INDEX
CONSUMERS'
PRICE INDEX

100

500 l l i t i f f f t l f f

f f t f f t t l f t t

1930 3*2* 3 4 3*6 3 8 4 0 4 2 4*4 4 6 4*8 5 0
141

142

1951 NATIONAL INCOME SUPPLEMENT

A comprehensive measure of real output
The constant-dollar gross national product is a comprehensive measure of the real volume of national production, including1 not only the manufacturing industries,
but also the extractive industries, construction, distribution, services, and government. Although estimates of
production—usually based on direct volume measurement
—are available for a large number of industries, gaps
in our information about others have made it impossible so far to build up a production measure for the
economy as a whole via such individual industry calculations. The constant-dollar gross national product fills the
demand for such a measure. However, given the present
statistical sources, only a very limited breakdown of the
constant-dollar gross national product by sectors of production is possible. In more detailed types of analysis
this series will have to be supplemented by the individual
industry measures now available.

Output measure free of duplication
A significant characteristic of the measurement of
production in the gross product framework is that—in
conformity with the definition of gross national product
—the implied measure of output for each industry of the
business sector is the output of that industry less its
purchases of intermediate products. In most other measurements of production by industries, no such deduction
for intermediate purchases is made. Output totals obtained by aggregating such industry measures will tend
to overstate increases of output (and understate decreases) to the extent that the ratio of intermediate
products to the total increases* and understate increases
of outout (and overstate decreases) to the extent that
the ratio of intermediate products declines. The gross
product measurement of real output is free from this
imperfection.

Partial measurement of long-term quality improvements
In common with all other measures of the volume of
production, constant-dollar gross national product cannot take full account of changes in the quality and type
of products. The price indexes by the use of which
constant-dollar gross national product is derived from
the current dollar figures are sometimes adjusted to take
account of quality and related changes in the products
whose prices they measure. But quality change cannot,
in general, be reduced to quantitative terms. In practice,
the price indexes and the constant-dollar gross national
product do not reflect part of the secular quality improvement and of the emergence of superior products—factors
which are characteristic of our economy.

Short-run fluctuations in output overstated
Another point relevant to the interpretation of the
measures here presented is that they overstate somewhat short-run fluctuations in output, because available price information understates effective short-run
fluctuations in prices. The major factors in this connection are an incomplete accounting of short-run changes in
premiums, discounts, and bargain sales. It may be noted
that direct measurement of volumes is not subject to this
imperfection.
Incomplete reflection of quality change may also be a
factor working in the same direction, for instance, dur


ing extreme sellers' markets associated with short supplies and inflationary demands. This shortcoming is common to both deflation and direct volume measurements.

Output valued at constant market prices
In conformity with the definition of current-dollar
gross national product, output is expressed at constant
market prices. The alternative of expressing output at
constant factor prices (that is, at market prices less
indirect business taxes plus subsidies) was not used.
In regard to the practical reasons for this choice, the
quantitative difference between the two measures of output would be negligible, since indirect business taxes
and subsidies are not important in the United States
price structure. The market price concept afforded a
simpler and more accurate basis of statistical measurement, particularly in view of the degree of detail in
which the results were desired. Available information
refers to market prices of goods and services, and the
detailed allocation of indirect taxes and subsidies that
would be necessary to arrive at their factor prices is a
complex statistical problem that cannot be solved accurately.

Quality shifts and industrial shifts reflected as
changes in output
The consistent valuation of output at constant prices
by deflation procedures yields a series having two important characteristics.
If a shift occurs from a product of lower quality to a
product of higher quality—relative quality being measured by relative price—the constant-dollar gross national product will register an increase. This is so because
current values will have increased and there is no change
in the prices which are used to deflate them. An opposite
quality shift will have the opposite effect. In ordinary market conditions, this would seem to be a proper way of
measuring real production.
Direct measures of physical volume should behave similarly, in principle. But in practice they do so only to the
extent that separate volume series are maintained for
products of different qualities and that these separate
volume series are given differential weights in proportion to their relative values in the base period. The allowance that can be made for quality differentials in
direct volume measurement is usually quite limited.
Another consequence of the systematic valuation of
each component of gross national product at constant
prices is that shifts of workers from industries in which
gross product per unit of labor input is relatively low
(high) to industries in which it is higher (lower) will
lead to an increase (decrease) in the over-all measure
of production even if no increase (decrease) in production occurs within the individual industries. This characteristic of constant-dollar gross national product should
particularly be kept in mind in studies of productivity,
borne measures of productivity are constructed to exclude
the effects of such industry shifts in order to isolate the
effects of technical changes as distinct from economic
factors.

