Once again, dear friends, we enter the exciting world of economics. I stopped to glance at the TV the other day as one of the usual talking heads said,"people do not understand the GNP". I shrugged off that condescending claim. Those types always think they are brilliant and the rest of us are dolts. But I started thinking, what if he's right. Today's education system doesn't do economics well, if at all. So, as I enjoy writing about economics, I thought I'd try to help anyone that missed that class.
First of all there are two numbers. The GNP is the gross national product. The GDP is the gross domestic product. They are similar but with definite differences. I don't want to wander to far into the weeds here. So Google them if you really want to know the difference. I prefer the GDP, as I feel it gives a better picture of what is happening in the country. The GNP looks at the economy as a whole and is what is most commonly reported on. While either one of these numbers represent the economy the GNP is the total value of all goods and services produced in the United States plus Americans and American companies abroad minus the value of goods and services produced by foreigners and foreign companies in the US. That's a bit to wrap your brain around. You might want to give that one a second read.
The Dow, the S&P, and the NASDAQ do not represent the economy. They represent the state of certain select stocks offered for sale. Their trends show the anticipated growth or decline in value of those stocks only. A stock can show an increase in value on the Dow for instance, while, at the same time bringing down the GNP. Let me explain. Let's say a company, Cranky Cranks Inc., employs a thousand people at four locations. Their business volume is ten million dollars and they make a gross profit of thirty percent and a net of ten percent. A good well run business. So they net one million dollars. They have half a million shares of stock outstanding valued at twenty dollars a share, so they pay dividends of two dollars a share. That gives them a price to earnings ratio of ten to one. All in all, very nice.
Let's say there is a business slowdown. Their volume drops to five million dollars. They hang in for a while but their dividend goes down to seventy-five cents a share. Their P/E drops to about twenty-six. Not good. Dow looks at them and the stock price plummets. This forces management does what they have to do. First they lay off half of their work force. Five hundred people join the unemployed. Next, to reduce fixed costs, they close two buildings and reduce their R&D program.
So now they have half sized themselves. But because of the reduced costs their net goes back up as does the stock value. So the Dow goes back up, too. Since they are doing less business and generating a smaller gross their contribution to the GNP goes down. Please, you CPAs out there, I know I oversimplify.
Finally, we get to growth. The government produces GNP numbers quarterly. Over the past four years the rate of growth for the GNP has been hovering around one percent. That is a very weak economy. A growth rate that weak will not sustain a growing population. That means further unemployment and underemployment. It is important that the government create an atmosphere where business can grow and flourish. The economy is not a zero sum game. One person making it does not take away from others. In a robust economy everyone does well including the tax collector.
All Americans need is an even playing field without the obstructions of an over-reaching, over-regulating, and over-spending government and we will do just fine.