Effects of changing Price-levels on the Economic Development of New Zealand.

By J. B. Condliffe, Professor of Economics, Canterbury College.

There is a similar development in the proportions of the population engaged in commercial and professional services. A certain proportion of the primary production (a proportion which is increasing) is directed also to the local market. This is particularly so in Canterbury with wheat and potatoes. Indeed, statistics show that Canterbury imports more than it exports overseas, and obtains the balance of its purchasing-power by supplying the rest of New Zealand with foodstuffs and manufactures.

All these factors, however, while they render caution necessary in the use of statistics of foreign trade as an indication of progress in the Dominion, do not invalidate the use of such an index, for the following reasons :—

For all industries and occupations, therefore, the credit policy upon which expansion or contraction largely depends is regulated by the balance of trade, which is taken in this paper as an indication of the economic health of the Dominion.

2. The Calculation of an Index of Productivity from the Export Returns.

The total figures of imports and exports by themselves do not convey any clear impression, except perhaps to expert eyes, of the changes in economic conditions which they record. The accuracy of these official figures, not perhaps in details but certainly in totals, the writer knows from experience in the Departments of Customs and Statistics to be very high. ^† The variety and nature of the Customs tariff make the production of original invoices indispensable, and the total values, as distinct from the values of particular items, must be accurate within a negligible percentage. There is less accuracy in the figures officially given for the values of exports, which, in some important cases, must be estimated here before being sold in London. But in this case, fortunately, the nature of the exports is such that the quantities exported are easily and accurately obtained. The official statistics have therefore been accepted as the basis of calculation.

There is, however, some difficulty in interpretation, even when the trade statistics are compared with the corresponding figures of population, and the chief impression gained is one of constant and unvarying progress (see Diagram A). There are two main confusing factors which must be eliminated before the essential facts can be made clear—viz., the

continuously increasing population over the whole period covered, and the changing trend of the level of general prices. Both of these factors have been eliminated by the following method:—

The only readily available means of making the necessary correction is by the use of index numbers of general wholesale prices. For the purpose of this calculation the index numbers devised by Dr. McIlraith and the Government Statistician have been divided into the value of trade per head for each year, and the results are plotted on Diagram B as shown.

3. The Validity of the Use of Index Numbers as a Measure of Price-Changes.

It is not proposed to make an elaborate justification of the method of index numbers in general. In practically every country in recent years index numbers of general prices have been devised to measure changes in the value of money. In effect they take samples of important wholesale prices and combine these in a weighted average so as to produce an index which is typical, not of any particular price-change, but of the general movement. In other words, they measure the changes in the value of the currency unit as compared with goods in general. The general accuracy of these index numbers is unquestioned, though their use for particular purposes, such as the measurement of the cost of living or of changes in the prices of particular commodities, is not always satisfactory.

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For the purpose of correcting the trade figures for changes in the value of currency, the index numbers of wholesale prices worked out in New Zealand by Dr. McIlraith for the period 1861–1910, ^† and by the Government Statistician for the period 1891–1923, were used. ^‡ These two index numbers were based upon different sets of commodities, calculated and weighted in different ways, and based upon different periods. Fortunately, the series overlap for the twenty years 1891–1910, and it was therefore possible in those years to compare the results arrived at by the use of each index number. It was intended to plot the results obtained in this period side by side in Diagram B, but the two lines ran so closely together that, the effect on the diagram was confusing, and when a coefficient of correlation was calculated by the method of Pearson based upon the formula r= ∑(xy)§/nσ₁σ₂ ^§, the result was plus 0.99, or almost perfect correlation. This

in itself is proof that the method of index numbers does measure accurately the changes in the value of money, and establishes the validity of the method used to eliminate the fluctuations of the money-standard.

Further corroboration of the validity of this method is obtained for a later period, 1900–19, for which the Government Statistician has calculated, with full and accurate data derived from the actual quantities of 99 per cent, of the exports, an index of the true volume of exports from year to year.^* When this index, calculated from actual quantities, is compered with the index obtained by using index numbers of wholesale prices in the method shown above, the coefficient of correlation obtained is plus 0.77.

The possible sources of divergence between the series are—(a) the necessity of accepting estimated export values; (b) the possible divergence of the prices of exported commodities from the general average level of prices (this is shown below to be important in later years); (c) different methods of calculation, especially different base periods. The high coefficient of correlation obtained is therefore satisfactory evidence of the validity of the method used.

4. The Trend shown by a Triennial Moving Average.

In order not to place too great reliance upon the figures in any particular year it was thought advisable to concentrate attention rather upon the general trend of the series than upon the annual variations from the trend. In order to do this a triennial moving average was calculated from the indices obtained in the manner described above, and it is this triennial moving average which is plotted in the heavier lines of Diagram B, while the lighter, broken lines show the annual figures.

