<3.1: ECONOMIC ACTIVITY>

--ECONOMIC ACTIVITY--

--DEFINITION--

'ACTIVITY', in the economic sense, refers to the LEVEL OF GROSS DOMESTIC PRODUCT (GDP), which is defined as...

"...the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period."

--WHY IS IT MEASURED?--

Under the premise 'THE MORE OUTPUT, THE BETTER THE ECONOMIC HEALTH', GDP has the following uses:
- - TO COMPARE DOMESTIC ECONOMIC PERFORMANCE OVER TIME: The data can be used to compare with previous periods to see if the economy is producing more or less.
  - TO COMPARE ECONOMIC PERFORMANCE OF DIFFERENT COUNTRIES: It provides a common measure that allows for international comparisons.
  - TO INFORM POLICY DECISIONS: GDP is used by policymakers to inform their decisions on the need or impact of economic policy.
  - TO MEASURE LIVING STANDARDS: GDP per capita is often used (incorrectly) to measure the living standards of a country's population, it provides an estimate of the average income per person in a country.

--FINISHED OR UNFINISHED?--

FINISHED ('FINAL') GOODS & SERVICES are products that do not require any further processing ("modification") and aren't used in the production chain of another good. whereas UNFINISHED ('INTERMEDIATE') GOODS & SERVICES are products that will be further processed into a FINISHED GOOD for sale.
--EXAMPLES OF FINISHED & EXAMPLES OF UNFINISHED--
Q. Is an engine that goes into a car a finished or unfinished good?
It is considered an UNFINISHED good as alone it is not sold to the final consumer, it has to be installed in the car and becomes part of the final price of the car.
Q. Is an egg that goes into a cake a finished or unfinished good?
It is considered an UNFINISHED good as alone it is not sold to the final consumer, it is part of final price of the cake that is sold to the customer.
Q. Is petrol that goes into your engine a finished or unfinished good?
It is considered a FINISHED good as alone it needs no more processing and the price of petrol is not included in the price of a car

--AVOID DOUBLE-COUNTING--

Q. Why is it so important to only include FINISHED GOODS & SERVICES?
Well, if the usefulness of GDP is to see if we are producing more output, then we need to avoid DOUBLE-COUNTING which will inflate the value of output and make it appear more is being produced.
For example, if in Year 1 we only produce a single egg that s sold to the consumer for $5, then we record GDP as $5, right? Now, if in the next year we still produce a single egg, but this time it isn't sold to the final consumer it is instead bought by the baker as a raw material and used to bake a cake that is sold to the consumer for $10, what is the GDP we record?
Is it the value of the egg ($5) plus the value of the cake ($10) totaling $15?Have we really increased our output of stuff from $5 to $15, a whopping 300%? This large increase is misleading as it 'DOUBLE COUNTS' the number of eggs being produced; there is still a single egg but its value has been counted twice.
Hence it is vitally important that we only count the value of final goods and services, which in this case is the cake, so GDP in year 2 is $10.

--WHAT IS NOT INCLUDED?--

INTERMEDIATE GOODS: As mentioned above in order to avoid double counting all INTERMEDIATE GOODS which are turned into final goods and services are not included.
USED GOODS: Any transactions involving second-hand goods are not included as their production was recorded in a previous year's GDP.
TRANSFER PAYMENTS: When the gov't transfers money such as unemployment benefits, or consumption vouchers this is called a TRANSFER PAYMENT and is not included as it does not reflect production activity.
NON-MARKETED ACTIVITIES: Any production activity that isn't transacted, such as VOLUNTEER WORK, or DIY jobs are not included as it is impossible to derive an accurate monetary value.
ILLEGAL GOODS: Similar to non-marketed goods, all economic activity involving illegal activities is not included, such as the production of illegal drugs and counterfeit goods.

--WHAT IF IT'S NOT SOLD?--

When a business produces output but fails to sell it, the increase in inventory is treated as an investment expenditure.

