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Economic Indicators

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 economy?

GNP -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 BY 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 = GNP

GDP - GROSS DOMESTIC PRODUCT

The Gross Domestic Product (GDP), is the monetary value of all goods and services performed IN 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.

C + G + I +F = 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 homemakers provide.

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.

FACTORING INFLATION

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 out inflation.

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 year.

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 growth.

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.

CPI - 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 rate.

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 http://www.bls.gov 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 are:

  • Civilian Labor Force
  • Unemployment
  • Unemployment Rate
  • Employees on Non farm Payrolls
  • Average Weekly Hours
  • Average Hourly Earnings
  • Employment Cost Index
  • Productivity
  • Consumer Price Index (measures inflation)
  • Producer Price Index (measures inflation)

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 NASDAQ.

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.


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