ECONOMIC CYCLES IN AUSTRALIA AND NEW ZEALAND. I. Nature of the Business Indexes Required. 11. Candidates for Inclusion. 111. Statistical Methods. IV. Composition of the Average Indices. V. Comparison with a British Business Index. I. The problem to be discussed is limited to a preliminary attempt to obtain some form of average of the more accessible series of data relating to economic fluctuations in Australia and New Zealand. By such a limitation of the problem many ques- tions must necessarily be temporarily passed over. No attempt will for the moment be made to elucidate causes, or to determine the value of particular series as forecasting indexes. Indeed, it is probable that for the latter purpose results of much greater value can be obtained from analyses of the monthly data of the post-war period. In this study only the periods from 1870 to 1913 and to 1923 have been covered, and those only for annual data. This is sdcient to give a long view over the pre-war experience, and enables us to see where the normal relationships were interfered with by the war. For more detailed analysis an intensive study of the developments of recent years is required. Moreover, the answer to the whole question of what constitutes business cycles is in a sense assumed. Professor Pigou, for instance, says: “We may rest satisfied with the statement that industrial fluctuations are fluctuations in the proportion of the community’s income-getting power that is actually engaged in work,”1 and would use as a rough measure either an index of production with the trend removed, or an index of the percentage of workpeople employed. Neither of these measures is available for the two countries under consideration, and even if they were it is doubtful whether they would be sufficiently applicable to and representative of the conditions of countries largely occupied in primary industrieoboth on account of the peculiar conditions of agricultural and pastoral employment, and of fluc- tuations in production due to fortuitous changes in factors such 88 rainfall and temperature. The conception, too, of business or trade “activity” as opposed to “production” of physical 68 I. -4. C. Pigou: Industrial Fluctuotiow, pp. IO-XX.
Transcript
ECONOMIC CYCLES IN AUSTRALIA AND NEW ZEALAND.
I. Nature of the Business Indexes Required. 11. Candidates f o r Inclusion.
111. Statistical Methods. IV. Composition of the Average Indices. V. Comparison with a British Business Index.
I. The problem to be discussed is limited to a preliminary
attempt to obtain some form of average of the more accessible series of data relating to economic fluctuations in Australia and New Zealand. By such a limitation of the problem many ques- tions must necessarily be temporarily passed over. No attempt will for the moment be made to elucidate causes, or t o determine the value of particular series as forecasting indexes. Indeed, it is probable that for the latter purpose results of much greater value can be obtained from analyses of the monthly data of the post-war period. In this study only the periods from 1870 to 1913 and to 1923 have been covered, and those only for annual data. This is s d c i e n t t o give a long view over the pre-war experience, and enables us t o see where the normal relationships were interfered with by the war. For more detailed analysis an intensive study of the developments of recent years is required. Moreover, the answer to the whole question of what constitutes business cycles is in a sense assumed. Professor Pigou, for instance, says: “We may rest satisfied with the statement that industrial fluctuations are fluctuations in the proportion of the community’s income-getting power that is actually engaged in work,”1 and would use as a rough measure either an index of production with the trend removed, o r an index of the percentage of workpeople employed. Neither of these measures is available for the two countries under consideration, and even if they were it is doubtful whether they would be sufficiently applicable to and representative of the conditions of countries largely occupied in primary industrieoboth on account of the peculiar conditions of agricultural and pastoral employment, and of fluc- tuations in production due to fortuitous changes in factors such 88 rainfall and temperature. The conception, too, of business or trade “activity” as opposed to “production” of physical
68 I. -4. C. Pigou: Industrial Fluctuotiow, pp. I O - X X .
MAY 1930 ECONOMIC CYCLES 69
quantity or value is one which will demand further considera- tion. To take a case in point, was the “war activity” from 1914 to 1919, which was accompanied by a decreased volume of production in most countries, a time of prosperity or depression? Obviously the answer must depend in part on the purpose we have in mind when asking the question.
Neither of these indexes being available, therefore, and even of doubtful validiitp if they could be obtained, attention may now be tnrned to the various series which can be had, and which appear, for theoretical reaaons and from the evidence of previous investigations, to be closely related to cyclical changes in countries such as Australia and New Zealand.
