for prof washington watson

ECONOMICS 321
Assignment 7

1. [Reading] Read ONE of the following papers. You have a choice between a shorter, more technical paper or a longer, easier-to-read one.

• ‘The Timing of Railway Construction on the Canadian Prairies’ (Technical, 13 pages)

• ‘Some Economic Issues Relating to Railroad Subsidies and the Evaluation of Land Grants’ (Easier to read, 21 pages)

1. 1. Write a 3-2-1 report on one of the two papers above. Remember that you CAN’T just copy-and-paste text from the paper. You must use your own words. (12 marks)

3-2-1 report:

1. 1. There are two versions of this question, one for each paper. Answer only the one related to the paper you chose. (2 marks):

1. 1. 1. ‘Timing of Railway Construction’: In Lecture 20, we learned that the Canadian Pacific Railway (CPR) successfully offered to extend the line from the original western terminus of Port Moody to Vancouver, 25 km away, in exchange for a considerable grant of land. While the CPR’s offer is a matter of public record, as is the ex post success of the endeavor, its ex ante motivations are less certain.

The model in this paper was developed for the wheat-growing regions of the prairies. Suppose you wanted to modify it to examine the CPR’s decision to extend the line. Suggest a specific modification that would have to be made to the model in order to do this. (1 mark for the suggestion, 1 mark for explaining why it is necessary.)

Hint: It’s taken for granted that equations (4) through (12) would have to be modified or replaced, since they deal with wheat farming explicitly. The question is, what would you replace them with? (e.g. “Equation (6) expresses freight rate as a function of wheat acreage. In the case of the Vancouver extension, an appropriate replacement for wheat acreage would be … , because … ” etc.)

1. 1. 1. ‘Economic Issues’: As discussed in class, the Canadian Pacific Railway received a grant of millions of acres of land from the Federal government. Based on what you have read in this article and learned in class, was a land grant of this size an appropriate incentive? If so, why? If not, what would have been a better incentive? Briefly explain your reasoning.

1. [‘Raphing] This question is meant to show you that you need to be careful when interpreting historical statistics, even when you THINK you have what you need!

In 1986, Alan Green1 used available data to estimate the net income of Canadian railways from 1871 to 1926. He used a factor income approach. Data limitations meant he had to make strong assumptions to be able to include the earlier years.

In this question, you’ll apply a simplified version of Green’s methods to calculate net income for the Canadian Pacific Railway (CPR) from 1926 to 1970. We actually have all the information we need for the CPR, so you’ll be able to see the impact of Green’s assumptions. I’ve converted all values to 2016 dollar values using the Canadian CPI.

IF DOING THE BELOW BY HAND, USE ONLY 1940 – 1949 (10 YEARS)

1. (2 marks) According to Green, “net railway income is the sum of wages and salaries, interest and dividend payments, [rent payments] and net savings”. Net “Savings are defined as the difference between net corporate income and dividends paid out.”

Use the data in this assignment’s companion Excel sheet to calculate net income (Wages and Salaries + Interest Payments + Dividend Payments + Rent Payments + Net Savings). You will have to calculate Net Savings as (Net Corporate Income – Dividends). Call this series ‘Net Income’. It should have values for every year from 1926 to 1976.

1. (4 marks) Green did not have access to this quality of data for his entire time period, so he had to make some assumptions. We’ll re-calculate our net income series using simplified versions of two of his assumptions:

   1. 1. Green found that the ratio of wages to operating expenses was very stable at around 59.1%, and used this relationship to estimate wages and salaries. (If operating expenses were $1000, wages were $591.) Calculate an estimated wage series for 1926 to 1970 by multiplying Operating Expenses by 0.591. Call it ‘Wages (Est.)’.

      2. Green did not have information on net corporate income before 1911, so he used net operating income to calculate net savings. Calculate an estimated net savings series for 1926 to 1970 as (Net Operating Income – Dividends). Call it ‘Net Savings (Est.)’.

      3. Use your results from i. and ii. to calculate an estimated net income series from 1926 to 1970. Call it ‘Net Income (Est.)’. (Use the same formula as in a., but replacing wages and net savings with their estimates from i. and ii.)

1. (4 marks) Plot Net Income (from a.), Net Income (Est.) (from b.), Net Corporate Income and Retained Income on a line graph. The vertical axis should be dollars, and the horizontal axis should be Year and stretch from 1926 to 1970. There should be 4 lines. As usual, make sure your chart, lines and axes have descriptive titles. If you’ve done this correctly, you should note that Net Corporate Income is much lower than either of your Net Income calculations, and that Retained Income is much closer to the value of Net Income (at least until 1956, but we’ll leave that to Question 3).

1. (4 marks) For the period 1926 – 1970, do Green’s assumptions provide reasonable results? Explain briefly. For the results to be reasonable, three things have to be true:

1. 1. 1. Net Income and Net Income (Est.) are about the same value.

