Key knowledge points
1. The nature and purpose of economic activity
Economic activity refers to to the volume of production(output), income, expenditure and employment that takes place in an economy
Within an economy, over any given period of time, it is likely that the value of expenditure will be equal to the value of production and the value of production will be equal to the value of income. Therefore, when measuring the level of economic activity, in theory:
P = E = I
Economic activity example
A manufacturing business (firm) produces (production) a durable capital good, for example, a small gas-fired electricity generator for $25,000 AUD.
The firm sells the consumer (households) the gas-fired electricity generator for $25,000 Australian dollars (“AUD”) (expenditure).
The manufacturing business earns FACTOR income from the sale of the electricity generator to the household of $25,000 AUD.
If an economy does not trade with the rest of the world, that is, the economy is a closed economy , and there are no savings, investment, tax or government spending, then, it must be the case that a country’s production, expenditure and income will be of equal value. For example, consider the two-sector (households and firms) model (see below) of a closed economy. In this economy, there are four flows:
· flow one (the black solid line) represents the factors of production (land, labour and capital);
· flow two (the green broken line) represents factor inco...