--MEASURING APPROACHES--

--INITIAL THOUGHTS--

Do you know who pays my wages? where does my INCOME come from? who does the SPENDING? How do parents know what SELLING PRICE to pay? Are all these values the same?

-EXPENDITURE = INCOME = OUTPUT-

Do you know who pays my wages? where does my income come from? who does the spending? How do parents know what price to pay?
If we wished to calculate the $ value of the economic activity created by OFS, we could use THREE APPROACHES based on the relationship between SELLING PRICE, SPENDING, & INCOME.
For example, the total SELLING PRICE of the final service (the study fees), is also equal to the actual SPENDING by your parents, which in turn is equal to the INCOMES that the spending pays for, such as part of my wages (for my labour), thus we have three ways to measure.

--EXPENDITURE APPROACH--

The EXPENDITURE APPROACH, as the name suggests, totals all the SPENDING that ON DOMESTICALLY PRODUCED FINAL GOODS AND SERVICES @ MARKET PRICES (aka the selling price in the marketplace). We can subdivide total spending into the following distinct groups:

HOUSEHOLD SPENDING: CONSUMPTION' (C)
BUSINESS SPENDING: INVESTMENT (I)
GOVERNMENT SPENDING: GOVERNMENT (G)
EXPORT SPENDING: EXPORTS (X)
LESS NON-DOMESTIC SPENDING: IMPORTS (M)

GDP = C + I + G + X - M

*WARNING! It is very important that we only count the spending on FINAL goods and services that are sold to the final user, and NOT any of the INTERMEDIATE goods that were used to make it. For example, we do not want to record the value of the egg that goes into a cake and then the value of the cake as well, as this would imply that the value of the egg has been 'DOUBLE-COUNTED', which inflates the overall value of output in the economy.

--INCOME APPROACH--

THE INCOME APPROACH, totals all the incomes earned ('also called 'FACTOR PAYMENTS') by the owners of the factors of production that have been used to make domestically produced final goods and services. As we know there are FOUR FACTORS OF PRODUCTION and the factor payment each receives are termed as follows:
- - - - LAND RESOURCE OWNERS EARN: 'RENT'
      - LABOUR RESOURCE OWNERS EARN: 'WAGES'
      - CAPITAL RESOURCE OWNERS EARN: 'INTEREST'
      - ENTERPRISE RESOURCE OWNERS EARN: 'PROFIT'

(EXTRA: Now for incomes to equal spending @ market prices (in other words for the money you spend on a good to be exactly equal to the income received by the producers, we need to make sure any tax deducted from factor incomes is returned and any subsidies that inflate factor incomes are deducted.)

--OUTPUT APPROACH--

THE OUTPUT (OR ADDED-VALUE) APPROACH, totals the value of all final goods and services by totaling their market prices (In other words 'the price tags of each good sold to the final user).
DOES THAT JUST MEAN ADDING UP ALL THE PRICES AT THE RETAIL MARKET? NO, WHAT IF A GOOD IS BOUGHT THERE BY AN INTERMEDIATE USER INSTEAD THEN IT WOULD BE DOUBLE COUNTED. (E.G. IF THE BAKER BOUGHT EGGS AT THE SUPERMARKET INSTEAD OF AT THE WHOLESALERS)
In order to avoid this problem, they total the added value of each intermediate good's 'price tag' at each stage of production. This is best explained with an example:

--EXAMPLE: EGG--

If you remember, the problem of double counting occurs because we don't know whether the good is a finished or an unfinished good, as it can be difficult to know whether it is being sold to the final consumer or for further processing. With the value-added approach, we do not have to be concerned about this. To understand why, let's look back at the example of an egg, and see how this problem is solved.

