Tuesday, December 4, 2007
World Economy
The world economy can be evaluated in various ways, depending on the model used, and this valuation can then be represented in various ways (for example, in 2006 US dollars).It is inseparable from the geography and ecology of Earth, and is therefore somewhat of a misnomer, since, while definitions and representations of the "world economy" vary widely, they must at a minimum exclude any consideration of resources or value based outside of the Earth.For example, while attempts could be made to calculate the value of currently unexploited mining opportunities in unclaimed territory in Antarctica, the same opportunities on Mars would not be considered a part of the world economy – even if currently exploited in some way – and could be considered of latent value only in the same way as uncreated intellectual property, such as a previously unconceived invention.Beyond the minimum standard of concerning value in production, use, and exchange on the planet Earth, definitions, representations, models, and valuations of the world economy vary widely.It is common to limit questions of the world economy exclusively to human economic activity, and the world economy is typically judged in monetary terms, even in cases in which there is no efficient market to help valuate certain goods or services, or in cases in which a lack of independent research or government cooperation makes establishing figures difficult.Typical examples are illegal drugs and prostitution, which by any standard are a part of the world economy, but for which there is by definition no legal market of any kind.However, even in cases in which there is a clear and efficient market to establish a monetary value, economists do not typically use the current or official exchange rate to translate the monetary units of this market into a single unit for the world economy, since exchange rates typically do not closely reflect world-wide value, for example in cases where the volume or price of transactions is closely regulated by the government.Rather, market valuations in a local currency are typically translated to a single monetary unit using the idea of purchasing power. This is the method used below, which is used for estimating worldwide economic activity in terms of real US dollars. However, the world economy can be evaluated and expressed in many more ways.It is unclear, for example, how many of the world's 6.5 billion people have most of their economic activity reflected in these valuations.
Finance
Finance is a field that studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. The term finance may thus incorporate any of the following:The study of money and other assets;The management and control of those assets;Profiling and managing project risks;The science of managing money;As a verb, "to finance" is to provide funds for business or for an individual's large purchases (car, home, etc.).The activity of finance is the application of a set of techniques that individuals and organizations (entities) use to manage their financial affairs, particularly the differences between income and expenditure and the risks of their investments.An entity whose income exceeds its expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary, such as a bank or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary pockets the difference.A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays the interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity. Banks are thus compensators of money flows in space.A specific example of corporate finance is the sale of stock by a company to institutional investors like investment banks, who in turn generally sell it to the public. The stock gives whoever owns it part ownership in that company. If you buy one share of XYZ Inc, and they have 100 shares outstanding (held by investors), you are 1/100 owner of that company. Of course, in return for the stock, the company receives cash, which it uses to expand its business in a process called "equity financing". Equity financing mixed with the sale of bonds (or any other debt financing) is called the company's capital structure.Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance), etc., as well as by a wide variety of organizations including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments, with consideration to their institutional setting.Finance is one of the most important aspects of business management. Without proper financial planning a new enterprise is unlikely to be successful. Managing money (a liquid asset) is essential to ensure a secure future, both for the individual and an organization.
