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Business
AN EIGHTH DISTRICT PERSPECTIVE
WINTER 1988/89

Gross State Product Series Provides New
Perspectives on Regional Economies
Arkansas’ economy is slightly smaller than New Zealand’s,
while total economic activity in Kentucky, Missouri and
Tennessee is comparable to that of Portugal, Austria and
Denmark. These surprising comparisons are made possible
due to a new data series, Gross State Product (GSP), recently
published by the U.S. Commerce Department’s Bureau of
Economic Analysis (BEA). Since GSP corresponds to a
nation’s gross domestic product, a direct comparison of a
state’s economic output with a nation’s is now possible. More
importantly, analysts of regional economies, long hampered
by the lack of a comprehensive measure of state economic
output, can use the GSP series for regional analysis and
forecasting.

What is GSP?
GSP indicates the market value of the goods and services
produced within a state during a year. One way this could
be measured is simply by adding up all types of spending
on final goods and services produced in an area during a
year. A different, more practical method, however, is used
in computing GSP: all the income derived from the
production of the year’s output is added together. Except
for two qualifications mentioned below, the two methods
yield identical results. Income equals the market value of
output because the receipts from the sale of output accrue
to those involved in its production as income. This income
includes compensation of employees, proprietor’s income,
rental and interest income as well as profits created in
production.
The two qualifications regarding the equality of the market
value of output and income are related to depreciation and
indirect business taxes. Both cause the market
price to differ from the amount of income
received by producers. Depreciation can be
thought of as the cost of capital goods that
have been used in producing a year’s output.
Depreciation is thus a cost of production that
adds to the market price, but is not available
as income to producers. Depreciation,
therefore, must be added to income in
estimating GSP. Similarly, indirect business




taxes—primarily sales taxes and property taxes—are treated
as costs of production by businesses and added to the prices
of the products they sell. To measure GSP, or total market
value of output, these taxes must be included.
GSP is reported as the sum of four components: three
types of income, adjusted for depreciation, and indirect
business taxes. Employee compensation is the largest
component, accounting for almost 60 percent of the nation’s
total GSP in 1986. Employee compensation includes wages
and salaries, employer’s contributions for social insurance
and other labor income. Proprietor’s income, the second
component of GSP, makes up 10 percent of the total. It is
reported with adjustments for changes in inventory and for
depreciation. The depreciation charge is called a capital
consumption allowance. Capital-related charges, 22 percent
of the 1986 total, include rental income, net interest income
and corporate profits adjusted for depreciation. Finally,
indirect business taxes make up the remaining 8 percent of
the total.
The sum of the first two components of GSP—
compensation and proprietors’ income—is very similar to
the “earnings by place of work” portion of state personal
income published in past years. Capital charges and indirect
business taxes, however, previously have been unavailable
on a state basis. Since capital charges, and particularly
corporate profits, tend to fluctuate more than earnings during
business cycles, their inclusion makes GSP a more sensitive
measure of the effects of business cycles on regional growth.
The GSP series, which will be updated in 1990, consists
of annual figures from 1963 through 1986 for each state and
the District of Columbia. For each area, the value of
production in 61 different industries is
available. A summary of the data can be
found in the May 1988 Survey of Current
Business, published by the U.S. Department
of Com m erce. M ore extensive data,
including constant-dollar GSP estimates, can
be obtained by contacting the Commerce
Department.
The methods used by BEA to estimate
GSP vary among industries. For the 34

WINTER 1988/89

FEDERAL RESERVE BANK OF ST. LOUIS

Gross State Product and Earnings Growth
Gross State Product
(billions of dollars)
1982
1986

u.s.
D is tric t
A rkansas
K entucky
M isso u ri
Tennessee

$3,104.1
179.0
23.5
42.3
61.2
52.0

service-producing industries included in the GSP series, each
of the four components were estimated separately, then added
to arrive at the total GSP figure. For the 27 farming, mining,
construction and manufacturing industries, BEA directly
estimated total GSP from economic census data on value
added in production and also estimated three of the four
components: employee compensation, proprietors’ income
and indirect business taxes. The sum of these three
components is subtracted from GSP to get capital charges.