Choice of 1939 market prices
Market prices of the year 1939 were used to value
output. (A departure from the use of 1939 prices in the
case of munitions purchases will be noted later.) The

SURVEY OF CURRENT BUSINESS
choice of a particular set of prices as a basis of valuation
is a matter of concern only to the extent that it influences
the relative importance of the components of gross national product and the relative movements of the aggregates. Unless the various physical quantities or their
relative prices all change in the same proportion, the
use of prices of different years as the basis of valuation
will result in different percentage movements of the
composite series, and no unique measure of the change
in real output is possible.
While theoretical considerations indicate that under
these circumstances comprehensive output comparisons
call for calculations in terms of the prices of each year
to which the comparisons refer, the vast additional labor
involved in constructing the full array of output series
did not seem warranted. Various tests indicated that
choice of market prices prevailing in other years as the
basis of valuation would not, in general, have greatly
affected the relative movements and proportions of gross
national product and its major components.
However, these tests also suggested that the choice of
the prices of a more recent year would have tended to
reduce somewhat the indicated long-term growth in gross
national product. The reason for this is that the products
whose output expands most tend to be the ones that decline in relative price. Hence, they receive a smaller
weight in the total if recent year market prices are used
to value output.
Prices of 1939 were chosen primarily because the use
of the prices of a more recent year, for which statistical
information is still tentative, as the basis of valuation
might have necessitated frequent revisions in the entire
constant dollar series. However, the basic data are equally
well adapted for calculating national output in terms of
the prices of any other year of the 1929-50 period. Publication of the full detail of the product breakdown of
deflated gross national product will, in conjunction with
current dollar information, provide the users of the data
with all the information necessary for undertaking such
calculations.
It should be emphasized that to the very considerable
extent that the relative movements and composition of
the constant-dollar gross national product series are unaffected by the choice of the particular set of constant
Prices in which they are expressed, that choice is really
a matter of indifference. For it is only percentage relations that matter. In themselves, the absolute levels of
"te dollar magnitudes have no significance.
Statistical Sources and Methods

General deflation procedure
As already stated, the general statistical procedure for
^taming constant-dollar gross national product is to
wide athe current dollar estimates, in as fine a product
s
ssi
I
on
IQOO
P° ble, by appropriate price indexes based o
s 100 i
d t liite
w& as 100, in order to eliminate from the current dolmr
estimates all price change as compared with 1939. ^
In most cases the information on prices is available in
greater detail than the current dollar estimates. For instance, personal consumption expenditures for shoes and
^ier footwear cannot be further broken down for all
™ in the current dollar estimates; but price indexes
? re available separately for an extensive list of footwear
ue
*ns. In situations such as these, the full information



143

on prices is utilized by combining the various indexes
into composites and by dividing the current dollar series
by them.
The weights given to the various indexes are usually
proportionate to their relative importance in terms of expenditures for the products in 1939 or some other year
for which detailed expenditure data are available. In
many cases, the availability of industrial censuses for
1939 facilitates the estimation of detailed expenditure
patterns for that year.
From the standpoint of deriving data in terms of
constant prices of 1939, this procedure of assigning fixed
weights to the price series is not strictly appropriate.
Ideally, shifting weights, reflecting the expenditure patterns of the years for which current values are to be
expressed in terms of 1939 prices, should be used. However, as has just been noted, this detail on current dollar
expenditure patterns is lacking. The constant dollar estimates for the various components will be in error to the
extent that price movements are disparate and current
quantity expenditure patterns depart from the one used
for weighting the individual price series.
Conclusive tests of the magnitude of the error cannot
be made. They would require exactly the type of information for lack of which the statistical procedure being
judged is adopted. However, relevant tests indicate that
the error is likely, in general, to be negligible.
These tests are applied to series for which in all years
the product detail of the current dollar estimates matches
that of the price indexes. Deflated estimates derived by
the correct procedure—in which separately deflated components are combined without committing a weighting
error—are compared with estimates obtained by deflating the sum of the components by composite price indexes
based on fixed weights.
Such comparisons show that differences are small even
when the fixed weighting procedure is applied to fairly
broad segments, and that they tend to become even
smaller as the segment is narrowed. If this tendency
carries through to the still narrower segments for which
there is actual resort to price indexes with fixed weights,
the resulting error must be unimportant.
In the following sections the major statistical sources
and methods used in deriving the constant dollar components of gross national product are outlined.

