David Moon: How You Define Terms Makes All the Difference

News Sentinel, August 24, 2013 | Go to article overview

David Moon: How You Define Terms Makes All the Difference


Recent data from the Bureau of Economic Analysis indicates that U.S. economic growth over the past three years was actually 13 percent per year greater than first reported.

Did the BEA discover some previously hidden pocket of economic growth or a prior math error?

No. It simply changed the definition of gross domestic product.

One of the changes is that the BEA now includes increases in unfunded pension liabilities in the calculation of "economic output." For an index calculation that is largely done on a cash basis, that change makes no sense.

The other, larger definitional GDP change relates to spending on research and development of both technological and intellectual assets.

As skilled negotiators know, defining the terms of a transaction is often more important than the stated price of an item.

Measuring economic activity is no different.

We all know that the Consumer Price Index is a measure of an increase in prices. Anyone with a checkbook or debit card, however, also knows that it bears little correlation with life.

How is this? Because of the way we define the terms.

For example, federal income taxes are excluded from the calculation of the CPI. An item on which some consumers spend as much as 20 or 25 percent of their income is excluded from the calculation of the supposed changes in their cost of living.

Even though 65 percent of the households in the U.S. own their own home, the cost of housing is not based on the market value or replacement costs of houses. …

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