Testing income series. An application of principal components

Abstract

A methodology based on principal components is developed for the testing and estimation of aggregate income series. The technique consists in extracting the first principal component from residuals of estimated demand functions which would incorporate the real income effect and other random disturbances. The first component should then reflect the behavior of real income. The procedure is applied to test Brazilian output series estimated by the author, covering the period 1911-1939, and to compare those series with the ones previously available for Brazil. © 1976.