Personal

consumption

The general procedure for deriving constant-dollar personal consumption expenditures for goods and services
was to divide the current dollar estimates, in a detail
sometimes finer than that of the published annual estimates, by price series that are components of the Consumers' Price Index of the Bureau of Labor Statistics
and of the series on Prices Paid by Farmers of the
Bureau of Agricultural Economics.
These two sets of prices were combined to give representation to prices paid by both urban and rural purchasers. It should be noted, however, that this procedure
by no means secures complete representation of all major
purchaser groups. For instance, the prices reflected in
the Bureau of Labor Statistics Consumers' Price Index
are those paid by moderate income families in large cities.
Prices paid by other urban groups—families living in
small cities and in towns, and families in low and in
high income brackets, for instance—are not included.

144

1951 NATIONAL INCOME SUPPLEMENT

Any differences in movement between these prices and
those covered by the indexes lead to error in the deflation
of the current dollar estimates of personal consumption by means of the indexes. To the extent, however,
that differences in the cost of living of various groups
are due merely to different consumption patterns—while
the prices of similar goods and services are the same—no
errors, of course, are introduced.
For the years 1942-47 an adjustment was made to the
published price indexes for the fact that they did not
take account of the full price increase that took place
during and immediately after World War II. The basic
study in which the techniques for making these adjustments were first developed is the "Report of the Technical Committee Appointed by the Chairman of the
President's Committee on the Cost of Living, June 15,
1944."
For the types of commodities and services for which
Bureau of Labor Statistics and Bureau of Agricultural
Economics price series are not appropriate, a wide variety of sources was used. These included special price
indexes computed by other agencies; price indexes derived from published price data, such as mail-order
catalogues; price indexes constructed by adjusting information on costs to a price basis by allowing for changes
in profit margins; and physical volume indexes, in instances in which this direct approach was superior to
the price deflation approach.
Estimates for all components of personal consumption
expenditures have not yet been completed with the degree
of detail which is planned for the final estimates. The
present estimates of personal consumption, in which the
partial results of the longer-run study were rounded out
by short-cut procedures, are likely to differ most from
the final ones in the case of expenditures for services.
This is the area in which statistical information is most
deficient and in which most of the improvising was done.

Investment
The deflated series on private new construction represents largely the constant dollar estimates of construction prepared by the Construction Division (now Building Materials Division) of the Department of Commerce.
These estimates—a regularly published series—are obtained by dividing the components of the current dollar
estimates of new construction by a detailed list of construction cost indexes, prepared by private and other
Government agencies. These indexes are derived, in general, by pricing fixed lists of construction materials and
labor.
Since the current dollar estimates of new construction
are in terms of selling prices, their deflation by means
of these indexes is not strictly appropriate. Their movement will vary from that of selling prices if there are
changes in productivity and in profit margins.
It was not found possible to make an adjustment for
productivity changes. However, a rough adjustment for
changing profit margins was introduced. There is strong
evidence that in the construction industry changes in
profit margins and in productivity are inversely correlated during the business cycle. Hence the errors due
to the neglect of profit margins and of productivity are
additive, and adjustment for only one of these factors will
make the indexes a closer approximation of changes in
selling prices.
Bureau of Labor Statistics wholesale price indexes
and Interstate Commerce Commission price indexes were