When this moving average was calculated, a further comparison with a similar average calculated from the Government Statistician's index of export productivity disclosed the fact that the tendency towards greater productivity per head during the period 1895–1910, which is clearly marked in the writer's calculations, was not paralleled by the Government Statistician's index for the years since 1900, although the annual variations, as noted above, show such a high degree of correlation. Examination of the data shows that the discrepancy is to be found in the second of the two causes noted in paragraph 3—viz., the possible divergence of the prices of exported commodities from the general level. During the period of rising prices New Zealand not only had the advantage of her receipts from exports rising in advance of her costs, especially interest and wages, but a further advantage in the fact that the prices of her exports were rising faster than the general level of prices. This appears to be due, firstly, to the fact that wholesale produce dealt with in large-scale speculative markets responds more quickly to changes in the value of money than the more sluggish retail prices, and, secondly, to the fact that there has been an increasing world shortage of animal products such as comprise the bulk of our exports.

The application of this consideration to the index of import quantities is, of course, the reverse of its application to the exports. Attention has been drawn repeatedly to the narrowing of the margin between exports and imports in recent years, despite the fact that an increasing volume of payment abroad on behalf of a growing public debt should have had the effect of widening the margin. The narrowing shown in the diagram should, by reason of the fact noted above, be even more pronounced than it is,

and this emphasizes the extent to which fresh borrowings were being undertaken both before the war and after, as well as during the actual war period. ^*

5. The Economic Bases of Pre-war Prosperity.

The economic bases of pre-war prosperity may perhaps best be considered in contrast with the conditions which were responsible for the depression of the preceding period.

It will be noted that during the period of the first Vogel borrowings, from 1870 to 1879, there is clear evidence of excessive importations based upon borrowed money. These importations come in successive peaks, each getting lower and lower. The continued excess of imports over exports in these years represents the loans which were brought in to develop the country. The continued depression in the quantity of imports per head of population after the slump of 1879 is evidence of the severe curtailment of purchasing-power in the worst years of the depression. Between the peak of 1878 and the trough of 1889 the volume of imports per head fell by 40 per cent., which represents a serious decline in the standard of living as well as a drastic economy in governmental expenditure upon constructional goods.

There is no evidence that this decline in importation was offset by any great development of local production. The secondary industries of New Zealand were then in the first stages of their development, and were themselves suffering heavily from foreign competition, as they must always do in the time of falling prices.

More significant is the decline in the exports per head during the period of the boom. The sharp decline in the first year or two of the period is mainly due to the falling-off in the production of alluvial gold. The persistent decline for the years following is more serious, representing as it does diminished productivity following a speculative boom launched at the beginning of a period of falling prices.

After the commercial development of refrigeration the increase in exporting-power is very rapid and great, amounting approximately to 40 per cent, in the same period. This is an indication of the cost to the colony of the borrowing policy, since the firstfruits of such an important development as refrigeration had to be sacrificed and supplemented by the rigid public and private economy indicated by the import returns. The last check to development offered by the banking crisis of the early “nineties” is also clearly seen.

By contrast with this period, the rapid expansion of exports and the consequent expansion of imports deserve examination. It is suggested that the chief economic bases of prosperity in this period, as indicated by the statistics used above, were—

6. The Spread of Prices in Recent Years.

While index numbers of wholesale prices are recognized as efficient instruments for measuring changes in the value of money as compared with goods in general, their efficiency for particular purposes is not so clear. The recent disputes in New Zealand over the adequacy of the Government Statistician's index number of retail prices as a measure of changes in the cost of living, while generally based upon wrong conceptions of the purposes and methods of index numbers, have proved the difficulty of devising an accurate index number of retail prices as a basis for wage calculations.

Wholesale prices, as a measure of monetary fluctuations, are not open to the same criticism; but, as has been indicated above, particular groups of commodities may diverge from the general movement because of special causes peculiar to those commodities. As monetary inflation raises the general level of prices sharply, this tendency to dispersion or spread of particular prices about the average is greatly increased, and is indeed one of the chief symptoms of the economic dislocation which always accompanies price-inflation. ^‡

An important example of this tendency is shown in the index number of wholesale prices calculated for New Zealand by the Government Statistician, and is summarized by Table 4 given below.

The tendency for prices to spread as inflation proceeded in the post-war boom is very noticeable when these series are plotted on a graph, and more noticeable still is the fact that the important pastoral products have risen less and fallen to lower levels since the slump than the merchandise we can import. This divergence is not the least of the handicaps under which the primary producer of the Dominion is suffering to-day. The extent to which the prices of products like building-materials and coal have soared away from export values may be taken also as one indication of the extent to which artificial interferences, such as protective tariffs, Government subsidies and advances, commercial combinations and industrial strife, have kept the level of domestic prices in New Zealand above the level of those products which have to face competitive world markets. This increased spread of the price-level has affected the calculation of export productivity considerably in the past few years.

By using the higher index number of general prices to correct the values of export products the quantity exported has been made to appear unduly