New Yardstick

Economists have long known that the gross national product, the nation's No. 1 economic growth indicator, has a serious flaw. It does not allow for inflation. When prices and production are both swooping up, the G.N.P. greatly overstates the rate of growth of the U.S. economy. When production sags, it understates the drop, since prices tend to hold up. To counteract these price distortions, the Commerce Department brought out a new indicator. Henceforth, along with the regular quarterly G.N.P. expressed in dollars of current value, the department will publish a G.N.P. showing what the actual change would have been if the G.N.P. had been measured in 1957 dollars. The constant-dollar G.N.P. has been computed back to 1947. By comparing the regular G.N.P. with the G.N.P. in constant dollars, economists will be able to tell at a glance how much real change has occurred in the total volume of production in the postwar period, how much apparent change was just the result of inflation.

To show where price changes have caused the most distortion, the new Commerce Department indicator carries with it a new set of price adjustments for each major category in the total, with 1957 prices equaling 100. Thus in the latest period reported, third-quarter 1958, residential-construction costs show the least change over 1957 (to 100.6), state and local government costs the most (to 103.1).

The new G.N.P. indicator is not likely to change the big dates by which the economy's ups and downs are traced. But it adds greatly to economists' understanding of what takes place in and before recessions and recoveries. For example, after the 1953-54 recession, U.S. prices rose only 1 1/2% for four quarters; in that time both constant-dollar and current-dollar G.N.P. climbed sharply. For the next eight quarters, from mid-1955 to mid-1957, prices jumped around 6%; in that time the constant-dollar G.N.P. leveled off (see chart). The economy was barely expanding at all, though the current-dollar G.N.P. soared to a new high. When the downturn came in mid-1957, prices went on rising. Result: the current-dollar G.N.P. fell off only 4 1/2%, the constantdollar G.N.P. 5 1/2%. Since the upturn in mid-1958, Commerce said, recovery has been taking place "in a setting of overall price stability." Hence, in the main, recovery gains are real.

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