When one speaks of the economy they should
speak of it as if it were an animate object. An economy may healthy,
productive or efficient. Likewise, an economy may be weak, slow or
inefficient. The question is, how do we know how to classify our
-GROSS NATIONAL PRODUCT
Economists have devised numerous statistics
designed to ascertain the overall health of our economy.
Historically, the most quoted measure of economic activity is what is
called Gross National Product (GNP).
The Gross National Product (GNP) is a nation’s
total output of goods and services produced
a country in one year. In obtaining the value of the GNP, only the
final value of a product is counted (e.g. homes but not the
construction materials they were built with). The three major
components of GNP are consumer purchases, government spending,
private investment and exports. The formula is thus:
C + G + I + X =
GROSS DOMESTIC PRODUCT
The Gross Domestic Product (GDP), is the
monetary value of all goods and services performed
a nation in one year. GDP measures the economic strength of a nation.
It is computed by multiplying the quantity of all goods and services
by its price. When this is done for all three categories, Consumer
spending, Government Spending and Investments, the results are added
to give us the GDP.
In the last several years GDP has gained
favor as a more accurate barometer of the state of the economy. With
growing globalization our economy is increasingly reliant on goods we
produce beyond our national borders. While GNP does not calculate
this, GDP does.
Though the GDP and GNP are the most widely used
system of determining a nation’s economic performance, they are
certainly not perfect. There are certain factors within the economy
that keep the GDP and GNP from being the most reliable measurements.
The first factors are reporting delays. Because
the reporting process on a nation’s monetary flow is so difficult to
document, GDP estimates are made quarterly. The figures are then
revised for months after that, so it takes a while to discover how
the economy actually performed. Thus there is a disparity between the
actual GDP and the reported GDP.
The second factor is the composition of output.
Generally, increases in the GDP insinuate that people had jobs and
earned an income. However, the GDP alone does not tell the
composition of the output. An increase in a certain amount of
dollars, may not mean that there was more output by laborers, but
that the government undertook production of lets say, a certain
weapon. A decline in GDP implies that the country is not doing as
well as it was before. Yet this does not always hold true, because
the decline could indicate a positive innovation such as a reduction
in the number of car batteries produced because a new one entered the
market that lasts for twice as long.
The third factor is quality of life. The GDP,
while it measures the production of a nation, has little to say about
the state in which the citizens are living. For example, a new
housing project may be built, but if its construction or location
interferes with the surrounding wildlife, then the value of the homes
could be viewed differently.
The fourth factor is the exclusion of non
market activities. Non market activities are those activities that do
not take place in the market, and most of them are not accounted for
because of measurement problems. Such activities include services
people provide for themselves like home maintenance, and the service
The fifth and final factor encompasses illegal
activities. The GDP also excludes many goods and services because
they’re illicit. These include gambling, smuggling, prostitution,
drugs, and counterfeiting. These activities as well as some legal
ones that are not disclosed because of tax reasons, is part of what
is called the underground economy.
The main purpose of any economic indicator is
to measure economic growth from one year to another. The problem with
this is that inflation creates what may be referred to as “phantom”
economic growth. Total production may remain stagnant one year but if
there is a three percent inflation rate it would appear as if
production (GNP or GDP) went up three percent. In order to deal
with the problem of skewed or inflated statistics economists have
developed a formula for factoring out inflation.
Examine the graph below.
This chart is merely a representation of the
difference between real and actual GNP. Real or what is also known as
constant GNP is that GNP figure where economists have factored out
inflation. Current or actual GNP is that figure that has not factored
What economists do is choose a “base year” and
convert the statistic to that base year. Currently we use 1982
dollars as the base year. In this chart then, the Real or constant
GNP is all GNP data converted to 1982 dollars. This allows
us to compare one year to the next without the influence of inflation
in the statistic. In a few years we will most likely adopt a new base
Look at how much higher the current GNP figure
is. In this figure inflation is affecting the figure. The reality is
that if we do not factor out inflation the figure is much higher then
it should be. In the real or constant GNP figure we have removed the
influence of inflation. Now we see that in actuality, while the
economy has grown, it has not grown in the astronomical fashion we
though it did. This is much more accurate version of our economic
Think of it another way, a dollar in 1950
bought alot more than a dollar in 1999. Without factoring out
inflation comparing GNP in 1950 dollars to GNP in 1999 dollars
just isn’t accurate.
CONSUMER PRICE INDEX
In an effort to remove inflation from price
measurements, economists use price indexes, which are statistical
series to measure changes in prices over time. To construct a price
index, a base year to compare all others to, is chosen. Next, a
market basket of goods is selected. These goods are
representative of the purchases to be made over time. The number of
goods in the basket must remain fixed after the selection is made and
thus captures the overall trend in prices. Lastly, the price of each
item in the market basket is recorded and then totaled. The final
total is representative of the market basket in the base year, and is
valued at 100%. In this way we can determine an inflation
There are many different purposes of price
indices. Some measure price changes of imported goods, while some do
the same for agricultural goods, and so on. Out of all the different
types of price indices, there are three that are the most important.
The first is the consumer price index
(CPI) that reports on price changes for about 90,000 items in 364
categories. It is compiled on a monthly basis by the Bureau of Labor
Statistics and is published for the economy as a whole. There are
also regional indices around the country.
The second type of price index is the
producer price index, which measures price changes received by
domestic producers for their output. It incorporates 3,000
commodities and uses the base year of 1982. The Bureau of Labor
Statistics also reports the producer price index on a monthly basis.
It is broken down into subcategories that include farm products,
fuels, chemicals, etc.
The third and final type of price index is
the implicit GDP price deflator that measures price change in
GDP and uses 1987 as its base year. Many economists believe that the
GDP is a good indicator of price changes that consumers will face
because of the fact that it covers thousands of items. However, the
deflator is compiled on a quarterly basis, so it is really obsolete
when it comes to measuring monthly changes in inflation.
LEADING ECONOMIC INDICATORS
In America, if we can quantify it, measure it,
count it and compare it, we will. This being the case, economists
attempt to capture almost every conceivable statistics that will tell
them about the overall health of the economy.
The Bureau of Labor Statistics, as well as
other government services, makes many of these indicators available
to the public over the web. You may visit the Bureau at
I recommend you visit the site and click on the link for
“Economy At A Glance.” This page shows many of the leading economic
indicators the government tracks. These economic indicators
- Civilian Labor Force
- Unemployment Rate
- Employees on Non farm Payrolls
- Average Weekly Hours
- Average Hourly Earnings
- Employment Cost Index
- Consumer Price Index (measures
- Producer Price Index (measures
Of course there are other leading economic
indicators as well. Some other key statistics include but certainly
are not limited to:
- Durable Goods Orders
- Non Durable Good Orders
- Housing Starts
- The stock market as measured by various
stock market indexes like the Dow Jones Industrial Average (DJIA
or “The Dow”), The Standard and Poor’s 500 (S&P 500), and the
By examining and monitoring these key
statistics, including GNP and GDP, we are able to get an idea of
how productive and healthy our economy is.