Economic activity refers to all actions involving the production, distribution and consumption of goods and services. These activities range from shopping at the local grocer to trading stocks on Wall Street to trading goods with other nations. However, it is possible to classify economic activities into five broad categories, which make up the components that measure a nation's total economic output.
The gross domestic product, or GDP, is the aggregate measure of a nation's total economic activity. The categories of economic activity that make up GDP include consumer spending, business investment in capital goods, government spending on goods and services, and net exports, with production a fifth category underlying the others. Many economists represent GDP as the following equation: GDP = C + I + G + NX, with C representing consumer spending; I, business investment; G, government spending; and NX meaning net exports, or the difference between exports and imports of products.
One of the primary classes of economic activity is production of goods and services. Production encompasses activities from the manufacture of small appliances to the provision of professional services, from data processing to medical care. Although production is not an explicit component of GDP, it is implicit as the production process yields the vast array of products and services that consumers, firms and governments buy and sell.
A prosperous economy requires that consumers spend money on goods and services ranging from groceries and prescriptions to automobiles and personal computers. Overall, consumer spendng accounts for more than 60 percent of GDP, according to Harvard economist Gregory Mankiw, a former White House adviser and the author of Principles of Economics.
For consumers to spend money, firms must produce goods and services that consumers want. Often, companies invest in new capital, such as factory space and machinery, that enables them to increase more goods or produce at a lower cost. Corporations' purchases of capital equipment, or investment, represents another category of economic activity. Investment expands the economy's production capacity, creating jobs and enabling the economy to generate more goods and services.
Governments at all levels play a major role in a nation's economy, both as purchasers and providers of goods and services. For example, governments purchase military equipment from manufacturers and provide services ranging from law enforcement to road and bridge construction. Governments levy taxes from individuals and households, distributing the revenues among various needs, including national defense, justice systems, public education and social welfare. During the Great Depression of the 1930s, English economist John Maynard Keynes suggested that governments should increase spending during times of economic crisis to increase demand in the economy when consumer and business spending declines.
International trade makes up an important category of economic activity. Most economists view trade as mutually beneficial for all parties involved, contending that trade enables nations to specialize in producing certain products and services while also obtaining the goods that other countries produce more efficiently. Net exports, or the difference between the value of goods exported and those imported, represents another element of GDP and measures the value of international trade. If the value of net exports is positive, a country has a trade surplus, meaning it exports more than it imports. If the value is positive, the country imports more than it exports, resulting in a trade deficit.
- "Principles of Economics" (3rd ed.); N. Gregory Mankiw; 2004
- Jupiterimages/Brand X Pictures/Getty Images