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Measurement of Economic Activity (Gross Domestic Product (GDP = C + I + G…
Measurement of Economic Activity
Gross Domestic Product
The GDP figure is a key indicator of the overall strength of an economy reflecting the general standard of living of a country's residents.
It is the main measure of economic strength and used to show whether a country's economy is expanding or contracting
Used by governments to shape economic strategy and to assess the affordability of public spending
The figure is comprised of a number of individual totals, which together show a country's total output or production in monetary terms and is based on the total value of goods sold during a period
The figure is measured over a given period, in the UK, this is quarterly
GDP growth rate is the key indicator of either an increase or decrease in the percentage of economic output in monthly, quarterly or annual periods. A rising GDP would give rise to an expanding economy, whereas a falling GDP would tend to suggest a contacting economy
The responsibility for calculation of GDP rests with the Office for National Statistics. The ONS will conduct a survey of many thousands of firms across many sectors
Nominal GDP: This is a measurement of the total value of final goods produced by an economy during a given period. The definition of final good is one that is sold to an end user. Consequently, raw materials sold to manufacture final goods would not be considered to be final goods and thus not included in the GDP calculation
Real GDP: The nominal GDP figure is adjusted to take into account inflation or deflation. It does not follow, that an increased GDP means that an economy's gross production or output has increased. The increased figure may be as a consequence of inflationary pressures on raw materials. The method used to calculate real GDP is to take a base year as a standard and compare the quantity of goods sold in the current year with that of the base year and calculate the difference. This will show not only the quantity but also the output changes over the period.
All individual totals comprising the overall GDP figure are gross and no deduction is made for depreciation.
GDP = C + I + G + (X-M)
C =
C
onsumption or all private consumer spending with a particular country's economy, including food, rent and durable goods, non-durable goods and services. This excludes new houses
I = Sum of a country's
I
nvestment spent on capital equipment, inventories and housing
G = total of
g
overnment expenditure on final goods and services including salaries of government employees, road construction and military machines, excluding social security spending
X = e
x
ports of goods and services
M = I
m
ports of goods and services
Disadvantages
It does not reflect the black economy which may be substantial in some countries. This black economy includes many illicit actives such as drug dealing. Consequently, not including figures relating to the activities would not therefore provide an accurate interpretation of GDP
Earnings in the UK by an overseas company and remitted back to foreign investors is not include in GDP
Money spent on care for the elderly is not included in GDP
Gross National Product
A method of measuring a country's output of final goods.
It is the value of all goods and services produced by a country's residents and companies, irrespective of where they are produced
GNP includes investments made by UK residents and business both inside and outside the UK
Includes all products manufactured by domestic companies regardless of where they are manufactured. I can be calculated on a country basis ora country per capita basis, which would be the GNP divided by its total population. This allows comparison of GNP of countries of differing sixes.
GNP excludes any income earned in the UK by foreign residents or businesses and does not include produces manufactured in the UK by overseas firms.
Measures a country's income rather than its production
Balance of payments
A record of all of a country's international financial transactions made by its residents with other countries
It is effectively a record of the value of goods exported, less the value of goods important, usually over a specific given time. In the UK this is quarterly
It is the value of transactions that is being referred to, not the number of transactions
This record is made in the domestic currency
If the balance of payments is in surplus, the value of a country's exports is greater than the value of its import
If the value of a country's imports is greater than its exports, there would be a balance of trade deficit
If the value of exports and imports were equal, then the balance of payments would be balanced or in equilibrium
BOP is a measure of how successful a country has been in selling its goods and services to other countries in comparison to other countries selling to it
If a country has a balance of payments surplus, it generally means that a country's economy is doing well and that country will be able to lend money to other countries. Therefore it can pay for all of its exports and still have surplus money
The movement of transactions is divided into the current account and the capital account
The currency account (balance of trade) measures international trade, the net income on investments and direct payments. It is composed entirely of short term transactions
Visible trade relates to the export and import of tangible items including raw materials, such as cocoa for chocolate manufacture, or oil. The balance of trade in relation to tangible items is referred to the visible balance and such items are referred to visible items
Invisible trade - trade in non-tangible items. Examples would include the City of London earnings, insurance, tourism, compensation of employees giving rise to the current account balance
The capital account is usually the smallest component of the balance of payments. It includes any transactions that do effect economic output, notably income production or savings, for example items may include trademarks and copyrights. The transactions contained within the capital account are generally long term transactions
Level of employment
A country's unemployment rate is one of the macro-economic measures used to determine how well a country's economy is performing
The stock market follows unemployment figures closely, therefore in times of high unemployment stock markets will tend to be depressed, whereas in times of near full employment stocks will tend to rise
The level of when full employment is reached it generally about 3-4% of the workforce
High levels of unemployment lead to a slow down in economic growth
Employment itself is very dependent on economic activity. When economic activity is high, there will be an increased demand for goods and services and thus a demand for those individuals who manufacture those goods and provide those services
In addition to the social costs of unemployment, there will be significant economic costs. These will include not only costs to the economy as a a whole but also personal costs
Loss of tax revenue: for every extra unemployed individual there will a reduction in the amount go tax received by the revenue services in terms of both direct taxation - income tax and indirect taxes including VAT. This is because unemployed workers will reduce non essential spending on non essential products and services, concerned not only with current status of unemployment but also with their future prospects and immediate security
An increase in government expenditure to support the unemployed: most unemployed individuals will become eligible for some form of unemployment or social security benefit including job-seekers allowance. This will be a drain on the economy, whereas previously the employee was funding the government in the form of both direct and indirect taxes, now it is the government funding the employee
Tax increases: If the level of unemployment remains high for a considerable period, the situation may become unsustainable and taxes may have to be increased. This will have a follow on effect on the employed taxpayers who will experience a reduction in their own disposable income and spend less on goods and services. This in turn will impact negatively on the sales of manufactured goods. Thus there may be a significant reduction in output
A reduction in demand in the housing market: unemployed workers may be unable to afford their mortgage repayments, leading to repossessions. Those planning to purchase new properties may be deterred form doing so which may result in less houses being built
Potential to send an economy into recession
The loss of output may lead to a reduction in GDP
There will negative effects on wage inflation with the possibility of wage freezes or even cuts for those in work - also known as wage compression
A reduction in output of goods and services that could have been produced by those who have become unemployed. It follows that an economy is performing considerably below its potential if there is a high level of unemployment.