      2. When Net Income goes up/down, Net Income (Est.) goes up/down.

      3. Any difference between Net Income and Net Income (Est.) is stable: if Net Income and Net Income (Est.) are about 10% apart one year, then they are about 10% apart in all years.

1. [Research] For this question, please refer to the Canadian Pacific Railway 1923 – 1970 report at
   

http://publications.gc.ca/site/eng/9.829634/publication.html

1. 1. In your graph for Question 2, you should have noticed that Retained Income (or Retained Earnings) is a much better match for the Net Income you calculated than the actual Net Corporate Income that is included in the data.

‘Net Corporate Income’ is the ‘bottom line’ (literally – the line at the bottom of a company’s income statement). Roughly, it’s the firm’s profit: everything the company earned that year, minus everything it spent money on.

Retained Earnings are a balance that accumulates year on year. They are calculated by adding Net Savings (Net Corporate Income – Dividends) to the previous year’s Retained Earnings.

We calculated our Net Income series using the Factor Payments approach, which is the same type of approach used to calculate national income (GDP). In this approach, income is the sum of the payments made to factors of production: labour (wages & salaries), capital (interest), land (rent) and entrepreneurship (dividends).

Knowing the above, explain why Net Corporate Income was so much lower than Net Income calculated using the Factor Payments approach. Also explain why Retained Earnings was (usually) much closer to the ‘correct’ Net Income value. (8 marks)

1. 1. After 1956, Retained Income no longer tracks Net Income very closely. Use information from the report to explain why this is the case. (6 marks) [Hint: the Notes for Table 4, on page 18, may be useful.]

1. [Optional] As we learned in class, before its incorporation in 1886, the area that is now Vancouver included the settlements of Burrard Inlet, Granville and Hastings. Why is Vancouver named Vancouver, and not any of those three names? Explain, and provide a properly cited, reliable source for your claim. (4 marks)

Data for Question 2 (By Hand Version Only)

Useful References (UVic connection or VPN needed for free access)

Question 1

Frank D. Lewis and David R. Robinson, “The Timing of Railway Construction on the Canadian Prairies,” The Canadian Journal of Economics, Vol. 17, No. 4, 1984, pp. 340 – 352.

Available at http://www.jstor.org/stable/134961

Stanley L. Engerman, “Some Economic Issues Relating to Railroad Subsidies and the Evaluation of Land Grants,” The Journal of Economic History, Vol. 32, No. 2, 1972, pp. 443 – 463.

Available at http://www.jstor.org/stable/2116824

Norbert MacDonald, “The Canadian Pacific Railway and Vancouver’s Development to 1900,” BC Studies, No. 35, 1977, pp. 3 – 35.

Available at http://ojs.library.ubc.ca/index.php/bcstudies/article/view/936

Les Munro, “Outline of History of the Canadian Pacific Railway’s Land Grants,” Canada’s Petroleum Heritage, Alberta Online Encyclopedia, 2010.

Archived at http://wayback.archive-it.org/2217/20101208163017/http://www.albertasource.ca/petroleum/featured_article/cpr_land_grants.html

Question 2

Alan Green, “Growth and Productivity Change in the Canadian Railway Sector, 1871 – 1926,” Long-Term Factors in American Economic Growth, University of Chicago Press, 1986.

Archived at http://www.nber.org/chapters/c9694

Government of Canada, “Canadian Pacific Railway Company 1923 – 1970,” Dominion Bureau of Statistics and Commerce, 1971.

http://publications.gc.ca/collections/collection_2017/statcan/52-202/CS52-202-1970-eng.pdf

Full series (1948 to 1970): http://publications.gc.ca/site/eng/9.829634/publication.html

Statistics Canada, Consumer Price Index – Historical Summary, http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ46a-eng.htm

Question 3

Government of Canada, “Canadian Pacific Railway Company 1923 – 1970,” Dominion Bureau of Statistics and Commerce, 1971.

http://publications.gc.ca/collections/collection_2017/statcan/52-202/CS52-202-1970-eng.pdf

Full series (1948 to 1970): http://publications.gc.ca/site/eng/9.829634/publication.html

Retained Earnings (Investopedia): http://www.investopedia.com/terms/r/retainedearnings.asp

Net Income (Investopedia): http://www.investopedia.com/terms/n/netincome.asp

Mark Kennan, “How to Calculate Retained Earnings on a Balance Sheet,” Chron, http://smallbusiness.chron.com/calculate-retained-earnings-balance-sheet-10597.html

Factor Payments (AmosWEB):
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=factor+payments

Alan Green, “Growth and Productivity Change in the Canadian Railway Sector, 1871 – 1926,” Long-Term Factors in American Economic Growth, University of Chicago Press, 1986.

Archived at http://www.nber.org/chapters/c9694

1 Full disclosure: I studied economic history under Alan Green at Queen’s University in the early 1990s.