9. The nation’s economy. Gnp. Economic indicators.

Analyzing a national economy involves many factors, some of which cannot be measured by data. One measure of an economy’s success that helps planners to make prediction about the future of the economy is gross national product.

Economists study different sides of the economy in different ways. Microeconomics is the part of economics that analyzes specific data affecting an economy. Macroeconomics is the branch of the economics that analyzes interrelationships among sectors of the economy.

Microeconomists use various methods to measure the performance of the economy. Statistics measure gross national product, or GNP, which is the value of all goods and services produced for sale during one year. All the goods and services produced must be counted, and their value determined.

In the United States the Department of Commerce computes GNP. Information is collected for every good or service produced in the nation during a year, but not everything is counted. Three factors limit the types of products counted.

First, only goods and services produced during a specific year are counted. Second, not every good or service produced or sold during the year can be counted. For example, if both the flour the baker used and the bread produced were counted, the flour would be added in twice and so exaggerate the gross national product. To avoid this problem, economists count a product or service only in its final form. They count the baker’s flour in its final product form – as a loaf of bread or cake. Products in their final form are called final goods and services. Third, GNP includes only goods sold for the first time. When goods are resold or transferred, no wealth is created.

One way in which economists measure GNP is the flow-of-product approach. Using this method, they count all the money spent on goods and services to determine total value. Each time a new product is sold, GNP increases.

Spending for products falls into four categories. The first, and the largest, consumer spending, includes all expenditures of individuals for final goods and services. Called personal consumption expenditures, this category accounts for about 65 per cent of GNP. The second category includes all spending of businesses for new capital goods. Since these purchases are investments, this category is called gross private domestic investment. It accounts for about 13% of GNP. The third category includes spending of all levels of government. Government purchases of goods and services account for about 21% of GNP. The fourth category is net exports of goods and services, about 1% of GNP.

Another way of determining GNP is the earnings-and-cost approach. This method accounts for all the money received for the production of goods and services, it measures receipts. Figuring gross national product by counting what people receive requires calculating what the entire country earns for the goods it makes and the services it performs. Included in earnings are such things as business profits, wages and salaries, and taxes the government receives for its services. Also counted are interest on deposits, money received as rent, and any other forms of income.

To help predict expansion or contraction of the economy, government economists identified a number of indicators. They fall into three categories: leading, coincident and lagging. Leading economic indicators rise or fall just before a major change in economic activity. The leading indicators include information about the number of workers employed, construction activity, and the formation of new businesses. Coincident economic indicators change at about the same time that shifts occur in general economic activity. Lagging economic indicators rise or fall after a change in economic activity.

Following and interpreting all economic indicators is time-consuming. The US Commerce Department, therefore, lists a composite index, or single number, for each of the three sets of indicators. These composite indexes are an average of all the indicators in each category. The composite index comprises three major categories. The first category of statistics that make up the composite index of economic indicators is employment. The second category is production. The third category includes measures of business activity.