SCENARIO 1: The final consumer buys the egg at the supermarket

STAGE 1: If we assume that at zero cost $0, the egg farmer sells the egg to the supermarket for $10, then the farmer has generated an added value of +$10. (Selling price - Cost)
STAGE 2: The Supermarket displays and sells the egg to a consumer to eat in a salad for $12, thus the supermarket has generated an added value of +$2 ($12-$10).
Now as long as both the farmer and the supermarket report their added values the problem of double counting is avoided, and the sum of the added values +$12. is equal to the value of the finished good.

SCENARIO 2: The final consumer buys a cake containing the egg.

STAGE 1: Same as before.
STAGE 2: The Supermarket now displays sells the egg to a baker for $12, who then uses it to make a cake which they sell to a final consumer to eat for $20, thus the bakery has generated an added value of +$8 ($20-$12).
Now as long as the farmer, the supermarket, and the bakery report their added values the problem of double counting is again avoided, and the sum of the added values +$20. is equal to the value of the finished good.

--CIRCULAR FLOW TASK--

The circular flow of income diagram can be used to illustrate how the three approaches equate to each other. SKETCH the DIAGRAM and LABEL the flows that correspond to each measuring approach.

--THE MONIAC MACHINE--

--TASK--

Explain, using 'OFS study fees' as the example of a 'domestically produced service', why all 3 approaches should result in the same value. (10)

--TYPES OF MEASURE--

--GROSS DOMESTIC PRODUCT (GDP)--

GDP is the total value of all final goods and services produced within a country over a time period (usually a year), REGARDLESS OF WHO OWNS the factors of production.

--GROSS NATIONAL INCOME (GNI)--

GNI (or GNP) is equal to the value of all final goods and services produced by the factors of production supplied by the country’s residents REGARDLESS OF WHERE THE FACTORS ARE LOCATED.

--NET FACTOR INCOME (NFI)--

We can see from the Venn diagram above that the difference between GDP and GNP is determined by THE RELATIVE SIZES of FACTOR INCOME FROM ABROAD WHICH IS PART OF GNP and FACTOR INCOME PAID ABROAD WHICH IS PART OF GDP.
Note that FACTOR INCOME FROM ABROAD MINUS FACTOR INCOME PAID ABROAD is called 'NET FACTOR INCOME FROM ABROAD'

--GNP > GDP--

If FACTOR INCOME FROM ABROAD > FACTOR INCOME PAID ABROAD, then NET FACTOR INCOME FROM ABROAD is 'POSITIVE', so GNP > GNP.

--GDP > GNP--

If FACTOR INCOME PAID ABROAD > FACTOR INCOME FROM ABROAD, then NET FACTOR INCOME FROM ABROAD is 'NEGATIVE', so GDP > GNP.

--CANVA TASK--

Using CANVA create your own Venn diagram for your country. Include at least THREE images for each segment.

--NOMINAL GDP--

NOMINAL GDP, refers to the value of all final goods and services, at CURRENT PRICES. In other words, the $ values used to calculate the price of a good are the ones 'currently' being offered in the marketplace.

--REAL GDP--

REAL GDP, refers to the value of all final goods and services, at CONSTANT PRICES. In other words, the $ values used to calculate the prices of goods produced are based on the price levels in a previous year (The base year).

--TASK--

Explain, using the concepts of NOMINAL and REAL values why the following statement may be untrue.

”If in 2019 the school of 100 students earned $1,000,000 in school fees, and in 2020 it earned $2,000,000, does this mean they are providing more educational services for students?”

”It’s uncertain because we don’t know if it’s really due to more students or simply the fact that the school fees have increased, or indeed a mixture of both”

--REAL GDP PER CAPITA--

REAL GDP PER CAPITA, refers to the value of all final goods and services, at CONSTANT PRICES. divided by the POPULATION.

