⁽¹⁾ At this stage, any account of 1981 has to be provisional. The first estimates of national income and expenditure in any year are prone to revision and should be treated with considerable reserve. Moreover, we do not yet have official national accounts for the fourth quarter, or full trade figures for the second and third; much of the discussion relies on our own estimates, based on fragmentary information.

⁽¹⁾ The traditional ‘Keynesian’ view, for example, is that monetary policy takes effect through the influence of interest rates (possibly adjusted for expected inflation) on expenditure decisions or, in non-clearing markets such as those for housing finance, through the availability of credit, rather than its cost. Other economists would stress the role in the transmission process of wealth effects, effects on capital flows and the exchange rate, or the (alleged) influence of money supply growth on price expectations. From the ‘monetarist’ standpoint money (somehow defined) is a unique asset which (in the ‘medium’ or ‘long’ term) bears a predictable and stable relationship to nominal national income, though the aetiology of this relationship is often left extremely vague.

⁽²⁾ The practical problems of ‘cyclically-adjusting’ interest rates or money and credit aggregates to obtain monetary indicators analogous to the full-employment budget deficit would be formidable. Whereas the effects of changes in economic activity on the budget balance are defined in terms of technical relationships, such as tax functions, the effects on interest rates and monetary aggregates are dependent upon a complex set of behavioural relationships. DCE may be interpreted as a crude attempt to adjust the change in the money stock for one particular non-policy influence—the balance of payments surplus or deficit.

⁽¹⁾ Except for the statistical discrepancy between the expen diture and output measures of GDP, the change in which, from £0.3 billion in 1980 to minus £1.3 billion in 1981, was equivalent to over 1½ per cent of output.

⁽¹⁾ The estimates are derived from an equation which expresses changes in retail prices as a distributed lag function of changes in import costs in sterling terms (distinguishing between the effects of changes in import prices in foreign currency and exchange rate changes) and changes in unit labour costs, the two most important elements of which are the rate of increase in average earnings and productivity movements. Changes in net indirect taxes have a contem poraneous effect on prices, as do changes in owner occupier housing costs due to changes in house prices or mortgage rates. Such calculations do not, of course, tell the full ‘causal’ story, which would require one to specify the complex set of interrelationships between the various cost variables.

⁽²⁾ A change in the method of recording of exports in October makes the published figures for the fourth quarter more uncertain than usual.

⁽¹⁾ Such estimates are given for a selection of reflationary fiscal measures in table 16, page 27 of the November Economic Review.

⁽¹⁾ However, it is not assumed that last year's omission of the Rocker-Wise adjustment will be made good.

⁽²⁾ Bank of England Quarterly Bulletin, December 1981, p. 451.

⁽¹⁾ See, for example, S. G. B. Henry and P. A. Ormerod, ‘Incomes policy and wage inflation: empirical evidence for the UK 1961-77’, National Institute Economic Review, no. 85, August 1978.

⁽¹⁾ The note on company sector finance was prepared by Mr. S. Wren-Lewis; that on productivity by Mrs. G. Wenban- Smith.

⁽²⁾ Capital consumption is a notional amount set aside to replace the proportion of firms' capital stock that has deterio rated for physical, rather than economic, reasons. These figures, and those for the value of the capital stock, measure capital goods at replacement cost and are from the ‘Blue Book’. Conceptual problems with this and other measures are discussed in detail in various articles in the Bank of England Quarterly Bulletin.

⁽¹⁾ 'The United Kingdom profits crisis: myth or reality; Economic Journal, vol. 85, March 1975.

⁽²⁾ Bank of England Quarterly Bulletin, June 1981 and earlier issues.

⁽³⁾ This ‘real profits’ series makes no allowance for capital consumption, and is deflated by the GDP deflator. The ‘profit share’ series is deflated by the income measure of GDP.

⁽¹⁾ Changes in the rate of cost increases will influence profit margins if firms mark up prices on the basis of historic (i.e. past) costs. Even if firms base prices on expected costs, if an acceleration in costs is unexpected profit margins may fall.

⁽²⁾ The long list of variables that define the relationship between profits and the change in liquid assets is contained in the appropriation, sources and uses of funds accounts for the sector.

⁽³⁾ The ratio is defined as bank advances divided by selected liquid assets, for the ICC sector including North Sea activities, as given in Financial Statistics. The coverage of the liquid asset series is far from ideal (it excludes for example notes and coin), and there are many breaks in the series, but it remains the best available comprehensive measure for the sector as a whole.

⁽⁴⁾ The CBI survey on liquidity has been carried out each April and October since 1974, and asks firms whether their net liquidity, defined as the difference between various financial assets and bank borrowing, has improved or wors ened over the last twelve months. Chart 2 plots the balance of the replies.

⁽¹⁾ Evidence that companies intended to improve their liquidity position by reducing employment is given in their replies to the CBI liquidity survey question on the action taken, or to be taken, in response to the deterioration in liquidity (see table 15).

⁽¹⁾ This survey is part of a research project on recent pro ductivity trends financed by HM Treasury.

⁽²⁾ See National Institute Economic Review, no. 98, November 1981, pp. 14-16.

⁽³⁾ Total factor productivity, calculated by weighting the factor productivities together by the factor shares in manu facturing industry, rose by an average of 2 per cent per annum between 1950 and 1974, and fell by 1.8 per cent per annum between 1974 and 1980.