Accountansy
Accountancy (profession) or accounting (methodology) is the measurement, disclosure or provision of assurance about financial information primarily used by managers, investors, tax authorities and other decision makers to make resource allocation decisions within companies, organizations, and public agencies. The terms derive from the use of financial accounts.Accounting is the discipline of measuring, communicating and interpreting financial activity. Accounting is also widely referred to as the "language of business".[1]Financial accounting is one branch of accounting and historically has involved processes by which financial information about a business is recorded, classified, summarized, interpreted, and communicated; for public companies, this information is generally publicly-accessible. By contrast management accounting information is used within an organization and is usually confidential and accessible only to a small group, mostly decision-makers. Tax Accounting is the accounting needed to comply with jurisdictional tax regulations.Practitioners of accountancy are known as accountants. There are many professional bodies for accountants throughout the world. Many allow their members to use titles indicating their membership or qualification level. Examples are Chartered Accountant (FCA, CA or ACA), Chartered Certified Accountant (ACCA or FCCA), Management Accountant (ACMA, FCMA or AICWA), Certified Public Accountant (CPA) and Certified General Accountant (CGA).Auditing is a related but separate discipline, with two sub-disciplines: internal auditing and external auditing. External auditing is the process whereby an independent auditor examines an organization's financial statements and accounting records in order to express an opinion as to the truth and fairness of the statements and the accountant's adherence to Generally Accepted Accounting Principles (GAAP), or International Financial Reporting Standards (IFRS), in all material respects. Internal auditing aims at providing information for management usage, and is typically carried out by auditors employed by the company, and sometimes by external service providers.Accounting/accountancy attempts to create accurate financial reports that are useful to managers, regulators, and other stakeholders such as shareholders, creditors, or owners. The day-to-day record-keeping involved in this process is known as bookkeeping.Accounting scholarship is the academic discipline which studies accounting/accountancy.
Fixed Assets
Why are Fixed Assets Recorded at Net Book Value?The question above would not be best answered without giving consideration to the meaning of Fixed Asset. Fixed Assets are items of property, plant and equipment engage by a business entity in the generation and expansion of revenue. According to International Accounting Standard (IAS) 16, Fixed Assets are assets whose future economic benefit is probable to flow into the entity and that the cost of the items can be measured reliably.It is pertinent to note that the cost of fixed asset component is comprised of its purchase price, including import duties and other deductible trade discounts and rebates. In addition, cost attributable to bringing and installing the asset in its needed location and the initial estimate of dismantling and removing the item if they are eventually no longer needed on the location.Depreciation is simply put to be the expense generated by the use of an asset. It is the wear and tear of an asset or diminution in the historical value owing to usage. Further to this; it is the cost of the asset less any salvage value over its estimated useful life. It is an expense because it is matched against the revenue generated through the use of the same asset. Depreciation is usually spread over the economic useful life of an asset because it is regarded as the cost of an asset absorbed over its useful life. Invariably the depreciation expense is charged against the revenue generated through the use of the asset. The method of depreciation to be adopted is best left for the management to decide in consideration to the peculiarity of the business, prevailing economic condition of the assets and existing accounting guideline and principles as implied in the organizational policies.The primary objective of a business entity is to make profit and increase the wealth of its owners. In the attainment of this objective it is required that the management will exercise due care and diligence in applying the basic accounting concept of “Matching Concept”. Matching concept is simply matching the expenses of a period against the revenues of the same period.Generally, the use of assets in the generation of revenue is usually more than a year- that is long term. It is therefore obligatory that in order to accurately determine the net income or profit for a period depreciation is charged on the total value of asset that contributed to the revenue for the period in consideration and charge against the same revenue of the same period. This is essential in the prudent reporting of the net revenue for the entity in the period.Net book value of an asset is basically the difference between the historical cost of that asset and it associated depreciation. From the foregoing, it is apparent that in order to report a true and fair position of the financial jurisprudence of an entity it is relatable to record and report the value of fixed assets at its net book value. Apart from the fact that it is enshrined in Standard Accounting Statement (SAS) 3 and IAS 16 that value of asset should be carry at the net book value, it is the best way of consciously presenting the value of assets to the owners of the business and potential investor.
