MEASURING THE ECONOMY

Economists have ways of gauging a country's economic status. These numbers always take the form of how much money is in the economy, though it is important to distinguish between the real numbers and the nominal numbers. Real numbers are numbers that are adjusted for inflation. (Inflation will be discussed later, but for now, just consider inflation as the continuing loss of value of currency) Inflation makes numbers seem larger than they really are, so real numbers are nominal numbers that have had the amount inflation accounts for removed. A measure of national out put is the GDP, the gross domestic product, which is the combined output within a country's economy. It includes all output occuring within a country, individual income, business income, everything in one year. GDP is the most common measure, and when economists say the economy has risen or fallen by a certain amount, they usually mean how the GDP has changed.

Another number measuring economic status is GNP, gross national product. GNP measures the output of a country's businesses and people, even they are overseas. Thus, citizens of a country that makes income in another country would be counted in the GNP. Multinational corporations would also have their profits registered in the GNP of their home country. GDP measures everything occuring within that country, even if the money was made by foreigners and foreign organizations. GNP minus GDP yields the net foreign factor income, the output represented by foreign activity. This number can be positive or negative depending on whether a country invests more overseas or more overseas countries invest in it. Sometimes, net foreign factor income is not significant because overseas profits and foreign profits made domestically may offset each other pretty well.

As stated before, GDP is a measure of the country's total output. How is this production measured? It is measured in how much it is worth. That means measuring the income made. Income and output are one and the same, because output generates income. So, every item or service that a country produces is multiplied by its market price and everything is added together to arrive at the GDP. GDP thus, is the total value of all goods and services produced in a country. GDP measures only sales to consumers, not sales from firms to firms. When companies sell products that are used as resources for another company, that income can not be counted as total output. Those products are inputs to be used to make other products. Only products marketted directly to the consumer can count as final output. To eliminate counting in these intermediate products, companies can just simply report only the income they made from consumers. Or, a product can be traced through the entire production process (food, for example, has to go through farmer to processor to distributor to retailer, etc.). Every step of the way, as the product is built upon, value is added to it. The value added is calculated by the price of the product minus the value of costs involved (the cost of buying the part of the product that already exists).

Although the concept of what GDP consists of may be difficult, the actual method of calculating it is not so bad. Remember that outputs (what GDP measures) reap in profits when they are sold. These profits provide income for everyone in a country. We can measure GDP either by adding up all the money spent by all individuals, the expenditures approach, or by adding up all the money made by all individuals, the income approach. The expenditures approach adds all personal spending, all investment (investment meaning money spent on the things that produce like machines and buildings, etc.), and government spendin, and net exports (exports minus imports). The income approach involves adding up all private income. It adds all the money that people earn (which does not count things like government help, etc.) and profits made by companies.