To be included in an average index, however, it is desirable that each series should move synchronously wi th the others, and that its major fluctuations should not materially precede or lag behind the average. Moreover, the series included should be as widely representative as possible of all the important aspects of economic activity, a requirement somewhat diillcdt of fuliil- ment in the cases under consideration here. If it should be found, however, that of all the series taken, very few fluctuate with a highly marked degree of inter-correlation, it is not necessary to conclude that hyclical fluctuations are not characteristic of the economy of the countries in question. It might well be that the ideal statistical measure is lacking, and that great dispersion of the individual series about the ave%=e is merely an indication that the phenomena sought for are of greater complexiitp and not easily to be isolated. This question wilI be discussed further in a subsequent section.
11. Wholesale prices have so often been used that no comment
on them is necessary. The only Australian series available, however, is that for Melbourne wholesale prices; and for New Zealand it was found necessary to splice two indexes in 1891 in order to get a single continuous index. They are both, there- fore, subject to some limitations as a single index of general economic fluctuations.
Export prices are of such great importance to Australia and New Zealand that their inclusion seems justifiable, both on account of the attention currently bestowed upon them by business men and farmers, and in order to compare the relative fluctuations of wholesale and export price indexes with the average cycles of conditions in general,
Imports and exports are of great importance as a trade
70 THE ECONOMIC RECORD MAY
barometer in countries with a relatively undiversified economic life. Professor Condlif€e has frequently pointed out their great importance in the case of New Zealand, where for many articles exports are a very reliable index of the value of production. They are most usually followed closely in their variations by the value of imports, though it seems demonstrable that fluctua- tions in the value of the latter are more likely to be influenced by capital borrowings than are fluctuations in exports. In the United States “. . . total imports tend t o run concurrently with changes in employment, production, and other standard barometers of the state of trade rather than to forecast them,”* Imports of crude raw materials have also been found since 1919 to constitute an excellent forecaster of general business a c t i ~ i t y . ~ For Great Britain much use is made of exports as an index of business conditions; though in the United States their fluctua- tions are very irregular and of little use as a barometer.‘ Both imports and exports have been included in the indexes presented here. Values have been taken rather than quantities, both on account of the lack of reliable data as t o quantities and because the prices paid and obtained are themselves elements of prime importance in the prosperity of Australia and New Zealand.
Bankruptcy.-A high degree of inverse correlation has been found in the United States between the numbers of busi- ness failures and a deflated clearings index of business.5 While Mr. Snyder compares only the crude numbers of failures, he states that the amount of liabilities is of greater importance.6 They involve many elements of error, however, on account of secular changes in prices, subsequent resumptions, and in- accurate statements of liabilities.
Nothing has been done here with the Australian figures. “The bankruptcy laws of the different States are even more dissimilar than the laws on most other questions of importance; they have also been fluctuating, and the subject of many experi- ments and amendments. This renders any work of compari- son difEcult and unsatisfactory.”7 The Australian Year Book enumerates further limitations : “For several reasons compari- sons drawn from these figures are of little value. In the first place, the statements of assets and liabilities are notably unsatis-
J . Hardy and Cox: Porecastin0 Business Conditions, p. 269. 3. Hardy and Cox: op. cit., p. ~ 6 8 . 4. Hardy and Cox: 09. cit., p. 171. 5. See Carl Snyder: Bun’nrss C cles and By*ness Measurements Chap. X. 6. See a180 E. W. Kemmcrer: dony and Prices, Chap. V.. whc; an Index of
business confidence has been computed or the United States by averaping indues of numbers of failures in proportion to the firms in business, and of the amount of liabilities involved.
7. Coghlan: A Statutical Account of Aurtralia and “V Zedand, 1903-04, p. 8 ~ 8 .
1930 ECONOMIC CYCLES 71
factory, particularly in regard to the former. Then, again, there is wide dissimilarity in regard to the laws in force in the various States and the methods of procedure thereunder in connection with bankruptcy. firther, there are no means of howing how many persons in each State who were in a bank- rupt condition made private arrangements with their creditors, either personally or by intervention of a solicitor.”
