Magazine article Government Finance Review

How to Read the Economy: A Primer

Magazine article Government Finance Review

How to Read the Economy: A Primer

Article excerpt

"What is the meaning of these numbers?" Leading, coincident and lagging indicators, CPI, GDP and other measures of economic activity important to state and local finance officers are explained.

An average day in today's America begins with the print and electronic media battering the public with statistic after statistic detailing, but not explaining, changes in the economic scene. This nonconversation has people reading or listening to discussions of what is happening to the GNP, GDP, GSP, CPI and one or more of the triumvirate index of leading, coincident and lagging indicators. The purpose of this article is to describe in lay language these indicators and to discuss their importance.

GNP, GDP and GSP

The broadest indicator of economic output and growth measures the gross national product. It covers the goods and services produced and consumed in the private, public, domestic and international sectors of the economy. This indicator has been adjusted recently to distinguish between:

* the Gross National Product (GNP), which measures the market value of all goods that are produced, regardless if they are produced in another country or the U.S.A.; and

* the Gross Domestic Product (GDP), which measures the market value of all American goods; that is, those produced solely in the U.S.A.

The two measures of the GNP/GDP come from 1) the demand point, detailing the markets for goods and services, and 2) the supply point, detailing the costs in producing goods and services.

The Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce provides GNP/GDP data on a quarterly basis through its monthly magazine, Survey of Current Business, and through press releases.

The Gross State Product (GSP), a relatively new concept, is the state counterpart of the nation's Gross Domestic Product (GDP). The GSP is the gross market value of the goods and services attributed to labor and property located in a specific state. GSP estimates are produced annually by the BEA.

At present, GSP estimates are prepared for 61 industries. For each industry, the value that goes into GSP contains four components: 1) compensation of employees, 2) business income with inventory valuation adjustment and capital consumption allowances, 3) indirect business tax (IBT) and nontax liability, and 4) other mainly capital-related charges. For the farming, mining, construction and manufacturing industries, BEA obtains the value for capital charges by directly estimating total value for GSP and three components--compensation of employees or proprietors, income and IBT--and then subtracting the sum of the three components from the total. For the other industries, BEA directly estimates each of the four components and then sums the components to get the total value to include in the GSP.

Consumer Price Index

The Consumer Price Index (CPI) is an information indicator that measures changes in the prices of a fixed market basket of consumption goods and services of constant quantity and quality purchased on average by urban consumers; hence, this indicator reflects the prices of those goods and services that people buy for day-to-day living. The CPI consists of seven major components: food and beverages, housing, apparel and upkeep, transportation, medical care, entertainment, and other goods and services. In calculating the index, price changes for the various items in 85 locations are averaged together with weights that represent their importance in the spending of the appropriate population group. Indexes for different months are usually compared in relative terms. Two CPIs are published: 1) the CPI for All Urban Consumers (CPI-U), which covers about 80 percent of the total population, and 2) the CPI for Urban Wage Earners and Clerical Workers (CPI-W), which covers 32 percent of the total population.

The price of the market basket is translated into an index value by comparing the current prices against average prices in a base period, which is assigned a value of 100. …

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