The integrated method for measuring profitability and productivity with special reference to the comparison of agriculture and manufacturing within and between countries

Submitted PhD 1984, awarded a Masters in Appled Science 1986.This thesis advocates ‘the integrated system’ based on an accounting approach for measuring the profitability and productivity of agriculture and manufacturing in order to make economic comparisons between regions and countries. For many years economists have used production functions such as the Cobb-Douglas and the CES production functions as important means and tools for economic analysis. Although the production function can express the whole picture of index numbers and duality as shown by Bruno, M. [1978], it can be improved by further development. The method of analysis must be based on interrelationships which can be extracted usefully from the macro or micro accounting system. A production function analysis can be supplemented with an accounting approach. However, the accounting system never produces an interrelationship from which the production function can be extracted with greater consistency. The integrated system, which is the author’s terminology, is an original method of integrating index numbers, duality and the accounting system. The production function completed by Bruno is one approach, while the production function extracted from the integrated system is another. Both can be used together in the future. Though the production function has a firmer base, the integrated system is easier to put into practice. A review of production functions in economic analysis and the introduction of a new production function extracted from the integrated system does not constitute the main objective of this thesis. However, the comparison of the two approaches for internal and international comparisons will be useful for development of economic analysis and the integrated system may replace the Cobb-Douglas approach in the future. The integrated system has this basic formula. It is the index of the ratio of net income to gross income (Sot) which is the product of the relative price index (I(β) or I(α.β)) and the physical productivity index (I (U.α) or I(U) I(α) is the index of product mix which includes technical change. The above formulation follows the approach of Allen, R.G.D. (1938, 1949, 1975). Sot=I(β).I(U.α) = I(β).I(U).I(α) = I(β).I(U.α) The above formula is applicable to any item making up total expenses. It can also be applied to net income and value added. Where duality can be introduced in a strict sense it is called ‘the double-fold duality’. Also the relation between single-deflation and double-deflation can be solved as an original part of the integrated system. The integrated system uses actual accounting data, without making the usual assumptions which the Cobb-Douglas approach must be used. It is a new technique for measuring the performance of aggregated industries, as well as that of individual businesses. In recent years, national accounts have begun to include individual sectors. Hence, such data as national accounts by sector can be used for comparing industries, provided that relative price indices (i.e. paid/received indices) are available for each sector. Thus, the method developed in this work makes it possible to compare profitability and productivity of industries within a country or between industries in different countries, from both micro and macro data. The most competitive industries and countries in the world market were selected for this long-term empirical study: Agriculture in New Zealand, Manufacturing in the U.S.A. and Japan. These industries were analyzed by farmer and by category of farmer, by manufacturer and by group of manufacturers, and by industry as a whole. The integrated system is also applicable to international comparisons, that is for examining the comparative advantage between agriculture and manufacturing. It can be useful in international trade theory, because it does not contradict the idea of Ricardo’s relative comparison between two countries, and because the neo-classical theory based mainly on the Cobb-Douglas production function seldom uses index numbers and duality satisfactorily, particularly in its application to international trade. The study presents more data for the empirical analysis of the comparative advantage between countries: U.K., Australia, Canada, and others besides. By using actual data as the input to a suitable model of comparative advantage, the integrated system can compare both specialized and balanced economies. In the future, national accounts will provide increasingly more details of individual industries. Hence, the integrated system will be applied more and more widely. Finally, relationships between the integrated system functions and the production functions were pursued. The integrated system functions are formulated using three relations and setting time as an independent variable. No assumptions are required. On the other hand, production functions require the assumptions of constant returns to scale, constant capital-labour ratios, and constant elasticities of substitution, in order to be used as important tools in economic analysis. The production functions such as the Cobb-Douglas and the CES can be expressed using symbols of the integrated system, and the integrated system functions cover the latent part of the production functions. The work reported here was concentrated mainly on empirical and analytical comparisons between regions and nations. The results should be useful for formulating future management plans and government policies, and may also contribute to the development of international trade theory as well as economic theory. The following conclusions are based on the above analyses of the work reported in the thesis. 1. Interrelationships between profitability, real growth and physical productivity can only be clarified using the integrated system and its pattern analysis. The rule for classifying changes in index numbers into regions within quadrants is illustrated. There has been no literature in the past that explains these interrelationships. 2. The differences between the characteristics of agriculture and manufacturing can be shown much more clearly using the integrated system than other methods 3. The integrated system suggests future trends in agriculture in terms of financial and technological structure and technological progress 4. International comparisons in terms of comparative advantage can be most appropriately shown using the integrated system, since the index of physical productivity does not include changes in the exchange rate 5. The integrated system can measure technical changes using I(α) or I(U.α). Futhermore, time (t”) as a parameter is necessary for the formulation of the linear and quadratic integrated system functions. Using the integrated system, it will be possible to recommend policies for management and government with respect to agriculture and manufacturing, corresponding to specific stages of technical progress. 6. By comparing economies using the integrated system, which combines index numbers, duality and the accounting system, three important relations are developed. One relation concerns cyclical movements or business cycles which can be explained for the first time using an accounting approach. Also using these relations, new exponential functions (the integrated system production functions), comparable to the Cobb-Douglas production function in economical analysis, can be formulated and the parameters estimated. 7. Through the review of the relationships between the integrated system production functions and the Cobb-Douglas production functions, economic analysis can be improved. This is because the assumptions in the Cobb-Douglas production functions can be tested by the integrated system production functions