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| Sholeh Patrick |
It's gross but key to economy
The economy keeps slowing. The U.S. Commerce Department reported Wednesday that Gross Domestic Product slowed to .6 percent last quarter, the slowest growth since 2002. Housing investments fell at the fastest rate in over a quarter century.
We're far from doomsday; we're still growing 2.2 percent, just growing at slower and slower paces -- a call to action. Hence, the Fed's lowering of interest rates twice this month to boost spending.
GDP is a formula by which governments and analysts measure the health of the economy. Put simply, it's how much a nation produces in the value of goods and services, measured by how much consumers (including the federal government acting as consumer) spend in a given period of time, such as a year. While its full measure is much more detailed, in essence the most common way to measure it is:
GDP = consumption + investment + net exports + government purchases (spending -- welfare type payments).
There are two other methods; one focuses on market value of goods, and the other on producers' income. Until the early nineties, the United States used GNP (gross national product), which did not take trade balance into account. GDP reflects the net (exports compared to imports) effect of trade, offering a more realistic account of net spending. Most of the rest of the developed world used GDP, so we changed.
According to the Bureau of Economic Analysis, GDP is used by the White House and Congress to prepare the federal budget, by the Federal Reserve to formulate monetary policy, by Wall Street as an indicator of economic activity, and by the business community to prepare forecasts of economic performance that provide the basis for production, investment and employment planning.
All of that translates to jobs, wages and prices for the rest of us. Pure growth, however, does not necessarily make things better. When the growth can be explained more by simple population increase or worse, inflation, that does not indicate a healthier economy. Per capita GDP, or the measure of spending and investment of the average individual, is a better indicator. Per capita GDP worldwide has not changed much over the centuries, comparing one country to another.
We've survived worse downswings, and nothing indicates this one won't cycle out eventually if we just hang on and focus on the long-term.
Sholeh Patrick is an attorney and a columnist for the Hagadone News Network. E-mail sholehjo@hotmail.com.