the major data used for deflating producers' purchases
of durable equipment, in a product detail which went
somewhat beyond that in which the estimates have been
published for the years 1929-45. Further breakdowns
were estimated, for deflation purposes, in instances in
which there were indications that the alternative procedure of dividing broader current dollar components by
fixed-weighted composite price indexes might yield significantly erroneous results.
Whenever composite price indexes were used, the
weights for combining their components were as far as
possible based on 1939 product values, derived mainly
from the 1939 Census of Manufactures. For price series
used for products for which values were not enumerated
separately in the census, and for composite price indexes
that could not be broken down further, the weights underlying the Bureau of Labor Statistics and Interstate Commerce Commission composites were accepted. The information from these two agencies was supplemented by
price indexes compiled by other agencies or constructed
from mail-order catalogs and other published sources of
price data.
The deflated estimates of net change in nonfarm business inventories were derived in the process of estimating
the inventory component of the current-dollar gross national product series. This process consisted of converting year-end book values of inventories into a series expressed in 1939 dollars; taking the difference of these
results; and multiplying the increments by the ratio of
current prices to base year prices. The required constant dollar series was available directly from the second
step.
Bureau of Labor Statistics wholesale price indexes
were the principal source of price information used for
deflation of the book value inventory data. In general, the
inventories of each industry listed in the annual industrial breakdown of the national income were deflated
separately. Total inventories for each industry were deflated by composites of price indexes appropriate to the
industry. The indexes were weighted, as far as possible,
by the relative importance in 1939 of the principal types
of inventory goods represented by the indexes. The inventory data used for weights were derived mainly from
the 1939 industrial censuses. In instances in which relative inventory weights could not be ascertained, Bureau
of Labor Statistics weights (based on sales) were employed.
Year-end book values of inventories reflect the prices
prevailing at various points of time. The exact time pattern reflected depends on the methods of inventory accounting used and on the rate of turnover of goods.
Accordingly, the price indexes had to be appropriately
lagged before being used to deflate the year-end book
value of inventories. These lags were estimated on the
basis of available sample information on the methods of
inventory accounting in the various industries and of
turnover ratios computed from Census and Bureau of
Internal Revenue information for 1939. (For a more detailed discussion of some of the aspects of inventory deflation, see Part III, section on Change in business inventories.)
In estimating the net change in farm inventories, quantity data furnished by the Bureau of Agricultural Economics on year-end stocks of crops and livestock were
utilized. (See Part III, notes on Income of unincorporated
enterprises.) a t Thei c net changes in these physical stocks
we
mu v a l u e d
P r e s Prevailing at the end of 1939.
The net foreign investment component of gross na-

SURVEY OF CURRENT BUSINESS
tional product was deflated by separately adjusting for
price change the receipts and payments items in the current balance of payments, whose difference net foreign
investment represents. The alternative procedure of deflating the net balance directly will be given consideration in the final report.
The deflators for merchandise exports and imports are
the indexes of unit value prepared by the Office of International Trade of the Department of Commerce. The weighting procedures used in deriving these indexes are not
strictly appropriate for purposes of expressing merchandise exports and imports in terms of 1939 dollars, but tests
indicated that theoretically superior weighting procedures
would not yield significantly different over-all results.
Statistical information for deflating the service items
in the current balance of payments is deficient. Moreover, problems that do not even admit of a clear-cut theoretical solution are involved. Further work is planned on
this segment, but it is not anticipated that revisions will
be large, in absolute terms.

Government purchases
The deflation of government purchases of goods and
services was particularly difficult because information
on the product breakdown of government purchases, as
well as on the prices paid by government, is deficient.
The task of deflating government purchases for World
War II was further complicated by the fact that munitions of changing types and quality were acquired by
the Federal Government in large amounts.
For purposes of deflation the current dollar breakdown of Federal Government purchases as published on
an annual basis was supplemented by further detail in
each of the categories listed—compensation of employees,
net purchases from business, and net purchases from
abroad. Compensation of employees was divided into
military, civilian except work relief, and work relief
wages; and supplements to wages and salaries were also
broken down further, to the extent necessary for deflation. Construction was subdivided in the considerable
detail in which the Commerce Construction Division estimates are available.
Other purchases from business were divided further
by segregating net purchases of silver; the net change
in the inventories of government enterprises; munitions
expenditures, for years in which their size was significant; and rough groupings of the remaining purchases
mto the object classes used in the Federal budget Within
Jnese object classes a fixed pattern of expenditures—
the one prevailing in 1938—was assumed for all years
J
or want of better information. Net purchases from
abroad were also broken down further.
In general, the deflated Federal compensation of employees items are an extrapolation of the base year figures
by man-hours wherever possible and by employment
^nen man-hours were not available or appropriate, as
J°r military service. It may be noted that this series and
the corresponding one for State and local government
^easure the gross product originating in government, as
s
nown in table A.
Deflated estimates of Federal construction represent
l
£e Construction Division's data, with the allowance for
hanging profit margins noted in the discussion of private
instruction. The volume of silver purchases was based
? w c t quantity data. The net change in the inventories
j *n Federal Government enterprises was estimated for
* £ Commodity Credit Corporation from quantity data,
hich were valued at 1939 prices, and for other enter


