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Leading Locations for 2014 Commentary: Why Should I Measure Regional Economic Performance Using Gross Metro Product (GMP)?

Q2 2014
Leading Locations for 2014 Resources
The overwhelming majority of the economic activity that takes place in the U.S. occurs be-tween people or businesses lo-cated within metropolitan areas. Metro areas are closely linked to one another by modern financial markets and supply chains, yet each forms a unique node of economic activity. Although many metro areas today experience recessions and recoveries at nearly the same time, there is still considerable variation in regional economic performance. For example, though the Great Recession barely registered in the Houston metro area, Detroit has struggled to hold steady.

Measuring economic perfor-mance can be a difficult task, and no single measure offers a complete picture. However, a comparison of gross metro product (GMP), which measures the market value of final goods and services pro-duced within a metro area, is often the best starting point for judging regional performance. This is because few measures can offer as comprehensive of a snapshot of a regional economy. Measures of employment offer a decent gauge of the health of regional labor markets but do not always separate growing economies from stagnant ones. The expansion of a highly productive factory or im-provement in production effi-ciency that results from new technologies can spark a slow-down in hiring in some regions, even while their overall output posts healthy increases.

A more meaningful basis for comparison measures a local economy in terms of the dollar value of its output, or by the in-come earned by its businesses and residents. GMP, which measures regional output in terms of national prices, offers a standardized way to compare the varied production processes used in different parts of the country. Differences in the trend rate of growth of GMP reflect real differences in industrial structure, the relative mix of goods produced, and the underlying skills of the local population.

Although GMP provides im-portant information about re-gional growth, like all measures, it is incomplete. GMP offers no information about the sustainability of growth, or regarding income or wealth inequality, which reflect other important dimensions of regional economic performance. Likewise, GMP provides little information about a region’s resource constraints, its utilization of available pro-ductive capacity, or its capacity for growth in the future.

For these reasons, a sum-mary measure that consists several different economic indi-cators (preferably, ones that correlate closely with some prior notion of economic perfor-mance but do not correlate closely with one another) may provide an even more compre-hensive gauge of regional eco-nomic performance than any of the indicators considered sepa-rately. For example, a summary measure comprised of diverse indicators such as GMP or per-sonal income, productive ca-pacity, a measure of capacity utilization or slack, and an indi-cator of future growth expecta-tions could serve as simple but useful tool for comparing two or more metro area economies.

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