2.2 The circulation of the national economy

The national accounts are designed to provide a systematic summary of the structure of the national economy based on economic units, economic actions and their connections. The production process that gives us our daily consumer goods (food, clothes, etc.) and public services (education, health care, etc.) is composed of a highly complex web of economic actions.

The foundation for the doctrine of economics has long been thought to lie in the system of national economic circulation. A closer inspection of the principles of this system will help us gain a clear and at once a realistic picture of how labour and other factors of production contribute to making the goods that satisfy our needs. At the same time the concept of circulation illustrates how commodities, i.e. the final end-products of goods and services, are released from production into consumption, capital formation and exports. The most comprehensive measure of production is gross domestic product or GDP. The volume of production is the value of GDP, and change in production from the previous year is the change in GDP. The value of GDP or the volume of production is used to calculate the GDP per capita figures that are used in international comparisons: this is computed by dividing GDP by the country's total population. Change in GDP volume, then, is used to describe the rate of economic growth - when estimates are published on the economic growth rate, they relate precisely to change in GDP volume.

GDP can be computed in three ways, each of which gives the same result:

GDP
= output - intermediate consumption
= consumption + investment (including inventories) + exports - imports
= employees' compensation + profits (including consumption of fixed capital or depreciation) + taxes on production - subsidies on production

GDP is computed both in current prices (i.e. as they are reported in financial statements and other sources) and in fixed prices (i.e. relative to price levels at a certain base year). GDP value is expressed in current prices, but GDP volume change is computed from fixed prices, which eliminates the impact of inflation.

Examples