145

prises by less satisfactory procedures involving the deflation of book values by lagged price-index composites.
The deflation of munitions purchases, which constituted a special problem, is described and evaluated below.
The remaining types of Federal purchases from business were deflated by matching them with price series
that appeared most nearly representative—largly selected from Bureau of Labor Statistics wholesale price
data. The deflation of net purchases from abroad is subject to limitations similar to those noted for the services
component of net foreign investment.
Further work is projected on the deflation of Federal
Government purchases. Two aspects of this work should
be distinguished. First, there will be refinements of the
methodology just outlined. It is not likely that they will
substantially modify the results. The additional information on the object breakdown of purchases and on the
prices relevant to this breakdown which can be made
available by further investigation is not likely to be
large. Moreover, even considerable modifications in the
object breakdown and in the price series used probably
would not affect materially the over-all results. This judgment is based upon experimentation with alternative
weighting systems and price series in connection with
deflating government purchases and other components of
gross national product.
The second aspect of the projected work relates to the
treatment of munitions expenditures. Here the generalization just made does not apply. In this case experimentation has indicated that alternative methods of constructing a volume measure and alternative weights given
to this measure would have a significant influence on
constant-dollar gross national product.
In the measures presented in this report, munitions
expenditures were deflated for the war years by a special
index of munitions prices based on series compiled by
the War and Navy Departments. For the postwar years
this index was not available, and an extension of it was
made on the basis of price series that seemed most appropriate—selected mainly from those used for the deflation of producers' purchases of durable equipment.
The general procedure of expressing all volumes in
1939 prices was not followed. Relative munitions prices
in 1939 were high as compared with later years, owing
largely to the small scale and experimental state of munitions production. It seemed more reasonable to assign
to munitions purchases a weight in proportion to their
relative prices in 1944, by which year the prices of munitions reflected a lower relative cost pattern.
This method of deflating munitions expenditures appears to be the most satisfactory. However, the final
estimates will be accompanied by a full discussion of alternatives and a presentation of their quantitative results. In view of the conceptual and statistical difficulties
involved, such a discussion is essential for intensive use
of the data; in the meantime, the movement shown by the
series during the war period should be interpreted with
caution.
The general procedure for deflating State and local
government purchases of goods and services was similar
to that adopted for Federal Government purchases.
Changes in the employee compensation component of deflated purchases reflect the movement of employment.
Deflated construction represents, Construction Division
data, adjusted for changing profit margins. An estimate
available for 1947 of the distribution of other purchases
from business was applied in all years for lack of further information; and the current breakdown so obtained

1951 NATIONAL INCOME SUPPLEMENT

146

was deflated by price series that seemed most nearly
applicable, selected chiefly from Bureau of Labor Statistics wholesale price data. Further work is projected
on this component of deflated gross national product also,
but material modifications are not expected.
Summary Tables
Table A summarizes the results of the deflation procedure which has been described. The "implicit price deflators'* presented in table B are obtained by dividing
the current dollar expenditure estimates (as shown in Part
V, table 2 of this report) by the corresponding constant
dollar series shown in table A.
In the price indexes so derived, price relatives receive
shifting weights in proportion to expenditures incurred each year for the goods and services which they
represent. This is in contrast to the more usual type of
price index in which weights are based on constant expenditure patterns.
The latter type of price index can be interpreted as
tracing the change in the total value of an identical
list of physical goods and services over the period of time
specified. The implicit deflators cannot be so interpreted.
They trace the change in the value of the physical goods
and services of any given year as compared with their
value in the base year 1939. Thus, in comparisons not
involving 1939, the movement of the implicit deflators

cannot be taken as a pure measure of the price change
because it is affected by changes in product composition
as well.
It may also be noted that it is not possible, strictly
speaking, to obtain constant-dollar gross national product
in prices of years other than 1939 by dividing the current dollar series by the implicit deflators with the base
year shifted. What would be needed for that purpose are
price indexes showing the value of the goods and services of any given year as compared with their value
stated in the prices of the year in terms of which constant-dollar gross national product was to be expressed.
However, for many practical purposes both of these
points may be neglected.
The implicit deflators for the change in business inventories and net foreign investment are not shown. In
the case of inventory change, the current and constant
dollar figures often include components of opposite algebraic sign. In the case of net foreign investment, such
components are always present, since net foreign investment is the difference between current receipts and
payments in the balance of payments. Even small movements of prices, provided that they affect the positive
and negative components dissimilarly, may cause large
changes in the ratios of the current dollar to the constant
dollar series, and disqualify these ratios from serving
as indicators of price movement.