SAving in Economics
Saving in economicsIn economics, personal saving has been defined as personal disposable income minus personal consumption expenditure. In other words, income that is not consumed by immediately buying goods and services is saved. Other kinds of saving can occur, as with corporate retained earnings (profits minus dividend and tax payments) and a government budget surplus.There is some disagreement about what counts as saving. For example, the part of a person's income that is spent on mortgage loan repayments is not spent on present consumption and is therefore saving by the above definition, even though people do not always think of repaying a loan as saving. However, in the U.S. measurement of the numbers behind its gross national product (i.e., the National Income and Product Accounts), personal interest payments are not treated as "saving" unless the institutions and people who receive them save them."Saving" differs from "savings." The former refers to an increase in one's assets, an increase in net worth, whereas the latter refers to one part of one's assets, usually deposits in savings accounts, or to all of one's assets. Saving refers to an activity occurring over time, a flow variable, whereas savings refers to something that exists at any one time, a stock variable.Saving is closely related to investment. By not using income to buy consumer goods and services, it is possible for resources to instead be invested by being used to produce fixed capital, such as factories and machinery. Saving can therefore be vital to increase the amount of fixed capital available, which contributes to economic growth.However, increased saving does not always correspond to increased investment, if savings are stashed in a mattress or otherwise not deposited into a financial intermediary like a bank there is no chance for those savings to be recycled as investment by business. This means that saving may increase without increasing investment, possibly causing a short-fall of demand (a pile-up of inventories, a cut-back of production, employment, and income, and thus a recession) rather than to economic growth. (This is often called the "paradox of thrift.") In the short term, if saving falls below investment, it can lead to a growth of aggregate demand and an economic boom. In the long term if savings falls below investment it eventually reduces investment and detracts from future growth. Future growth is made possible by foregoing present consumption to increase investment.In a primitive agricultural economy savings might take the form of holding back the best of the corn harvest as seed corn for the next planting season. If the whole crop were consumed the economy would deteriorate to hunting and gathering the next season.
Principles of Insurance.
Commercially insurable risks typically share seven common characteristics.[1]
A large number of homogeneous exposure units. The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004.[2] The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, the actual results are increasingly likely to become close to expected results. There are exceptions to this criterion. Lloyd's of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.
Definite Loss. The event that gives rise to the loss that is subject to insurance should, at least in principle, take place at a known time, in a known place, and from a known cause. The classic example is death of an insured on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.
Accidental Loss. The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be ‘pure,’ in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks, are generally not considered insurable.
Large Loss. The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is little point in paying such costs unless the protection offered has real value to a buyer.
Affordable Premium. If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that anyone will buy insurance, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards (See FAS 113 for example), the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the transaction may have the form of insurance, but not the substance.
A large number of homogeneous exposure units. The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004.[2] The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, the actual results are increasingly likely to become close to expected results. There are exceptions to this criterion. Lloyd's of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.
Definite Loss. The event that gives rise to the loss that is subject to insurance should, at least in principle, take place at a known time, in a known place, and from a known cause. The classic example is death of an insured on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.
Accidental Loss. The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be ‘pure,’ in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks, are generally not considered insurable.
Large Loss. The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is little point in paying such costs unless the protection offered has real value to a buyer.
Affordable Premium. If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that anyone will buy insurance, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards (See FAS 113 for example), the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the transaction may have the form of insurance, but not the substance.
Business valuation methods
Discounted cash flows method
Main article: Valuation using discounted cash flows
A method for determining the current value of a company using future cash flows adjusted for time value. The future cash flow set is made up of cash flows within the determined forecast period and a continuing value that represents a steady state cash flow stream after the forecast period, known as the Terminal Value.
Multiples method
Main article: Valuation using multiples
A method for determining the current value of a company by using a sample of ratios from comparable peer groups. The specific ratio to be used depends on the objective of the valuation. The valuation could be designed to estimate the value of the operation of the business or the value of the equity of the business. When calculating the value of the operation the most commonly used ratio is the EBITDA multiple, which is the ratio of EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) to the Enterprise Value (Equity Value plus Debt Value). When valuing the equity of a company, the most widely used multiple is the Price Earnings Ratio (PER) of stocks in a similar industry, which is the ratio of Stock price to Earnings per Share of any public company. Using the sum of multiple PER’s improves reliability but it can still be necessary to correct the PER for current market conditions.
