^{page 14 note (1)} Basically, the average of the three measures.

^{page 15 note (1)} Our figures for stocks include most of the discrepancy between the compromise and expenditure estimates of GDP. As recorded—i.e. in the expenditure estimate of GDP—the change in stockbuilding between the half years is equivalent to a fall in GDP of about 1 1/2 per cent.

^{page 15 note (2)} Total final sales; the sum of consumers' expenditure, investment, public current spending and exports.

^{page 15 note (3)} See Hansard, Vol. 833, no. 84, 21 March 1972, column 1388.

^{page 15 note (4)} See Financial Statement and Budget Report 1972-73, HMSO, page 10.

^{page 17 note (1)} These comments can be no more than impressions because figures for employment in the economy as a whole were not available beyond the end of last year at the time of writing. We therefore have to guess the recent movement of employment from the unemployment figures—and this can be hazardous in the absence of independent information on the numbers of people seeking jobs, or on the propensity of job-losers to register at the employment exchanges. As well as being distorted by the effects of the miners' strike, the movement of unemployment during the second half of last year and the first half of this may also have been influenced by a higher than ‘normal’ propensity to register. In other words, with unemployment already very high, further sackings (and then re-engagements) are likely to have been of relatively ‘hard-core’ employees—e.g. males with dependents, whose propensity to register in order to obtain benefit is likely to be close to unity.

Even after allowing for these effects, however, it still seems (using compromise GDP) that employment fell further than would have been expected last year, and has risen faster this. Of course, there is no strong reason to expect previous relationships with output to hold through a period of unprecedented (post-war) unemployment. Further, the fact that we now seem to be back on the relationship, if we use the compromise estimate of GDP, does not prove that this estimate is the correct one. A, so far, unreversed and step-like increase in productivity occurred in 1966/7—though there were some special factors at work then such as SET (see the article by Bowers et. al. in this Review, pages 75-88).

^{page 17 note (2)} This arises (with devaluation) because the adverse effect of the worsened terms of trade appear much more quickly than the beneficial effects on trade volume resulting from the changes in relative prices.

^{page 18 note (1)} With cuts in the rates of duty on drink and tobacco such as to leave the revenue from these items the same as it would have been under the present system. See National Institute Economic Review no. 60, May 1972, pages 16-21.

^{page 19 note (1)} National Institute Economic Review no. 61, August 1972, pages 10-11.

^{page 20 note (1)} Note that the calculation of this index is based on the index of manufacturing production. The latter is part of the output measure of GDP (i.e. the measure with the highest reading at present). It is therefore possible (but no more than possible) that the utilisation index is if anything understating the degree of spare capacity, if it turns out that the latest output figures are revised downwards.

^{page 23 note (1)} The implicit deflator of the constant price estimates of consumers' expenditure.

^{page 25 note (1)} In current prices the factor cost ‘drag’ is much less marked, assuming that indirect tax rates (with the notable exception of local authority rates) remain unchanged—i.e. that the implicit deflator of the factor cost adjustment series does not rise in line with the general inflation.

^{page 25 note (2)} Wholly unemployed, excluding school-leavers and adult students, seasonally adjusted, Great Britain. Now called the unemployed.

^{page 26 note (1)} House of Commons Hansard, 16 November 1972, col. 226. In table 7 we have spread the payments evenly through the years, though it seems that they will actually be made in arrears.

^{page 27 note (1)} This does not of course make up for the apparent shortfall from the 1972 budget forecast.

^{page 27 note (2)} See fn. (1), page 18 above.

^{page 27 note (3)} The same compatibility is also technically possible under a higher wage assumption—say £3.50 a week on average earnings (about 12 per cent). This could be achieved by concentrating the reflation (or the offset to fiscal drag) on indirect taxes and/or subsidies. The standard rate of VAT might then have to be put as low as 5 per cent, however, or, if the same effect were to be achieved solely through subsidising nationalised industry prices, subsidies might have to run at an annual rate of the order of £1,500 million. The latter is an ‘expensive’ way (in revenue loss terms) of influencing consumer prices because, roughly, only half of the output of these industries is purchased (directly and indirectly) by consumers. In addition (in the lower-VAT case) only domestic prices would be kept down to a 5 per cent increase—export prices might rise by much more because VAT is not levied on overseas sales. In other words, international competitiveness would probably still be severely eroded, though this point does not apply to the case of subsidies.

But either subsidies on this scale or VAT at 5 per cent may well not be compatible with EEC membership. The only other way of combining £3.50 with 5 per cent output and prices would be if the long-run rate of productivity increase were as high as, say, 5-6 per cent, which seems to us unlikely. In the short run, figures of this order may be recorded, but, as we show in the main text above, this is not wholly relevant. Much of the short-run productivity gain in an upswing goes into retained profits to finance the following rise in investment.

^{page 27 note (4)} The question of the mix between earned and unearned income does not materially affect this argument. In any case, total unearned personal income amounts to only a tenth of all personal income, and a significant proportion of it goes to the old (though it is unequally distributed); presumably one would not wish to lower their share of national income as a whole.

^{page 28 note (1)} These figures are only illustrative. They do not imply that we think it feasible to move suddenly from the present rate of inflation to a zero rate.

^{page 28 note (2)} The short-run gains in productivity during an upswing are not usually wholly reflected in prices. They go, in significant proportion, into retained profits, which in turn finance the investment upswing.

^{page 28 note (3)} i.e. one that did not harm our competitiveness—basically a gain vis-à-vis primary producing countries.

^{page 28 note (4)} As a rough guide, each 1 per cent devaluation eventually adds 0.15 to 0.2 per cent to the retail price index, depending on what assumption is made about how much of the (sterling) price rise is absorbed by foreign suppliers.