A NEW WAY TO MEASURE THE ECONOMY

(8H) 12/13/13
Starting in spring 2014 the US Bureau of economic Analysis at the Commerce Dept. will release a new economic statistic on a quarterly basis. It’s called gross output (GO), a measure of total sales volume at all stages of production; GO is almost twice the size of GDP.
GO is a better indicator of the business cycle and more consistent with economic growth theory.
GDP has a major flaw: in limiting itself to final output, GDP downplays the “make” economy, that is, the supply chain needed to produce all those finished goods and services.
Journalists are constantly overemphasizing consumer and government spending as the driving force behind the economy, rather than saving, business investment and technological advances.
Consumer spending represents 70% or more of GDP, followed by 20% by government and slowdown in retail sales or government stimulus is necessarily bad for the economy.
Gross output exposes these misconceptions. First, gross output provides a more accurate picture of what drives the economy. Using GO as a more comprehensive measure of economic activity, spending by consumer turns out to represent around 40% of the economy, not 70%. Spending by business is substantially bigger, representing over 50% of economic activity.
Consumer spending is largely the effect not eh cause of prosperity.
Second, GO is significantly more sensitive to the business cycle that GDP.
Since 2009 nominal GDP has increased 3% to 4% a year, but GO has climbed over 5% a year.
It establishes the proper balances between production and consumption, i.e. between the “make” and the “use” economy.
Gross output is the natural measure of the production sector, while net output GDP is appropriate as a measure of welfare. Both are required in a complete system of accounts.

Source—forbes mag, mark skousen

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