For New Zealand the crude number of bankruptcies has been used in preference to “debts proved” minus “assets realised,” in order to keep out the influence of price changes, and because the latter are not available prior to 1884. Private assignments and compositions are not included in the published statistics.
Railway freight traffic has often been used as an index of the movements of internal trade. It measures directly the movement in trade of all classes of commodities, but is not of such outstanding importance when domestic trade is already represented by other indexes. Sometimes idle cars are used as a measure in the United States, though better indexes are car loadings, net ton miles of revenue freight, and gross or net freight earnings. Gross earnings have often been used,* and while often available over long periods they are difficult to correct for secular changes in rail rates. It seems likely that this consideration would render them very unreliable in the cases here in question, as there have been many arbitrary changes of rates as a direct result of public ownership of the railways.9
For New Zealand use has been made of the figures for “tons of freight carried.” A “ton-mile” index would be much more reliable but cannot be had. On account of the nature of New Zealand’s domestic economy, however, it would seem likely that the average journey of one ton of freight, over any given line mileage, would not have varied very much in length from year to year, while most of the influence of increasing line-mileage has been eliminated by using only variations about the secular trend.
The lack of uniformity in the Australian railway statistics, and the lack of ton-mileage data, except for a few States, pre- clude the use of railway statistics in the Anstralian index.
Bank clearings and the velocity of circulation of credit are important only for Australia over the period covered. Clear-
8. See especially D. S. Thomas:.Socid Aspects o the Business Cycle; and W. M. Persons: “Construction of a Busineu Barometer Lased upon Annual Data,” ua Amm’can Economic Review for December, 1916, pp. 739-769.
9. See N e w Zealand Year Book, rga7, p. 391.
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ings, or better, bank debits, are probably of most value as an index of business in the United States. Thus Mr. Carl Snyder says: “There is . . . one process in the industrial system which is peculiarly sensitive to industrial changes in every phase of business, and which reflects the whole trade of the country and weights it automatically according to the pecuniary importance of the factors involved. That process is the pay- ments made by bank cheques; for, in this country, eighty per cent. of payments of all kinds, in the eschange of goods, property, and services are made by means of bank cheques.”l0 He found that for the five years over which both clearings and debits were available, clearings fluctuated almost exactly the same as bank debits, and could be used as a reliable index of the latter. In order to remove the influence of price changes, however, he considered it necessary to deflate the clearings index by a composite index of wholesale commodity prices, wage-pay- ments, and cost of living and rents. The adequacy of this should be tested by ( a ) its efficiency in continuing the pre-war trend of clearings when deflated, with no sudden break or change of direction, and ( b ) its close approximation t o an index secured by dividing his volume of trade index into bank debits. hLr. Snyder obtained very satisfactory resul-ts from his deflated clearings index. Eardy and Cox, however, point out a number of limitations to the use of crude clearings. The latter cannot be used as an index of the amount of change in business activity, as they are af€ected by bank amalgamations, price changes, and speculation, and they have a pronounced upward trend, due not only to increased clearings but to increases in the use of cheques. They are also much more subject to the influence of urban than rural activity, and largely ignore wage-payments and cheques deposited in drawee banks o r presented for pay- ment over the counter.ll
Inasmuch as a satisfactory deflation index is not available back to 1870 for Australia,u attention has been turned to the velocity of circulation of credit, as measured for Australia by annual clearings divided by average active deposits. For the United States Mr. Snyder found that such an index corre- sponded very closely in its major swings with his volume of trade index, both as regards the time element and the amplitude
10. Bw’nrsr Cyclrr and Bw‘nrrs Mrarurrnuntr, p. 134. 11. Hardy and Cox: o . Cit.. p. 19a. XI. Bank clearings an8 debits have been dropped from both the American Tele-
phone and Telegra h and the Harvard indexer on account of the difficulty of de- flation.-Hardy ant!&: 09. cit., p. a75. Professor Persons also found that clearings (ddated by wbolualr pricea only) had a tendency to forecast chaagees in his average barometer, and excluded the index on that account.
