Macroeconomics/Economic Activity

From Wikibooks, open books for an open world
Jump to: navigation, search

'Economic activity' is a very broad term, and can be measured in a number of ways. In general, it means the level of activity, the number of transactions, the value of those transactions and the overall output or goods and services produced within an economy.

Measures of Economic Activity[edit]

Gross Domestic Product[edit]

The most commonly used statistic is the average "Gross Domestic Product (GDP)" . GDP is the total money value of all the final goods and services produced in an economy in a given year. However, there are difficulties associated with using GDP, such as inflation - the money value of an economy's products will increase even if there is no real growth, as inflation reduces the value of money. So, GDP is often adjusted for inflation, the result being called real GDP.

For example, if the GDP of an economy in 2004 is 1 trillion, and the next year is 1.1 trillion, the change in GDP is 10%. However, if money inflation is 5% then the change in real GDP is somewhat less than that.

Gross National Product[edit]

Graphical Models of the Economy[edit]

  1. Using the Circular Flow Diagram/Model (C.F.D./C.F.M.) we can "top" the flow using
  2. We should obtain the same figure using any of the three methods. However there are difficulties.
    • Statistical - systematic of accidental errors in data gathering
    • The shadow economy (i.e. undeclared income) - more commonly known as the 'black market'
    • Tax evasion and Tax avoidance
    • Many exchanges do not use money
  3. All these methods can be used. "Incomes received" is most frequently used.

Terms used in measuring economic activity[edit]

Gross[edit]

  • Total with no adjustment for inflation, taxation or wear and tear. For example, "I have gross earnings of 40,000, before paying income tax."

Depreciation[edit]

  • The rate at which things fall in value over time. This may be a result of wear and tear, or obscelesence. For example, cars often rapidly depreciate after a few years.

Net[edit]

  • allowance has been made for wear and tear or obsolescence.

→ NET = GROSS - rate of DEPRECIATION

  • For example: I have a car worth 20,000. If it depreciates at a rate of 10% per annum, after one year it is worth 20,000 - 2,000 = 18,000

Domestic[edit]

  • activity within a country's economy from production units located within it, regardless of ownership.

National[edit]

  • activity resulting from production units owned by citizens of a country, regardless of location.

→ NATIONAL = DOMESTIC + NET INCOME FROM OVERSEAS

Market Prices[edit]

  • The amount of money that a willing buyer pays to acquire something from a willing seller, when a buyer and seller are independent and when such an exchange is motivated by only commercial consideration. This price is also known as the equilibrium price.

Factor cost[edit]

  • total cost of the factors of production to produce an item, distinct from the market price. It ignores any indirect taxes and subsidies

→ FACTOR COST = MARKET PRICES - INDIRECT TAXES + SUBSIDIES

National Income[edit]

  • National income is the sum of the incomes that all individuals in the economy earned in the forms of wages, interest, rents, and profits. It excludes government transfer payments and is calculated before any deductions are taken for income taxes.

Current prices[edit]

  • at existing price levels, i.e. Money G.D.P.
  • also known as nominal prices

Constant prices[edit]

  • values taken at a base year to remove the effects of inflation, i.e. Real G.D.P.