Table A.—Gross National Product or Expenditure in Constant Dollars, 1929-50 1
[Billions of 1939 dollars]
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950
Gross national product

78.1 72.3
58.6 56.6
0.4 5.3
27.7 27.5
24.5 23.9

Personal consumption expenditures
Durable poods
Nond u rnblo poods
Services

14.9 10.1

Gross private domestic investment

5.4
4.8
_ o

New construction
Producers' durable equipment
Change in business inventories..

Net foreign investment
_
_
Federal
Government purchases of goods and services..
State and local.
Gross private product *
_
Gross government product

.6

—

3

7.9

8.7
1.
7.3
73.5
4.6

61.9 61.5 67.9 73.9 83.9 87.9 84.0 91.3 100.0
51.8 51.1
57.2 62.8 65.0 63.9 67.5 71.3
3.9 3.8 4.4 5.4 6.6 7.0 5.7 6.7 7.7
25 2 24.9 27.0 28.6 31.8 32.9 33.4 35.3 37.1
22.* 7 22.4 22.6 23.2 24.4 25.1 24.8 25.5 26.5

5.9

1.1

3.8
3.3

2.1

115.5 129.7 145.7 156.9 153.4 138.4 138.6 143.5 143. 5 154 .3
76.6 75.8 78.0 81.1 86.3 95.7 98.3 100. 3 102.9 108.7
5.7

4.6 5.3 10.4 12.3 12.6 12.9 15.5
44.5 47.9 50.2 40.5 49.7 50.4 51.7
32.0 33.2 35.2 36.4 38.0 39.6 41.6
5.4 6.6 8.3 20.3 19.3 22.7 17.8 24.8
1.9
6.9 8.0 7.9 9.4
2.6
13.2
3.6
•6.7
11.8 12 6 11.6 2.2
2. - 1 . 7
- . 5 -1.0
.6
1.
-2.1 -2.2 -1.8
4.8
19.2 22.2 20.8
64.3 71.3 60.6 19.6
16.1
13.0 11.0
58.2 65.4
12.
8.5 10.
9.2 9.8
6.1 6.0 6.0
7.6 8.
125.3 133.0 129.7 125.6 128.8 133 133 143.8
5.0

40.1 41.3 42.6
27.6 28.8 30.4

3.5
6.7 9.3 11.4 6.3 9.9 13.7 17.1
1.5 1.7 2.2 3.1 3.8 3.3 4.9
1.9
2.0 2.7 3.6 4.8 5.5 3.9 4.6
-3.0
.9 1.4 2.1
.4
-1.8
-1.1
-1.0
.1
.2
.1
-.2
1.2
.3
1.0
8.9 8.7 10.1 10.1 11.9 11.4
13.1 13.8 21.1 45.0
9.4
12.7
1.6 1.7 2,3 3.1 3.0 4.9 4.4 5.3 5.2
38.3
7.1 6.9 7.4 7.9
7.S 7.2 G.4 7.0
6.7
7.1
67.7
.-56.5 62.0
76.4 80.9 76.4 83.7 92. 106.2 116.5
67.6
4.7 4 . 6 5.0 5.9
7.5 6.9 7.6 7.6 7.8 9 . 3 13.1 20.3 23.9 23.7 12.8
6.3

1.6

9.8

10.3 10.5

1
1

Detail will not necessarily add to totals because of rounding.
Gro:ss national product, less eomp:nation of general government employees.
* Compensation of Keneral Government employees.

Table B.—Implicit Price Deflators for Gross National Product by Major Segments, 1929-50
[Index Numbers, 1939 = 100]

1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943
1944 1945 1946 1947 1948 1949 1950
Gross national product