Growth of District GSP
Before GSP data were available, analyses of regional
growth were often based on less inclusive economic
indicators, such as employment, personal income or
earnings. Changes in these indicators are unlikely to provide
a complete picture of the changes in a region’s economic
activity. The following example shows that a comparison
of the District’s and nation’s growth based on earnings data
differs somewhat from a comparison based on GSP.
The table shows annual growth rates of both GSP and
earnings during the first four years of the current recovery
period. Earnings in the District (as represented by Arkansas,
Kentucky, Missouri and Tennessee) grew at a 7.2 percent
annual rate during the first four years of the recovery, a
somewhat slower rate than the nation’s 7.6 percent rate. If
GSP is used as the basis for the comparison, however, most
of the disparity vanishes. As the table shows, District GSP
grew at a 7.7 percent annual rate compared with a 7.8 percent
national rate. District GSP grew from $179 billion to $240.5
billion between 1982 and 1986.
What accounts for the difference between the earnings
and GSP comparisons? While both compensation and
proprietor’s income grew slower regionally than nationally

$4,191.7
240.5
31.6
53.1
83.5
72.3

Compounded Annual
Growth Rates 1982-86
Earnings
GSP
7.80/0
7.7
7.7
5.8
8.1
8.6

7.6%
7.2
7.8
5.1
7.6
7.9

(as reflected in the earnings comparison), this was not true
of the other components of GSP. Capital charges in the
District grew nearly as fast as the national average and
indirect business taxes grew substantially faster in the
District.
The table also shows that Tennessee has enjoyed the
strongest growth between 1982 and 1986 among the four
District states, in terms of either compensation or GSP. Even
more than the earnings data, the GSP figures show that
Tennessee’s economy expanded faster than the nation’s during
the first four years of the expansion period.
—Thomas B. Mandelbaum

This is the final issue of Business - An Eighth
District Perspective. The Bank’s three quarterly
regional publications will be merged into one regional
publication, Pieces of Eight - An Economic
Perspective on the Eighth District. Our goal is to
increase the usefulness of the Bank’s analyses of
economic activity in the Eighth District. The new
format will allow greater flexibility in covering topics
and providing data. Pieces of Eight will debut
February 1989 and will be published quarterly. Current
subscribers of our regional publications will
automatically receive the new publication.

Business—An Eighth District Perspective is a quarterly summary of business conditions in the area served by the Federal Reserve
Bank of St. Louis. Single subscriptions are available free of charge by writing: Research and Public Information Department,
Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, Missouri 63166. Views expressed are not necessarily official
positions of the Federal Reserve System.
2



WINTER 1988/89

FEDERAL RESERVE BANK OF ST. LOUIS

E IG H T H D IS T R IC T B U S IN E S S D A T A
Rates of Change1
Current Quarter
G en eral B usiness In d e x e s 2
A rka n sa s
K e n tu cky
M issouri
T e n n e sse e

P ayroll E m p lo ym en t
U nited S tates
D istrict
A rka n sa s
Little R ock
K e n tu cky
Lo u isville
M issouri
St. Louis
T en n e sse e
M em p h is
M a n u fa c tu rin g E m p lo ym en t
U nited States
D istrict
A rka n sa s
K e n tu cky
M issouri
T e n n e sse e
R etail S a le s 3
U n ite d S tates
A rka n sa s
K e n tu cky
M issouri
T e n n e sse e
P erso nal In co m e
U n ite d S tates
D istrict
A rka n sa s
K e n tu cky
M issouri
T e n n e sse e

1987

111/1988
1.6%
0.7
1.9
2.0

4 .4 %
4.4
3.0
5.1

- 0 .2 %
1.8
2.4
4.6

1 .5 %
0.3
3.0
3.4

3 .3 %
3.3
3.6
2.6
3.6
4.4
2.1
1.8
4.4
5.2

2 .0 %
2.5
2.2
1.1
1.8
2.7
2.4
2.7
3.3
3.6

2 .7 %
2.4
1.6
2.9
2.2
2.3
2.1
2.2
3.2
3.1

2 .1 %
2.3
5.5
3.5
0.3
2.2

-1 .2 %
-0 .2 '
2.1
0.2
-2 .3
0.4

-1 .8 %
-1 .7
-1 .8
-2 .1
-1 .4
-1 .7

4 .2 %
3.8
3.5
4.0
8.5

5 .9 %
2.0
-2 .2
2.1
6.2

6 .2 %
2.1
12.9
3.3
9.2

8 .7 %
8.6
5.5
9.7
7.6
10.2

5 .9 %
5.7
5.8
4.1
5.4
7.0

6 .6 %
5.8
5.7
3.6
6.5
6.7

111/1988
3 .3 %
0.2
0.7
2.6
2.7
1.4
-1 .0
-0 .3
-0 .3
-2 .6
111/1988
1.4 %
2.7
4.3
6.1
2.1
0.6
111/1988
5 .4 %
-5 .4
31.6
-5 .8
11.2
11/1988
8 .4 %
6.9
13.2
7.0
5.0
6.4