Main article: Valuation using discounted cash flows
A method for determining the current value of a company using future cash flows adjusted for time value. The future cash flow set is made up of cash flows within the determined forecast period and a continuing value that represents a steady state cash flow stream after the forecast period, known as the Terminal Value.
Multiples method
Main article: Valuation using multiples
A method for determining the current value of a company by using a sample of ratios from comparable peer groups. The specific ratio to be used depends on the objective of the valuation. The valuation could be designed to estimate the value of the operation of the business or the value of the equity of the business. When calculating the value of the operation the most commonly used ratio is the EBITDA multiple, which is the ratio of EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) to the Enterprise Value (Equity Value plus Debt Value). When valuing the equity of a company, the most widely used multiple is the Price Earnings Ratio (PER) of stocks in a similar industry, which is the ratio of Stock price to Earnings per Share of any public company. Using the sum of multiple PER’s improves reliability but it can still be necessary to correct the PER for current market conditions.
Buisness Valuation
Businesses or fractional interests in businesses may be valued for various purposes such as mergers and acquisitions, sale of securities, and taxable events. An accurate valuation of privately owned companies largely depends on the reliability of the company's financial information. Public company financial statements are audited by Certified Public Accountants (US), Chartered Certified Accountants (ACCA) or Chartered Accountants (UK and Canada) and overseen by a government regulator. Private companies do not have government oversight and are generally not required to have their financial statements audited. Private company financial statements are commonly prepared to minimize taxes by lowering taxable income and the financial information may not be accurate. Public companies tend to want higher earnings to increase their share prices. Inaccurate financial information can lead to over- and undervaluation. In an acquisition, due diligence is commonly performed by the buyer to validate the representations made by the seller.
Financial statements prepared in accordance with generally accepted accounting principles (GAAP) usually express the values of the assets at their costs rather than their higher market values. For example, the balance sheet would reflect a piece of land at the purchase price rather than its appreciated value. Certain types of assets and liabilities such as securities held for sale will be reflected at their market values rather than their costs so that the company's financial information is more meaningful. This process is called "mark-to-market" but is subject to manager bias who may be compensated more with higher values. An extreme example of a company taking advantage of mark-to-market accounting to pump their own share price was Enron.
Financial statements prepared in accordance with generally accepted accounting principles (GAAP) usually express the values of the assets at their costs rather than their higher market values. For example, the balance sheet would reflect a piece of land at the purchase price rather than its appreciated value. Certain types of assets and liabilities such as securities held for sale will be reflected at their market values rather than their costs so that the company's financial information is more meaningful. This process is called "mark-to-market" but is subject to manager bias who may be compensated more with higher values. An extreme example of a company taking advantage of mark-to-market accounting to pump their own share price was Enron.
Asset Valuation
Valuation of financial assets is done using one or more of these types of models:
Relative value models determine the value based on the market prices of similar assets.
Absolute value models determine the value by estimating the expected future earnings from owning the asset discounted to their present value.
Option pricing models are used for certain types of financial assets (e.g., warrants, put options, call options, employee stock options, investments with embedded options such as a callable bond) and are a complex present value model. The most common option pricing models are the Black-Scholes-Merton models and lattice models.
Common terms for the value of an asset or liability are fair market value, fair value, and intrinsic value. The meanings of these terms differ. The most common term is fair market value defined as the cash price an item would sell for between a willing buyer and willing seller assuming they both have knowledge of the relevant facts and they have no compulsion to buy or sell. Fair value is used in different contexts and has multiple meanings. Some people use the term to mean the same thing as fair market value. Fair value is also a term used in accounting and law. It is used in generally accepted accounting principles (GAAP) for financial reporting and in law in shareholder rights legal statutes. In these cases, fair value is defined in the accounting literature or the law, respectively. Fair value may be different from fair market value in the accounting and legal contexts. Intrinsic value is an asset's true value regardless of the market price. When an analyst determines a stock's intrinsic value is greater than its market price, the analyst issues a "buy" recommendation and vice versa. The determination of intrinsic value may be subject to personal opinion and vary among individual analysts.
