Measuring economic activity (unit 8)

Measuring economic activity serves two functions: enables economists to identify economic problems and provides an objective basis for evaluating macroeconomic indicators.

All indicators of the overall state of the economy are based on a common measure called the gross national product (the GNP).

The gross national product is the total market value of final goods and services produced in a single year by factors of production owned by a country's citizens, regardless of where the output is produced. This is a measure of economic growth or decline. If the GNP is rising, the economy is said to be relatively strong. If the GNP is falling, the economy is said to be relatively weak.

Economists distinguish between two concepts: the gross national product (the GNP) and the gross domestic product (the GDP). The GDP is the total market value of all final goods and services produced in a single year by factors of production located within a country. As we can see, the GNP is a more comprehensive measure as it evaluates the output of businesses belonging to the citizens of a country regardless of their location.

To distinguish increases in the quantity of goods and services from the increase in their, prices economists use the concepts of real GNP and nominal GNP. Nominal GNP is the value of the final output in current prices (prices of that period), whereas real GNP is calculated in constant prices and takes into account the price index for that period (inflation or deflation): Real GNP = Nominal GNP : price index.

In order to calculate the GNP; economists add the amounts that were spent by the three elements of the economy, namely households, businesses, and government, to purchase the final products, and net exports, which is the difference between the country's exports and imports. We can express this mathematically as C+I+G+E=GNP, where. C – consumer household spending; I - investment, or businesses, G -government purchases of goods and services, E - net exports.

A nation's standard of living is measured by the amount of goods and services available, to its citizens. One way to calculate living standard is to divide the GNP by the population. It is per capita GNP and shows how much of the GNP is available to one person.

When people discuss what share of the "economic pie” should go to the government, they mean what percent of the GNP should be spent on defense, welfare, education, and other government programs. When the GNP is increasing faster than the population, more goods and services are available per person, and living standards are likely to improve.

Types of markets (unit 9)

A market is a social arrangement that allows buyers and sellers to discover information and carry out a voluntary exchange of goods or services. Along with a right to own property, it is one of the two key institutions that organize trade.

The function of/market requires, at a minimum, that both parties expect to become better off as a result of the transaction. Markets generally rely on price adjustments to provide information to parties engaging in a transaction, so that each may accurately gauge the subsequent change of their welfare. Markets are efficient when the price of a good or service attracts exactly as much demand as the market can currently supply. The chief function of a market, then, is to adjust prices to accommodate fluctuations in supply and demand.

Although many markets exist in the traditional sense (such as flea markets) there are various other types of them. Markets may be classified in two broad categories: consumer markets and industrial/ organizational or business-to-business markets. These categories are based on the characteristics of the individuals and groups that make up a specific market and the purposes for which they buy products.

The consumer market consists of individuals or households that purchase goods and services for personal use and who do not buy products primarily to make a profit.

The industrial/organizational market is made up of enterprises that buy goods and services for resale to the consumer market or for their own operations.

A market can also be organized as an auction, as a shopping center, as a complex institution such as a stock market, and as an informal discussion between two individuals.

In economics, a market that runs under laissez-faire policies is a free market. It is 'free' in the sense that the government makes no attempt to intervene through taxes, subsidies, minimum wages, etc.

Markets of various types can spontaneously arise whenever a party has interest in a good or service that some other party can provide. Hence there can be a market for cigarettes, for chewing gum, for contracts, for the future delivery of a commodity, etc. A market arises only in a case when all parties meet the four following requirements:

• They must need or want a particular product or service.

• They must have the ability to purchase the product. Ability to purchase is related to buying power, which consists of resources such as money, goods and services that can be traded in an exchange situation.

• They must be willing to use their buying power.

• They must have the authority to buy the specific products.