Economic Measurements

Each society's economic system reflects the country's history, traditions, aspirations, and politics. What works for one culture might not work as well for another, and vice versa.

In measuring the success of different economic systems, the fairest approach would be to apply the standards that are valued by the people of that culture. Such goals as economic stability, job security, and equality of income and opportunity are given higher priority in some cultures than others.

One of the measures traditionally used for keeping economic score is gross national product (GNP) -the dollar value of all the final goods and services produced by an economy during a specified period (usually a year). GNP includes profits from foreign-owned businesses within a nation's borders, and it includes receipts from overseas operations of U.S.-based companies.

The latest method used for tracking an economy is gross domestic product (GDP), which also measures the total output of goods and services. However, unlike GNP, the new GDP includes profits from foreign-owned businesses within anation's borders, and it excludes receipts from overseas operations of U.S.-based companies. When GNP (or GDP) is compared over a number of years, a pattern appears. A rise in GNP (or GDP) is a sign of economic growth, indicating that the country has achieved at least one goal - a higher level of production, which can be distributed to the people.

GNP and GDP are also used to compare two or more economies. These measures can be adjusted for inflation and currency rates, but these figures may be misleading because of different population sizes. So economists often calculate per capita figures - a nation's total GNP (or GDP) divided by its population.

Government policymakers and businesspeople use GNP and GDP to forecast trends and to analyze the economy's performance. Although the measure is well entrenched, many economists complain that it is sometimes misleading. The value of all the underground economy, for example, is not reflected in GNP or in GDP figures. Revenues from illegal drug sales, gambling, prostitution, and other crimes are not included because they are not reported (for obvious reasons). "Under the table" payments for jobs done off the payroll are also left out of these calculations. The proceeds from small-scale transactions between individuals are not usually reported either. Finally, the value of bartering, or trading, goods and services cannot easily be measured because money is not used in the transaction. In some less-developed economies “underground” sources of income like this make up the substantial portion of GNP.

(From “Contemporary Microeconomics”by Milton Spencer)

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