Macroeconomics/Economic Activity

'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

Gross Domestic Product

The most commonly used statistic is "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 (or purchasing power) 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 inflation rate is 5% then the change in real GDP is somewhat less than that.

• see also: Gross domestic product on Wikipedia

Graphical Models of the Economy

Circular flow. Purple flow is flow of money, and orange flow is flow of goods and services.

1. Using the Circular Flow Diagram/Model (C.F.D./C.F.M.) we can "top" the flow using
   • Expenditure
   • Income
   • Output
2. We should obtain the same figure using any of the three methods theoretically. However, there are difficulties in reality, e.g. statistical discrepancy: systematic of accidental errors in data gathering.
3. All these methods can be used. "Incomes received" is most frequently used.

Shortcomings of GDP

GDP is not a perfect measure. The following points are some examples of shortcomings of GDP.

Shortcomings in measuring total production

• Production in the shadow economy, or black market is not included in GDP.
• Household production is not included.

Shortcomings in measuring well-being

• The value of leisure is not included in GDP.
• Production causes pollution and other negative effects to environments, but these negative impacts are not measured by GDP.
• Increase in crime may require extra government spending, which increases GDP. However, increase in crime reduces well-being. Therefore, GDP is inaccurate in measuring well-being in this aspect.

Terms used in measuring economic activity

Gross

• 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

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

Net

• 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

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

National

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

→ NATIONAL = DOMESTIC + NET INCOME FROM OVERSEAS

Market Prices

• 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

• 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

• 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

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

Constant prices

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