--REAL GDP PER CAPITA @PPP--

PRICE LEVELS differ between countries, therefore, a high income in a high-cost country will have a lower PURCHASING POWER, than if it was earned in a low-cost country, and vice versa, therefore when comparing GDP values BETWEEN COUNTRIES, to derive information about LIVING STANDARDS, it is better to use values that have been converted to account for these differences. COST OF LIVING INDEX

--TASK--

Explain the underlying concept behind the following statements...

--TASK--

Using the data below explain why the ranking of Singapore rose, and the US fell when GDP per capita at PPP is used.

--HL/SL CALCULATIONS--

--CALCULATE NOM. GDP W. EXP. APPROACH--

Using this information, we find that nominal GDP = 11.3+3.2+3.5+2.5−2.1 = 18.4 billion

--CALCULATE GNI/GDP from GDP/GNI--

If we look at the Venn diagram below we should be able to see that...

GNP = GDP + NET FACTOR INCOME FROM ABROAD (NFI)

44bn = 46bn + (+$2.7m -$4.7m = -$2m)

If NFI is 'NEGATIVE' GDP > GNP

If NFI is 'POSITIVE' then GDP < GNP

In a P3 question one of the values for GDP or GNP will be missing and the typical questions that could be asked are as follows:
If GDP is 46m, and the amount of factor income sent abroad is $4.7m, whilst the amount of factor income received is $2.7m what is GNP?
If GNP is 44m, and the amount of factor income sent abroad is $4.7m, whilst the amount of factor income received is $2.7m what is GDP?

--REAL GDP from TABLES--

--REAL GDP W. DEFLATOR--

--DEFINITION & FORMULA--

So we have seen that the nominal value can be converted to its real rate (using a chosen base year's prices), in other words it can be 'DEFLATED' to its real value. The MULTIPLE by which it is deflated is not surprisingly called the 'DEFLATOR', and is determined as follows:

DEFLATOR = (NOM GDP / REAL GDP) * 100

...and this multiple can be used to CONVERT NOMINAL GDP to REAL GDP

REAL GDP = (NOM GDP / DEFLATOR) * 100

--WORKED EXAMPLE--

Using the same data as used above we can see how the deflator works:

The 100 in 2001 means the nominal value needs to be deflated by 0% to get the real value based on 2001 prices: $881 / 1 = $881
The 118.8 in 2002 means the nominal value needs to be deflated by 18.8% to get the real value based on 2001 prices: $1160 / 1.188 = $976
The 130 in 2003 means the nominal value needs to be deflated by 18.8% to get the real value based on 2001 prices: $1223 / 1.30 = $941

--PAST PAPER TASK--

--REAL GDP PER CAPITA--

This is simply the REAL GDP of a country DIVIDED by its POPULATION. If we assume the population of the economy is 10, and we use the REAL GDP values calculated above we get:
Real GDP in 2001 = £881 billion / 10m = £88,100
Real GDP in 2002 = £976 billion / 10m = £97,600
Real GDP in 2003 = £941 billion / 10m = £94,100

--BUSINESS CYCLE--

--DEFINITION--

The BUSINESS CYCLE refers to the CYCLICAL FLUCTUATIONS IN THE LEVEL OF REAL GDP that occur around its long-term natural growth rate.
In other words, if we were to add a trendline to the REAL GDP rates of an economy over time, we would clearly see an UPWARD TREND, (Which is referred to as 'POTENTIAL GDP') however, there are 'GAPS' between the trendline, and the ACTUAL GDP rates recorded, which follow a cyclical pattern of rising then falling as shown below.

--PHASE: EXPANSION--

EMPLOYMENT?
GENERAL PRICE LEVEL?
GROWTH (REAL GDP)?

--PHASE: TROUGH--

--PHASE: CONTRACTION--

--PHASE: PEAK--

--TASK--

Complete the table below in your google doc.

