Economic well-being looks at the contribution made by people, households, businesses and communities to the economy and society. The level and growth of a country’s economic well-being can be measured using GDP, which can be calculated using the circular flow of income.
The circular flow of income (below) shows how national income can increase or decrease as a result of changes in the different flows shown in the diagram.
GDP can be calculated in three different ways from the use of the circular flow of income diagram.
The first way is known as the product method which involves adding up the value of all the goods and services produced in the country by each industry. This measures the work that is being done and the best way to measure this is to look at the work paid for. This can result in a number of problems. One would be that work is done but there is no income received, this could include parenting and looking after your own children rather than employing someone to do it for you, even though work is still being done. Another situation would be income being received but there is no work being done. For example, people on benefits, they are not working but are still receiving money. Another issue that needs to be considered is work that is being done but the state does not know about it. For example, one off type jobs such as helping a friend with house repairs or some child-minding.
The second method is known as the income method, which comprises of adding up all the incomes within the circular flow of income, including salaries, profit and interest. Although, there are some incomes that must not be included as they do not come from economic activity such as student grants and pensions.
The final method is known as the expenditure method where all the costs and spending within the diagram are added together. This includes personal spending, government spending and investment spending. The costs of stock not sold would also have to be included within this method.