1930 ECONOMIC CYCLES 73
of the fl~ctuati0ns.l~ On the other hand, Hardy and Cox con- sidered such an index of doubtful value in the United States. They found that the velocity curve for New Pork City ran much more closely with most indexes of business activity than the velocity of deposits outside New Pork. However, when weighted so as to give outside velocity twice the influence of New Pork velocity, the major swings were found to correspond fairly well.
For Australia velocity of credit circulation will later be Been to have considerable significance. The nature of the criticisms presented above should, however, be kept in mind, as well as the fact that the figures refer only to Melbourne and Sydney back to 1895, and to Melbourne alone prior to that year. In view of the large proportion of the population centred in these cities, however, and to their dominant position in the Gnancial world, these limitations are not as serious aa they might seem. It was deemed inadvisable to include the opera- tions of the newer clearing-houses, which have not been very long in operation.
Railway under construction has been found to have a high correlation with business activity in the United States, for which country both Professor Persons and Thomas and Ogburn14 have used statistics relating to “new miles of railway completed.’’
For both Australia and New Zealand such data have little or no recognisable relation to other indexes of activity, no doubt on account of the much smaller total mileage added annually, and to political exigencies in railway construction. For Piew Zealand, however, it has been found possible t o make use of the statistics relating to “miles of railway under con- struction,” which, though far from ideal in definition, does have considerable correlation with the other indexes and allows of some weight being given to constructional activity.
Unemployment as an index has already been adverted to in a previous section, and its relation to business cycles is obvious. Unfortunately, no unemployment figures of a reliable
13. “The exact statistical meaning of the ‘velocity of bank deposits’ is the ratio of the amount of checks drawn each month in any particular centre to the pverage of demand deposits for that month in that centre. I t represents the number of t i m u on the average, that a dollar of demand deposits is paid out in a particular centre for a specific unit of time.”-Op. cit., pp. 144.45. His exact statistical measurement of velocit as thus defined referred only to a restricted area and a limited period of time, &r which there was no observable aecular trend but a rather marked seasonal variation. To get a longer comparison he then took total clearings for the countr l divided by ‘total uidividual deposits ih National Banks’ (which unfortunately in- clu3ed time as well an demand deposits). The result, after elimination of secular trend and seuonal variations. was connected very cloaely with his deflated clear- in- index of business. Occasionally it led a little, but its method of construction ahodd not be overlooked.
14. W. F. Ogburn and D. S. Thomas: “The Influence of the Business Cycle on Certain Social Conditions,” in Journal of the American Statutical Sodriy for sep tember, 19az.
74 THE ECONOMIC RECORD MAY
nature are available for New Zealand. For Australia an index of unemployment has been included from 1906 on.
The net terms of trade, insofar as they can be measured by the relation of export to import prices, have also been com- pared with the other available indexes. They have not been included in the composite index in either case. Attention should be drawn t o the fact that the import and export price indexes used are subject to limitations as t o their reliability.
111. The process adopted in isolating the cycles in each series
is a fairly familiar one, and requires little explanation. Since only annual data have been used the question of corrections fo r seasonal variations does not arise. The remaining fluctuations in the series may be classified as due to secular trends, cyclical oscillations about the latter of the kind we desire t o study, and random changes peculiar to each individual series. The latter, of course, cannot be eliminated-the only practical course is to leave out of consideration series in which random fluctuations are relatively important.
The removal of secular trend is a different matter. There are a number of methods in actual use, but none can be preferred on purely theoretical grounds alone. Practical reasons have led to the adoption of nine-year moving averages as a measure of the secular trend in all but one of the series here presented. The moving average has the great advantage over more in- volved mathematical processes that it is comparatively easy of calculation; and, when once the period of the average has been decided, involves Little exercise of personal judgment and no great statistical experience to compute or interpret. Moreover, in an exploratory study of this nature it may be doubted whether the elaborate process of fitting mathematical curves would give results of any greater practical value. Thus Thomas and Ogburn, after computing a similar index for the United States, in which the cycles of each individual series were computed from trends fitted by the method of least squares, checked their results by constructing another index in which the cycles were computed from trends consisting of nine-year moving averages. The two curves proved to be remarkably similar, especially in their points of maxima and minima. There were slight differ- ences of amplitude, no doubt due to the elimination of some of the end items, but none of significance. The co-efficient of correlation between the two indexes was + 0.95.