Prices1

District Employment1
Key In d u stries
F a b rica te d M etal P ro d u cts
E le ctrica l and E le ctro n ic E q u ip m e n t
N o n e le c tric a l M a ch in e ry
T ra n s p o rta tio n E q u ip m e n t
Food and K in d re d P ro d u cts
T e x tile and A p p a re l
P rin tin g and P u b lish in g
C h e m ic a ls and A llie d P ro d u cts
C o n s tru c tio n




1985

1986

Current Quarter

Current Year

C urrent Q uarter

C urrent Year

111/1988

111/1987 - 111/1988

111/1988

111/1987 - 111/1988

6 .2 %
2.1
4.1
-2 .1
-0 .1
-2 .7
2.1
2.1
1.8

9 .5 %
0 .7
2.1
-0 .7
13.5
2.6
3.3
14.0
3.9

4 .4 %
6.3
2.8
-0 .3
5.7
-6 .4
2.7
7.8
15.5

1 0 .2 %
1.6
2.7
1.7
6.0
3.9
5.2
10.4
5.9

3

E IG H T H D IS T R IC T B U S IN E S S D A T A

U n e m p lo y m e n t R ate
U n ite d S tates
D istrict
A rka n sa s
L ittle R o ck
K e n tu c k y
L o u is v ille
M isso u ri
St. Louis
T e n n e sse e
M e m p h is

C o n s tru c tio n C o n tra c ts 4
(m illio n s o f d o lla rs)

Current
Quarter

Previous
Quarter

Average

Average

1987

1986

111/1988

11/1988

5 .5 %
6.7
8.1
6.6
7.8
5.9
6.0
6.4
6.0
5.2

5 .4 %
6.3
7.9
6.6
8.3
6.1
5.0
5.9
5.4
4.8

Current
Quarter

Previous
Quarter

Same Period

Same Period

1987

1986

111/1988

11/1988

111/1987

111/1986

$478.9
49.8
105.1
160.2
163.7

$502.1
47.0
102.1
153.0
199.9

$ 503.2
53.4
104.4
157.1
188.3

$535.5
63.4
110.7
154.2
207.2

$406.9
18.7
102.1
116.7
169.4

$ 381.9
31.5
75.3
124.1
151.0

$415.1
30.0
93.4
140.0
151.7

$ 392.3
53.3
110.2
121.8
107.0

6 .20/0
7.2
8.1
7.1
8.8
6.9
6.3
7.0
6.6
5.7

7 .0 %
7.8
8.8
6.9
9.3
7.1
6.1
7.0
8.0
6.8

R e s id e n tia l C o n s tru c tio n
D istrict
A rk a n s a s
K e n tu c k y
M isso u ri
T e n n e sse e
N o n re s id e n tia l C o n s tru c tio n
D is tric t
A rka n sa s
K e n tu c k y
M isso u ri
T e n n e sse e

NOTE: With the exception of employment and prices in key industries, all data are seasonally adjusted. Data for Arkansas,
Kentucky, Missouri and Tennessee are used to represent the District.
1 All growth rates are compounded annual rates of change. The 1985 through 1987 growth rates compare the fourth quarter of
the year listed with the fourth quarter of the previous year.
2Although each index is a comprehensive measure of economic activity, the Arkansas and Missouri indexes, computed by Southwestern
Bell, are not strictly comparable to the Kentucky and Tennessee indexes, which are computed by South Central Bell.
3Sources: Arkansas from Southwestern Bell, Kentucky from the Kentucky Revenue Department, Missouri and Tennessee from the U.S.
Department of Commerce.
4Excludes nonbuilding construction. Source: F. W. Dodge Construction Potentials, proprietary data provided by special permission.




Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102