9 116.3 105.0 94.2 90.7 95.5 97.7 98.3 102.7 100.9 100.0 101.5 109.5 124.6 133.4 136.2 140.3 152.6 168.6 180.6 179.3 183.2
5 120.7 108.0 94.9 90.6 96.0 98.3 99.5 103.2 100.9 100.0 101.l 107.4 120.3 131. 137.5 142.6 153.5 168.4 177. 175.1 178.0
116.5 113.3 104.8 93.5 91.5 96.1 95.5 96.0 99.7 1C0.2 100.0 102. 109.2 124.5 136.4
188.7
153.
159.9 173. 182. 185. , 198.0
129.7 123.1 105.5 90.2 89.2 99.1 102.9 103.4 107.0 101.9 100.0 101.
150.
i.5 171.2 192. 202. 195. 5 149.3
126.0 120.0 111.6 100.3 92.0 92.3 93.4 95.4 99.2 99.7 100, 100.
i.O
145.
116.8 119.7 126.4 134.6 142.5
106.0 101.0 90.3 83.9 80.8 79.7 91.7 89.1 100.4 100.1 100.0 102.0 107.3 117.1
104.8 117.0 130.0 141.5 157.9 188.4 185.9 197-2
106 102.3 93.1 79.5 77.2 85.6 87.0 89.4 98.1 99.5 100.0 102. 110.9
6.2
120.5 132.8 141.8 149.7 170.3 202.2 222 2 219.2 234.4
106.0 102.0 97.0 91.9 89.8 94.7 94.4 94.3 99.0 100.9 100.0 102. 106.9 110.1 111.9 111.5113.1 124.9 144.6 157 8 163 170.0

Personal consumption expenditures
Durable goods
Nondurable goods
..
Scrvi ccs
Gross private domestic investment
New construction
Producers' durable equipment
Change in business inventories
Net foreign investment

Government purchases of goods and services.. 107.5 104.8 97.6 91.1 91.9 97.0 97.4
95.9 95.9 89.6 88.2 97.0 96.7
Federal
8 106.6 98.0 91.4 93.2 97.0 97.7
State and local0 117.4 105.3 93.9 90.4 95.5 97.9
Gross private product
Gross government product




.

98.4 102.1 100.2 100.0 101.1 117.2 132.8 137.8
135.3
98.9 103.4 100.0 100.0 100.9 122 .7 135.9 139. 136.
5
2
98.1 101.3 100.4 100.!
3 106i.7 115.0 121 5 125.9
98.4 102.9 100 9 100.0 101 .< no .2 125.5 134.4 136.0
e

4 204.3
136.7 157.6 177.4 191.0 196
207,
163.6 185.2 192. 4 196.7 .-.".1
137 .1
201
132.9 146.3 168. 6 189 . 1 196. 0 201.1

138.2 151.5 168.5 180.7 178. 6 182
99.4 100.2 97.6 94.1 95.1 95.0 97.5 99.8 100.9 100.0 99.6
100.8 116.6 127.2 137.2 151.7 162.8 170.0 179.3 189.0 199

-PART V."

Statistical Section
<=JLi&t of ^tatidticai

ZJabied

NATIONAL INCOME AND PRODUCT ACCOUNTS
PAGE

I. National Income and Product Account,
1950
II. Consolidated Business Income and Product Account, 1950
____
III. Personal Income and Expenditure Account, 1950
IV. Consolidated Government Receipts and
Expenditures Account, 1950
V. Rest of the World Account, 1950
VI. Gross Saving and Investment Account,
1950

148
148
149
149
149
149

ANNUAL TABLES
1. National Income by Distributive Shares,
1929-50
.
2. Gross National Product or Expenditure,
1929-50
3. Personal Income and Disposition of Income,
1929-50
.
4. Relation of Gross National Product, National
Income, and Personal Income, 1929-50
5. Sources and Uses of Gross Saving, 1929-50 __
6. Liquid Saving Estimates of the Securities
and Exchange Commission and their Reconciliation with Personal Saving Estimates of the Department of Commerce,
1933-50
7. Consolidated Business Income and Product,
1929-50
8. Government Receipts, 1929-50
9. Government Expenditures, 1929-50
10. Social Insurance Funds, 1929-50
11. Transactions of the Rest of the World with
the United States, 1929-50
12. National Income by Legal Form of Organization, 1929-50
13. National Income by Industrial Origin,
1929-50
—
14. Wages and Salaries, by Industry, 1929-50
15. Supplements to Wages and Salaries, by Industry, 1929-50
16. Income of Unincorporated Enterprises, by
Industry, 1929-50
17. Corporate Income before Federal and State
Income and Excess Profits Taxes, by Industry, 1929-50
18. Federal and State Corporate Income and Excess Profits Tax Liability, by Industry,
1929-50
19. Corporate Income After Federal and State
Income and Excess Profits Taxes, by Industry, 1929-50
20. Net Corporate Dividend Payments, by Industry, 1929-50