1930 ECONOMIC CYCLES 75
On the other hand, moving averages change frequently in direction and rate of change, and they somewhat distort concave or convex series of data. The fact that the end items of the series cannot be used was not a very important consideration in these particular cases. The conclusions are to some extent antici- pated, it is true, in deciding to adopt a period of nine years for the moving average, but many reasons can be found for the adoption of such a period. In any case, it is mainly in the amplitude of fluctuation that the limitations of the method will be found, and possible distortions of this nature are minimised by the process of averaging six or seven curves.
After computing the trends for each series, indexes of cyclical change were obtained by expressing as percentages of the trend figures for each year, the absolute deviations there- from of the individual items for each corresponding year. The different indexes of cyclical change to be included in the two composite indexes were then averaged, after reducing each one to relatives (by means of) dividing each item through by the standard deviation of its series. “Using the standard devia- tions as the units, results in series which, logically, may be averaged, since the series with wide fluctuations have high stan- dard deviations and those with narrow fluctuations have small standard deviations. The process of dividing each series by the standard deviation of that series is equivalent to espressing each series in terms of its standard deviations as a unit; the series of relatives resulting all have the same standard deviation. The process gives the same weight, as nearly as may be, t o the series averaged.”16 *
Finally, in order to test the adequacy of each series as an element in the composite or averaged index desired, each one has been correlated by the Pearsonian method with the com- posite index tentatively adopted. Previous studies have pro- ceeded by the preliminary computation of correlation co- efficients between each series and the wholesale price index, the latter being selected as the best single measure of business fluc- tuations. In view of the wider dispersion of the Australasian curves about their average, and because it was by no means certain that wholesale prices were as good an indes as for other countries, this step has been omitted. The coefficients given here indicate a small element of spurious correlation due to the fact that each series enters the average with which it is correlated, but aa Professor Persons points out, the possible error can be of only very slight proportions.
15. w. M. Persons: lac. cir., pp. 75960.
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TABLE I. Australia : Percentage Deviations of Beries from Estimated
A. B. C. -~ D. E. F.
Trends. Wholesale prices. Export prices. Imports. E orts. V z c i t y of credit circulation. Unemployment (reversed).
NOTES TO TABLE I. A. Data from AustraZian Year Books. S.D. = 9.001. B. The price series used prior to 1901 relates to New South
Wales only, but gives a very good indication of movements in Am- tralia as a whole. Thus, Sir Timothy Coghlan states ia A Stotistical Account of Australia and New Zealand, 1903-04, p. 909, whence the index is taken: “The figures refer to New South Wales alone, but they may be accepted as also indicating in a fairly accurate degree the position in which the other States of Australasia stand in regard to this matter. The total value of the exports of each State is greatly afFected by the prices obtained for certain leading lines of raw pro- duce, of which wool, wheat and flour, tallow, silver and silver lead, hides, leather, tin, copper, coal, fruit, butter, sugar, meat and timber a re the most important. The value of these articles represents a total of about seventeen and a half millions, or ninety per cent. of the total export of domestic produce.” The figures were originally compiled with the base year 1903, but may be, and have been, validly recomputed to 1901. In subsequent years the official Commonwealth export price index has been used, as stated in the Australian Year
C. The original figures used relate to calendar years. Data from Australian Year Books, and annual volumes on Ove~sea Trade.
D. The original figures used relate to calendar years. Exports of ships’ stores were added after 1906, when they were no longer included in the published totals. As their values are not stated by months, the fiscal year figures after 1913 were adjusted to calendar years on the assumption of equal semi-annual distribution. Data as under C. S.D. == 10.801.