--FULL EMPLOYMENT--

--POTENTIAL OUTPUT--

Output cannot be produced without the employment of labour hence we say the DEMAND for LABOUR is 'DERIVED' from the level of demand for output in an economy.
Any FLUCTUATIONS IN REAL GDP will therefore lead to FLUCTUATIONS IN EMPLOYMENT.
- - When the economy's 'ACTUAL GDP LEVEL = POTENTIAL GDP LEVEL' the level of employment in the economy is EQUAL TO THE FULL-EMPLOYMENT LEVEL, or to put it another way the level of unemployment is EQUAL TO THE NATURAL RATE OF UNEMPLOYMENT.
  - When the economy's 'ACTUAL GDP LEVEL > POTENTIAL GDP LEVEL' the level of employment in the economy is GREATER THAN THE FULL-EMPLOYMENT LEVEL, or to put it another way the level of unemployment is LOWER THAN THE NATURAL RATE OF UNEMPLOYMENT.
  - When the economy's 'ACTUAL GDP LEVEL < POTENTIAL GDP LEVEL' the level of employment in the economy is LOWER THAN THE FULL-EMPLOYMENT LEVEL, or to put it another way the level of unemployment is GREATER THAN THE NATURAL RATE OF UNEMPLOYMENT.

In the diagram below when the economy's ACTUAL GDP is GREATER THAN THE POTENTIAL LEVEL, (the PINK area) the ACTUAL RATE OF UNEMPLOYMENT is BELOW THE NRU (FULL EMPLOYMENT) LEVEL of 3%.
Similarly, we can see that when the economy's ACTUAL GDP is LESS THAN THE POTENTIAL LEVEL, (the GREY area) the ACTUAL RATE OF UNEMPLOYMENT is ABOVE THE NRU (FULL EMPLOYMENT) LEVEL of 3%.

--TASK--

Explain, using a diagram the following relationships:

- - - - ACTUAL = POTENTIAL = UNEMPLOYMENT = NRU
      - ACTUAL > POTENTIAL = UNEMPLOYMENT < NRU
      - ACTUAL < POTENTIAL = UNEMPLOYMENT > NRU

--LIMITATIONS OF GDP--

-UNDERVALUES WELLBEING-

GDP does not tell us whether any of the following features which have a POSITIVE IMPACT on WELLBEING are occurring.
- - - - GREATER TECH ADVANCEMENTS.
      - HIGHER LIFE EXPECTANCY.
      - LOWER levels of POLLUTION.
      - GREATER EQUALITY.
      - HIGHER MEAN YEARS OF SCHOOLING.
      - FEWER WORKING HOURS.
      - LESS DEPLETION OF SCARCE RESOURCES.
      - MORE MERIT GOODS.
      - FEWER DEMERIT GOODS.
      - MORE LEISURE TIME.
      - GREATER GENDER EQUALITY.

-OVERVALUES WELLBEING-

GDP does not tell us whether any of the following features which have a NEGATIVE IMPACT on WELLBEING are occurring.

- - - - LOWER LIFE EXPECTANCY.
      - HIGHER LEVELS of POLLUTION.
      - GREATER INEQUALITY.
      - LOWER MEAN YEARS OF SCHOOLING.
      - INCREASED WORKING TIME.
      - LESS LEISURE TIME.
      - MORE DEPLETION OF RESOURCES.
      - GREATER OUTPUT of DEMERIT GOODS.
      - LOWER OUTPUT of MERIT GOODS.
      - LESS GENDER EQUALITY.

--OMISSIONS--

THERE ARE NUMEROUS GOODS AND SERVICES THAT ARE EXCLUDED FROM GDP STATISTICS WHICH CAN IMPACT WELL-BEING AND INCOME LEVELS.

--TASK 1--

WATCH THE VIDEO BELOW of ROBERT KENNEDY'S SPEECH on GDP, List the NEGATIVE and POSITIVE OMISSIONS that impact WELL-BEING.

--TASK 2--

If the President gave RISING REAL GDP PER CAPITA RATE as evidence that a country's citizens are enjoying a higher standard of well-being under their leadership, what questions would you want to be answered before you agreed? LIST A MINIMUM OF 6.