Relative value models determine the value based on the market prices of similar assets.
Absolute value models determine the value by estimating the expected future earnings from owning the asset discounted to their present value.
Option pricing models are used for certain types of financial assets (e.g., warrants, put options, call options, employee stock options, investments with embedded options such as a callable bond) and are a complex present value model. The most common option pricing models are the Black-Scholes-Merton models and lattice models.
Common terms for the value of an asset or liability are fair market value, fair value, and intrinsic value. The meanings of these terms differ. The most common term is fair market value defined as the cash price an item would sell for between a willing buyer and willing seller assuming they both have knowledge of the relevant facts and they have no compulsion to buy or sell. Fair value is used in different contexts and has multiple meanings. Some people use the term to mean the same thing as fair market value. Fair value is also a term used in accounting and law. It is used in generally accepted accounting principles (GAAP) for financial reporting and in law in shareholder rights legal statutes. In these cases, fair value is defined in the accounting literature or the law, respectively. Fair value may be different from fair market value in the accounting and legal contexts. Intrinsic value is an asset's true value regardless of the market price. When an analyst determines a stock's intrinsic value is greater than its market price, the analyst issues a "buy" recommendation and vice versa. The determination of intrinsic value may be subject to personal opinion and vary among individual analysts.
Macroeconomics.
Macroeconomics examines the economy as a whole "top down" to explain broad aggregates and their interactions. Such aggregates include national income and output, the unemployment rate, and price inflation and subaggregates like total consumption and investment spending and their components. It also studies effects of monetary policy and fiscal policy. Since at least the 1960s, macroeconomics has been characterized by further integration as to micro-based modeling of sectors, including rationality of players, efficient use of market information, and imperfect competition.[2] This has addressed a long-standing concern about inconsistent developments of the same subject.[3] Analysis also considers factors affecting the long-term level and growth of national income within a country and across countries.
Microeconomics
Microeconomics examines the economic behavior of agents (including individuals and firms) and their interactions through individual markets, given scarcity and government regulation. Within microeconomics, general equilibrium theory aggregates across all markets, including their movements and interactions toward equilibrium. Partial equilibrium is concerned with interactions in one market, taking prices from other markets as given. Other fields in microeconomics, such as game theory or industrial organization, deal with strategic interactions, (i.e. where each agent takes into account the actions of other agents).
Microeconomics
Microeconomics examines the economic behavior of agents (including individuals and firms) and their interactions through individual markets, given scarcity and government regulation. Within microeconomics, general equilibrium theory aggregates across all markets, including their movements and interactions toward equilibrium. Partial equilibrium is concerned with interactions in one market, taking prices from other markets as given. Other fields in microeconomics, such as game theory or industrial organization, deal with strategic interactions, (i.e. where each agent takes into account the actions of other agents).
Economy , Economics...
social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Greek for oikos (house) and nomos (custom or law), hence "rules of the house(hold)."
A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are affected by incentives and resources.
Areas of economics may be divided or classified in various ways, including:
microeconomics and macroeconomics
positive economics ("what is") and normative economics ("what ought to be")
mainstream economics and heterodox economics
fields and broader categories within economics.
One of the uses of economics is to explain how economies work and what the relations are between economic players (agents) in the larger society. Methods of economic analysis have been increasingly applied to fields that involve people (officials included) making choices in a social context, such as crime [3], education [4], the family, health, law, politics, religion [5], social institutions, and war
Areas of economics
Areas of economics may be classified in various ways, but an economy is usually analyzed by use of microeconomics or macroeconomics.
A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are affected by incentives and resources.
Areas of economics may be divided or classified in various ways, including:
microeconomics and macroeconomics
positive economics ("what is") and normative economics ("what ought to be")
mainstream economics and heterodox economics
fields and broader categories within economics.