E. From 1896 to 1926, Sydney and Melbourne bank clearings divided by yearly averages of “deposits not bearing interest” in N.S.W. and Victoria (including Commonwealth bank deposits after 1924). Data from Finance Bulletins, State banking returns, and Australian Year Books. From 1868 to 1894, Melbourne bank clear- ings divided by “deposits not bearing interest” in Victoria (yearly averages back to 1879;. prior thereto, averages for quarters ending December 31st, with adjustment to fit yearly averages). The clear- ings figures were obtained from the Finance Bulletins and Victorian Year Books back to 1885. Prior to that date they were kindl sup- plied by the Commonwealth Statistician, but as his earlier Jgures (and some of those in the Finance Bulletins) include coin settlements, which are excluded from the later figures, they were adjusted to fit the later series without a break due to change of definition. After these corrections the whole index for Victoria was re-adjusted to fit the indcx for the two States together at 1895. In 1912 and previous years banknotes were included to a small extent, disappearing with their displacement by the Australian note issue. S.D. = 8.724.
The figures used are averages for the years from 1913 on. Prior to that date they relate only to the end of the year, but proper adjustment was made to avoid an arbitrary break in the series. In this instance the deviations were calculated from the simple average for the period 1906-27. S.D. = 18.859.
T M L E 11. New Zealand : Percentage Deviations of Series from Estimated
Trends.
Books. S.D. = 6.831.
S.D. = 12.712.
F.
A. Wholesale prices. B. Export prices. c. Imports. D. Exports. E. Bankruptcy (reversed). F. Railway under construction. G. Freight carried on railways.
NOTES TO TABLE 11. A. The official wholesale price index has been used for the pqriod
after 1891. Prior to that date use w a s made of Dr. McIlwraith's index of wholesale prices, recomputed to the base period 1909-13. His index is continued for several years after 1910 in the Report OR the Coat of Living in New Zealand, 1891-1914. Data from New Zealand Year Books and J. W. Mcnwrruth: The Course of Prices in New Zealand. S.D. = 5.796.
1930 ECONOMIC CYCLES 79
B. The index used from 1866 to 1900 was computed from data in J. B. CondMe: The External Trade of New Zealand, pp. 881-891 and Table F; by means of dividing the recorded values of exports by their values a t 1890-99 prices. After 1900 an index was computed in similar manner from data in the New Zealand Year Book, 1929, p. 315; and then recomputed to the base period 1890-99 equals 100. A fuller consideration of New Zealand export and im ort price indexes is given in the writer’s Import of Capital, Appenzix I. (un- published). S.D. = 8.398.
C . Data from New Zealand Year Books. S.D. = 14.126. D. Data from New Zealand Year Books. S.D. = 9.018. E. Data from New Zealand Year Books and McIlwraith: op.
F. and G. Data (referring to. years ending March 31st of years following those stated) from “Statutxal Summaries’’ of New Zealand Year Books. S.D. of F. = 16.430. S.D. of G. = 4.481.
Git. S.D. = 23.389.
TABLE 111. Australia: Percentage Deviations of Beries in Terms of Their
TABLE IV. New Zealand: Percentage Deviations of Series in Terms of Their
A. B. C. D. E. F. G.
A
Standard Deviations. Wholesale prices. Export prices. Imports . Exports. Bankruptcy (reversed). Railway under construction. Freight carried on railways. B C D E F G
TABLE V. Various Series: Percentage Deviations in Terms of Their
Btandard Deviations. A. Australia: Composite index. B. Australia: Net terms of trade. C. Australia: New railway mileage. D. New Zealand: Composite index. E. New Zealand: Net terms of trade. F. New Zealand: New railway mileage. G. Great Britain: Composite index
A. Simple average of series in Table III. B. Export prices divided by import prices. The latter index is
for N.S.W. only, but see note B to Table I. C. Data from Coghlan: op. cit., p. 561, and Australian Year
Books. Most of the States changed over from calendar years to years ending June between 1885 and 1904.
D. Simple average of series in Table N. E. Export prices divided by import prices, the latter from data
in possession of the writer. F. Data from Coghlan: op. cit., p. 661, and New Zea lad Year
Books; years ending March of years following those stated. G. From D. S. Thomas: op. cit., p. 187.
