Economic Activity: Key Players and GDP Calculation

Elements Involved in Economic Activity

We assume that our economy is a mixed system. A country's economy interacts with other countries, leading to exports and imports. With these assumptions, the elements are:

• Families and consumers
• Companies and producers of goods and services
• Government
• Non-governmental organizations (NGOs) or non-profit institutions
• The rest of the world, which has commercial relations

These interactions produce a cycle with a series of activities that lead to cash flows and real flows. Real flows occur when property is transferred; money flows occur when money is handled. This activity should be quantified (i.e., expressed in monetary units), which we call accounting. This accounting is necessary to:

• Determine the level of development of a country.
• Make comparisons with other countries.
• Identify economic shortcomings and address them.

Understanding GDP

GDP (Gross Domestic Product) is the flow of goods and services produced in a country during a specified time, expressed in monetary units. The production of goods and services encompasses everything that has occurred, either final or intermediate. The gross value added is the difference between the value of all production and intermediate consumption.

In these economic indicators, we have to distinguish between domestic and national figures. Figures are domestic when referring to economic activity within the political boundaries of a country. They are national when referring to those residing in that country, whether within or outside the country.

Ways of Calculating GDP

1. By Way of Production or Supply

GDP is calculated by summing the contributions made by all economic sectors and all branches of economic activity to the creation of added value (the sum of what agriculture, industry, etc., contribute). The sum of all these contributions reveals the GDP via the production method.

2. By Way of Income

GDP is the sum of all remuneration paid to owners of factors of production. This is called compensation of employees and gross operating surplus.

3. By Way of Demand or Spending

This method adds the value of all final goods and services that are consumed. We have to distinguish between final consumption, which is the value of what people have consumed, and gross capital formation, which consists of all assets that have been purchased as an investment, such as elements to produce something or durable consumer goods. To this, we must add the difference between exports and imports.

National Income

National Income is defined as the amount of goods and services produced by a country in a given period, usually one year. It consists of all the income generated by all residents of a country, whether within or outside it. When national income is divided by the number of people in that territory or country, it gives us the per capita income. This income is levied on income from labor or capital income. What is not perceived by either is called surplus or net investment.