There are, in addition, several ways of defining national activity:

• Gross domestic product (GDP) is the total of all economic activity in one country regardless of who owns the productive assets.
• Gross national income or gross national product (GNI/GNP) is the total of incomes earned by residents of a country regardless of where the assets are located.
• Net national income (NNI) makes allowance for capital consumption, the wear and tear of capital resources. NNI is equal to GNI less depreciation.

Net national income is the most comprehensive measure of activity but it is of little practical value because of the problems of accounting for depreciation.

Gross concepts are more widely used, in particular gross domestic product (GDP). The difference between GDP and GNI or GNP is usually relatively small.

Although GDP offers a better guide to changes in domestic production, and is thus a better tool for steering economic policy, it is by no means an exhaustive measure of a country’s output/spending/income.

There are a number of omissions, which result in the official figure being an under-estimate. In particular, no account is taken of transfer payments (e.g. pensions, social security payments), gifts, unpaid and domestic activities, barter transactions, second hand sales, quality changes and environmental costs.

There is also another under-recording problem relating to tax avoidance or evasion. Transactions deliberately concealed from the authorities (the black, hidden or shadow economy) are thought to be largest where taxes are the highest and bureaucracy the most demanding.

The only industrial economies which adjust their GDP figures for the shadow economy are Italy and America although, by the very nature of the activities, it is impossible to gauge the accuracy of the estimates.

The GDP figure can be expressed in three ways:

• ‘market prices’ (the expenditure measure),
• ‘factor cost’ (the income and output measures) or
• value added (the output measure), which subtracts from the market prices total the value of indirect taxes and adds back in the value of subsidies.

This factor cost adjustment allows consistent comparisons between the various measures.

The most commonly used measure in the UK is now ‘gross value added (GVA) at basic prices’.

(The concept of value added is used to avoid double counting which could, for example, arise by including the output of the steel industry again as part of the car industry.)

Combining value added, which for any one activity is the total value of production less the cost of inputs such as raw materials and components valued elsewhere, gets round this problem.

‘Basic prices’ includes subsidies and excludes taxes (eg VAT) on products only.

Account also has to be taken of inflation when making comparisons over time.

Until 2003, this was done by measuring in ‘constant prices’, that is re-valuing current output data in prices applicable in a given base year (say 1995).

Technically, this was known as ‘fixed-base chain-linking’ and gave an indication of ‘real’ or volume changes over time.

In 2003, a new methodology for tracking ‘real’ changes was introduced, known as ‘annual chain-linking’, a process which produces ‘chained volume measures’ of GDP.

They are calculated by applying the price structure prevailing in the previous year for each year, except the most recent year, where chained volume measures are calculated by applying the price structure prevailing in (currently) 2005.

The year 2005, therefore, is the latest base year and is the year in which the current price data and the chained volume measures are the same.

The procedures for the various measures of activity can be summarised as follows:

• Output data are generally published in value terms annually in the UK National Accounts (the Blue Book) and as quarterly indices, with a (currently 2005) base year (=100).
• Expenditure data are mostly collected in current prices and are then converted into constant prices by deflating each component by an estimated price indicator. These constant and current price versions are used to calculate an overall deflator (ie price index) used for the income measure. Expenditure data are collected by category (consumption, government, investment and net exports) on quarterly and annual bases and are published quarterly, one to three months in arrears but frequently revised.
• Income data are collected and published in current prices only. The categories include compensation of employees and the gross operating surplus of corporations. They are available on quarterly and annual bases and they are published quarterly, one to three months in arrears but subject to frequent revisions.