IV. Reference has already been made to the general question
of the interpretation of an indes composed of such different constituents as indexes of prices, value, physical volume, and commercial phenomena such as bankruptcy and velocity of credit circulation. If it were desired to compare the fluctua- tions of the constituent series with those of the composite in- dexes, it would be necessary, in order t o secure coefficients of correlation which might be validly comparable with each other, that the composite indexes should comprise price and non-price elements in about equal proportion. It will be seen that this condition is roughly fulfilled in the composite indexes for PLUS tralia and New Zealand presented in Table 0. The index for
1930 ECONOMIC CYCLES 83
the latter country, for example, is a compound of t v o price indeses, two indexes of prices multiplied by quantities, and three indexes of phenomena into which prices do not enter. The Australian index fuWs the requirement in a slightly less satisfactory manner, but it, too, is a componnd of tmo price
CHART I. Australia: Cycles of Individual and Averaged Series, in Terms
of their Standard Deviations. - - g - : s : :
z
indexes, two indexes of prices multiplied by quantities, and two indeses (for most of the period) into which prices do not enter. Moreover, the index of business conditions for Great Britain, with which some comparisons will be made later, is a somewhat similar composite of one price index, three indexes comprising both prices and quantity terms, and three indeses of factors into which the price element does not enter. It would follow, therefore, that international comparisons of the indexes will not be invalidated on the score of dissimilarity in their construction. We may now examine the coefficients of correla- tion presented in Tables VI. and VII.
84 THE ECONOMIC RECORD MAY
C U R T 11. New Zealand: Cycles of Individual and Averaged Series, in
Terms of their Standard Deviations.
C U R T 111. Economic Cycles in Australia, New Zealand, and Great Britain.
1930 ECONOMIC CYCLES 85
TABLE VI. Australia : Correlation Coelgicients for
NOTE.-All codcients other than those specially charaderised are plus items. In some cases the periods covered are not exactly idefltical, owing to the necessity for lagging and leading the senes.
It should be noted that the two sets of coefficients given in the Tables refer to ( a ) the period from 1874 t o 1913 for Anstralia,l6 and 1870 to 1913 for New Zealand; and ( b ) the complete periods 1874 to 1923 fo r Australia and 1870 t o 1923 for New Zealand. Moreover, comments on the individual series must not be interpreted without reference (to the limitations as) to the reliability of the original data set forth in the notes to Tables I. and 11. In the case of unemployment and the number of bankruptcies the plus and minus signs of the original data have been reversed.
( a ) Australia It w i l l be seen that none of the series included in the index
has a smaller coefficient than i- .608, except wholesale prices up to 1913, and the latter has a coefficient for the whole period of + .636. Moreover, in all cases the synchronised items have higher values than are obtained when the composite index is either lagged or led, and irrespective of the period taken.
To turn to the individual series in detail. Wholesale prices appear to have a slightly greater tendency to precede the com- posite index than to follow it, though (as with all the series) the tendency for both to synchronise is considerably greater. Better correlation is found if the war decade is included. Ex- port prices in both periods are much more highly correlated than wholesale prices; and have a similar though stronger tendency
16. IMdcient series were included from 1870 to 1873 to make the average represen tahve.
86 THE ECONOMIC RECORD MAY
TABLE VII. New Zealand : Correlation Coeficients for Individual Series
struction .. ,. .. .263 -522 a191 .l& -482 -191 Net terms of trade . . -079 a328 .043 -013 -008 - *280 New railway mileage - .328 - .079 -423 - a170 - -061 -234 NOTE.-All coefficients other than those specially characterised are
plus items. In some cases the periods covered are not exactly identical, owing to the necessity for lagging and leading the series.
to precede than t o follow the composite index. There is no marked difference between the two periods. Imports are the most highly correlated item of all those included, reaching + .809 up to 1913. The tendency to follow the composite index is more marked than the tendency to precede it, especially in the period including the war decade. Esports are somewhat more highly correlated in the second than in the first period, any tendency to a lag or lead being about even. The velocity of credit circulation has a fairly high coefficient, and f o r the second period is more inclined t o precede than t o follow the composite index. Unemployment (with signs reversed) has, for the period 1906 t o 1922, a very much greater tendency to precede than to follow the composite. I n fact, when lagged uffer the composite, unemplopment has (when the signs are not altered) a positive correlation of + .326. Inasmuch as this is less than twice the probable error, however, this is not very significant.