One of the uses of economics is to explain how economies work and what the relations are between economic players (agents) in the larger society. Methods of economic analysis have been increasingly applied to fields that involve people (officials included) making choices in a social context, such as crime [3], education [4], the family, health, law, politics, religion [5], social institutions, and war
Areas of economics
Areas of economics may be classified in various ways, but an economy is usually analyzed by use of microeconomics or macroeconomics.
World Economy
The world economy can be evaluated in various ways, depending on the model used, and this valuation can then be represented in various ways (for example, in 2006 US dollars).
It is inseparable from the geography and ecology of Earth, and is therefore somewhat of a misnomer, since, while definitions and representations of the "world economy" vary widely, they must at a minimum exclude any consideration of resources or value based outside of the Earth.
For example, while attempts could be made to calculate the value of currently unexploited mining opportunities in unclaimed territory in Antarctica, the same opportunities on Mars would not be considered a part of the world economy – even if currently exploited in some way – and could be considered of latent value only in the same way as uncreated intellectual property, such as a previously unconceived invention.
Beyond the minimum standard of concerning value in production, use, and exchange on the planet Earth, definitions, representations, models, and valuations of the world economy vary widely.
It is common to limit questions of the world economy exclusively to human economic activity, and the world economy is typically judged in monetary terms, even in cases in which there is no efficient market to help valuate certain goods or services, or in cases in which a lack of independent research or government cooperation makes establishing figures difficult.
Typical examples are illegal drugs and prostitution, which by any standard are a part of the world economy, but for which there is by definition no legal market of any kind.
However, even in cases in which there is a clear and efficient market to establish a monetary value, economists do not typically use the current or official exchange rate to translate the monetary units of this market into a single unit for the world economy, since exchange rates typically do not closely reflect world-wide value, for example in cases where the volume or price of transactions is closely regulated by the government.
Rather, market valuations in a local currency are typically translated to a single monetary unit using the idea of purchasing power. This is the method used below, which is used for estimating worldwide economic activity in terms of real US dollars. However, the world economy can be evaluated and expressed in many more ways.
It is unclear, for example, how many of the world's 6.5 billion people have most of their economic activity reflected in these valuations.
It is inseparable from the geography and ecology of Earth, and is therefore somewhat of a misnomer, since, while definitions and representations of the "world economy" vary widely, they must at a minimum exclude any consideration of resources or value based outside of the Earth.
For example, while attempts could be made to calculate the value of currently unexploited mining opportunities in unclaimed territory in Antarctica, the same opportunities on Mars would not be considered a part of the world economy – even if currently exploited in some way – and could be considered of latent value only in the same way as uncreated intellectual property, such as a previously unconceived invention.
Beyond the minimum standard of concerning value in production, use, and exchange on the planet Earth, definitions, representations, models, and valuations of the world economy vary widely.
It is common to limit questions of the world economy exclusively to human economic activity, and the world economy is typically judged in monetary terms, even in cases in which there is no efficient market to help valuate certain goods or services, or in cases in which a lack of independent research or government cooperation makes establishing figures difficult.
Typical examples are illegal drugs and prostitution, which by any standard are a part of the world economy, but for which there is by definition no legal market of any kind.
However, even in cases in which there is a clear and efficient market to establish a monetary value, economists do not typically use the current or official exchange rate to translate the monetary units of this market into a single unit for the world economy, since exchange rates typically do not closely reflect world-wide value, for example in cases where the volume or price of transactions is closely regulated by the government.
Rather, market valuations in a local currency are typically translated to a single monetary unit using the idea of purchasing power. This is the method used below, which is used for estimating worldwide economic activity in terms of real US dollars. However, the world economy can be evaluated and expressed in many more ways.
It is unclear, for example, how many of the world's 6.5 billion people have most of their economic activity reflected in these valuations.
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