Factor Analysis: Some Basic Principles and an Application

Economists have paid very little attention to the statistical methods known as "factor analysis" or "component analysis." These methods were developed primarily by psychologists. Sociologists have also used them to some extent. These methods may eventually help economists to solve some of their problems. With this in mind, the author has tried to set forth the basic principles of factor analysis, and to indicate how the U.S. Department of Agriculture has used them to establish county level-of-living indexes for farm families in the United States. Those readers who are interested in a full, detailed, theoretical treatment of the subject might well read Harman's recent book which also includes an extensive bibliography.' Hagood and Price 2 discuss applications to sociological research. Tintner 3 discusses uses in economic research. The author thanks Ralph Champion, Farm Population Branch, ERS, for his help.