(a) New Zealand. In this case the lowest coefficient for the pre-war period is
4- .522, for railway construction, all the others reaching at least .625. In the period including the war decade railway con-
struction has a slightly lower coefficient ; and freight carried on the railways falls to + .412. The latter fall is not very surpris- ing, and as the prewar coefficient is + .700 the series may be regarded as a valid index. It will again be noticed that in all
1930 ECONOMIC CYCLES 87
cases the synchronised items have higher values than are ob- tained when the composite index is either lagged or led. This applies to the coefficients for both periods, except that up to 1913 imports tended slightly to follow the composite index, though practically as good a connection exists for synchronised items.
Wholesale prices have easily the highest correlation with the composite index, and the coefficient is the same irrespec- tive of the period taken. They have no observably greater tendency to precede than to lag. For New Zealand export prices are less highly correlated than wholesale prices. They have a greater tendency, and one which is more marked for the second period, to precede the composite index rather than t o follow it. Imports have not such a relatively high correlation as in the case of Australia, though Cguring amongst the highest for the later period. A greater tendency to follow than to precede the composite is very strongly marked in both periods. Esports have a fairly high correlation for both periods, and in both the tendency to precede the composite index is much greater than the tendency to follow it. The number of bankruptcies (with signs reversed) has a high correlation, especially in the later period. It has a greater tendency to lag than to precede, especially in the pre-war years. The high correlation of freight carried on the railways in the first period, and its big fall when the war decade is included, has already been mentioned. In the
TABLE VIII. Correlation Coeficients for Australian, New Zealand
and British Cycles. 1874 1874 ~. - - 1913 - 1922 1870 1870
British Index Led. British Index Led. 2yrs. 1Yr. om. 2Yrs. 1yr. ours.
Australian & British . - -671 . i78 - - - New Zealand & British .543 -715 -400 - - - New Zealand & Austra- ----.
lian .. .. .. .. .. - -705 .686 - ,637 -740
NOTE.-All coefficients are plus items.
pre-war period there is a greater tendency for it to precede than to lag behind the composite index. Nothing can be added to what has already been said about railway under construction.
The coacients for the net terms of trade and railway mile- age added annually are also shown for both countries, but have no significance here.
88 THE ECONOMIC RECORD MAY 1930
V. In view of the high relative importance of Great Britain
as a market for Australasian products and a source of supply for imported goods, and of the intimate relationships of the hancial and monetary systems of these dominions with those of the home country, it would seem reasonable t o expect con- siderable connections, though with some lag, between cyclical fluctuations in all three countries. If such a connection were not observable in the indexes presented here, the evidence against such a theory would not be great; since the indexes themselves might not be representative. Inasmuch as such a connection can be demonstrated, however, there is some little ground for regarding it as a, vindication, both of the theory and of the indexes. The chance that the results are due to accident is rather remote.
In Table VIII. the two Australasian indexes have been correlated, for varying lags, with a British index for the period up to 1913, and with one another up to 1922. Up to 1913 the Australian and British indeses have a coefficient, for synchron- ous items, of + .778, and it is only slightly lower with the Aus- tralian cycles lagged a year. In the case of New Zealand and British cycles, t h e coefficient is -I- .715 when the New Zealand cycles are lagged a year, but only f .40Q for synchronous items. This would suggest that Australian and New Zealand cycles would be highly correlated if the latter were lagged a year; and such is, in fact, $he case up to 1913. But the correlation f o r synchronous items is nearly as high, and for the whole period up to 1922 is even as high as 4- .740. It would seem likely, therefore, that the New Zealand and Australian cycles have been tending in recent years to occur synchronously, though whether there has been a change in their joint and several relations to the British cycles is not apparent from the index used here. This is obviously a case where more detailed research, utilising quarterly or even monthly data, is required; and one in which particular attention should be devoted to the develop- ments of the post-war years.
The relation of the cycles here isolated t o such phenomena as production, rainfall, crop yields, banking, capital movements and various social phenomena will be taken up subsequently.
