Civil Engineering Reference
In-Depth Information
MEASURING ECONOMIC ACTIVITY
The national accounting framework provides a systematic and detailed description
of the UK economy and, by following agreed international accounting conventions,
it enables comparisons to be made with other countries. It is not our intention to
delve into the minutiae of this system, but just to establish the general measurement
concepts necessary to discuss the broader role of construction.
To begin the analysis, we consider a simple economy without a government
sector, a financial sector or an overseas sector - that is, our starting point is a simple
two-sector model economy and we analyse only the relationship between households
and businesses. The complications of the real world will be considered later. We
have already portrayed economic activity using this type of a model in
Chapter 1
(see
Figure 1.4)
, and for convenience a modified version is presented in
Figure 13.1
.
To make our starting model effective, we make these assumptions:
•
households receive income by selling whatever factors of production they own
•
businesses sell their entire output immediately to households without building
up any stocks
•
households spend their entire income on the output of the businesses.
These three assumptions seem realistic. Businesses will only make what they can
sell. Production does involve paying for land, labour, capital and enterprise, and
these services generate income payments - rent, wages, interest and profit - which,
in turn, are spent. The model of the circular flow outlined in this way suggests
that there is a close relationship between income, output and expenditure. These
relationships are presented in a traditional format in
Figure 13.1
.
From
Figure 13.1
, it is clear that businesses reward the owners of factors of
production (land, labour, capital and enterprise) by paying them rent, wages,
interest and profit and, in turn, these factor rewards (incomes) form the basis of
consumer expenditure. This model shows that it is possible to measure the amount
of economic activity during a specified time period by adding up the value of total
output, or total income, or total expenditure. In effect, it is only necessary to adopt
one of these three approaches since conceptually they are identical - even in the
actual national accounts they rarely differ by more than 0.5 per cent. The small
discrepancy is due to each being calculated using different statistical methods.
To get a better idea of the magnitude of the numbers involved, readers
are advised to look at a copy of the
UK National Accounts: The Blue Book
(ONS 2011c).
Tables 1.1
and
1.2
summarise all three methods of measurement -
namely the
output approach
, the
expenditure approach
and the
income approach
.
By analysing these statistics, it is possible to gain a good insight into the economy,
especially as the data usually covers the last 10 years. Although very few people
actually study the detailed breakdown of the accounts from cover to cover, they are
an essential data source for anyone concerned with macroeconomics. Indeed, the
national accounts are far more important than just indicating changes in GDP; they
form a central reference for those who wish to broaden their understanding of the
economy and its measurement.