150
150
151
151
152

152
153
154 •
155
155
156
156
158
160
162
164
I66
168

1Y0
172

PAGE

21. Undistributed Corporate Income, by Industry, 1929-50
.___
22. Inventory Valuation Adjustment, by Industry, 1929-50
23. Net Interest, by Industry, 1929-50
24. Number of Full-Time Equivalent Employees,
by Industry, 1929-50
25. Average Number of Full-Time and PartTime Employees, by Industry, 1929-50
26. Average Annual Earnings per Full-Time
Employee, by Industry, 1929-50
27. Number of Active Proprietors of Unincorporated Enterprises, by Industry, 1929-50__
28. Number of Persons Engaged in Production,
by Industry, 1929-50
29. Corporate Sales, by Industry, 1929-50
30. Personal Consumption Expenditures by Type
of Product, 1929-50
31. New Construction Activity, by Type,
1929-50
32. Producers' Durable Equipment, 1929-45
33. Net Change in Business Inventories, 1929-50
34. Supplements to Wages and Salaries, 1929-50
35. Employee Contributions for Social Insurance, 1929-50
_
36. Transfer Payments, 1929-50
37. Monetary and Imputed Interest, 1929-50
38. Reconciliation of Department of Commerce
Estimates of Corporate Profits with Bureau of Internal Revenue Tabulations,
1929-50
39. Major Items of Personal Income and Personal Consumption Expenditures in Kind,
1929-50

174
176
178
180
182
184
186
188
190
192
198
200
200
201
201
201
202

202
203

QUARTERLY AND MONTHLY TABLES
40. National Income by Distributive Shares,
Quarterly, 1939-50
41. National Income by Distributive Shares, Seasonally Adjusted Quarterly Totals at Annual Rates, 1939-50
42. Gross National Product or Expenditure,
Quarterly, 1939-50
43. Gross National Product or Expenditure, Seasonally Adjusted Quarterly Totals at Annual Rates, 1939-50
44. Disposition of Personal Income, Quarterly,
1939-50
45. Disposition of Personal Income, Seasonally
Adjusted Quarterly Totals at Annual
Rates, 1939-50
.
46. Relation of Gross National. Product, National Income, and Personal Income, Quarterly, 1939-50
47. Relation of Gross National Product, National
Income, and Personal Income, Seasonally
Adjusted Quarterly Totals at Annual
Rates, 1939-50
48. Personal Income, Seasonally Adjusted
Monthly Totals at Annual Rates, 1929-50

204
205
206
207
208
209
210

211
212
147

National Income and Product Accounts, 1950
Table I.—-National Income and Product Account, 1950
[Millions of dollars]
193,568

Personal consumption expenditures

Compensation of employees:
Wages and salaries
Supplements
_

145,844
7,489

Gross private domestic investment

Income of unincorporated enterprises and inventory valuation
adjustment.

_

Rental income of persons

_

_

35,964

-

_

48,867

Net foreign investment

_

-2,304
42,499

Government purchases of goods and services.

8,039

Corporate profits and inventory valuation adjustment:

.

Corporate profits before tax:
Corporate profits tax liability
Corporate profits after tax:
Dividends. __
_
Undistributed profits
Inventory valuation adjustment

Net interest
National income

18,593
___

___

_

_
_

9,169
13,605
—5,126

__.

_

_ 5,386

x

238,063

Indirect business tax and nontax liability
23,798
Business transfer payments
_,
752
Statistical discrepancy__
, — 1 f800
Less: Subsidies minus current surplus of government enterprises
260
Charges against nd national product2
.
261,453
Capital consumption allowances
_
21,177
CHARGES AGAINST GROSS NATIONAL PRODUCT 2
1

Data for other yea is in table 1.

;

Data for other years in table 4.

GROSS NATIONAL PRODUCT 3

282,630
3

282,630

Data for other years in table 2.

Table II.—Consolidated Business Income and Product Account, 1950 1
[Millions of dollars]
Compensation of employees:

Consolidated net sales:

Wages and salaries:
Disbursements
Excess of accruals over disbursements.

To
To
To
To

120,062
0

Supplements:
Employer contributions for social insurance.
Other labor income

3,185
3,136

184,547

consumers
government
business on capital accountabroad
....

Change in inventories

44,529

M11
-

4,338

Income of unincorporated enterprises and inventory valuation
adjustment
_
__ 35,964
Rental income of persons

__

Corporate profits and inventory valuation adjustment:
Corporate profits before tax:
Corporate profits tax liability
Corporate profits after tax:
Dividends
»
Undistributed profits
Inventory valuation adjustment

8,039
_