--ALTERNATIVES TO GDP--

-HAPPINESS INDEX--

--OECD BETTER LIFE INDEX--

--HAPPY PLANET INDEX--

--CANVA TASK--

FIND TWO ALTERNATIVES TO GDP NOT ALREADY MENTIONED AND CREATE A ONE-PAGE POSTER ON BOTH, WHICH NEEDS TO INCLUDE WHY IT IS A BETTER MEASURE OF WELL-BEING THAN REAL GDP PER CAPITA AS WELL AS THE LATEST RANKINGS. [THE BEST WILL FEATURE AS AN EXEMPLAR ON THE BOUNOMICS WALL OF FAME]
TIP: USE THIS SITE
There are several alternative measures to Gross Domestic Product (GDP) as a measure of well-being. Here are a few:
Genuine Progress Indicator (GPI): This is an alternative measure of economic progress that accounts for factors such as income inequality, unpaid household work, and environmental damage.
Human Development Index (HDI): This measure includes three dimensions of human development: a long and healthy life, access to knowledge, and a decent standard of living.
Happy Planet Index (HPI): This measures a nation's well-being by taking into account life expectancy, experienced well-being, and ecological footprint.
Better Life Index (BLI): This measure looks at several dimensions of well-being, including housing, income, education, and work-life balance.
Inclusive Wealth Index (IWI): This measures the wealth of a country by accounting for its natural, human, and physical capital.
Social Progress Index (SPI): This measure includes indicators related to basic human needs, foundations of well-being, and opportunities for individuals and communities.
Multidimensional Poverty Index (MPI): This measure assesses poverty by considering a range of indicators, including health, education, and living standards.
Each of these measures provides a different perspective on well-being, beyond just economic growth. By taking a more holistic approach, they can provide a better understanding of how well a society is functioning and what areas need improvement.

Now go to the google doc and answer these questions.

1) GDP = 125 + 46 + 35 + 12 -15 = 203bn

2) GNI = 203bn + (4.5 - 3.7) = 203.8bn

3) IGNORE, error!

4a) Base year is 2016 as the price deflator is 100

4b) Real GDP

2015: 19.9/98.5 = 20.2
2016: 20.7/100 = 20.7
2017: 21.9/102.3 = 21.4
2018: 22.6/107.6 = 21.0
2019: 22.3/103.7 = 21.5

4c) In 2016 the nominal = the real, as 2016 was the base year, so the same prices were used.

4d) In 2017-18, nominal GDP rising would mean either prices have risen, or real GDP has risen (or both). Since Real GDP has fallen, prices must have risen.

4e) In 2018-19 nominal GDP falling would mean either prices have fallen, or real GDP has fallen (or both). Since Real GDP has risen, prices must have fallen.

4f) Real GDP per capita

2015: 19.9/98.5 = 20.2/1.2 = 16.83
2016: 20.7/100 = 20.7/1.21 = 17.1
2017: 21.9/102.3 = 21.4/1.22 = 17.54
2018: 22.6/107.6 = 21.0/1.23 = 17.07
2019: 22.3/103.7 = 21.5/1.27 = 16.92

4g) In 2018-19, real GDP rose, yet GDP per capita fell because the increase in population was proportionally more than the increase in real GDP, hence the per capita value fell.

--WHY MEASURE GNP?--

The GNI is often regarded as the best indicator of a country’s LIVING STANDARDS, as it measures the income available to the dwellers of a country in particular the wages earned by cross-border workers, repatriated profits and dividends.
However it does not record unilateral transfers – most importantly remittances – which are amongst the largest types of income inflows to developing countries. For many developing countries GNDI is significantly larger than GNI, from 3% for India to 75% for Liberia. This column argues that GNDI is preferable, since GNI masks heterogeneity in purchasing power.
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