The Gross Domestic Product (GDP) is the product of several key players in the market. It can be explained graphically as GDP= C+I+G+(X-M). C stands for consumption, I investment, G is government spending, X is exported, and M is imported. The export and imports make the foreign sector. It is therefore clear that the GDP is influenced by consumers, businesses, government, and the foreign sector. If consumers decrease their level of consumption, the GDP is affected negatively, and the same applies to the other players.
All four major participants in the market cannot work effectively in the absence of one of them. For instance, the business sector is responsible for the production of goods and services which have to be consumed for production to continue. Conversely, the business sector cannot be able to meet all the costs required for production since some of them require a high start-up capitals.
Here is when the government intervenes to provide things such as infrastructure, security, among others (Kazee, 2010). In return, businesses have to give back to the government in the form of taxes. Sometimes, the government is compelled to give incentives to producers as a way of boosting their production or as a way of protecting consumers from being exploited by the producers.
Most businesses produce excess goods and services than the local consumers can consume; this requires them to source for other markets outside the country. This is done in the form of exports, where businesses sell their products in the global market. On the other hand, these businesses cannot be able to produce all the different types of products required by consumers forcing them to import from other countries. Some raw materials are also imported to facilitate production.
The major source of revenue to the government comes from taxes. There are different types of taxes charged on different kinds of people; for instance, consumers have to pay value-added tax, the business has to pay corporate tax, and importers have to pay the excise duties. The money collected is used by the government to develop the social amenities (Boettke, 2001). It is, therefore, clear that the four key players in the economy depend on each other in promoting growth and development.
The circular flows representation entails the full relations of major sectors, normally in markets, and that any alteration in any one sector may cause changes in other areas. All of the economy’s flows of monetary, trade, and industrial activities are interconnected. If one or more of the flows is misrepresented, the general performance and health of the economy may be altered. For instance, the economy’s ability to produce is calculated by the supply of its dynamic resources and the mode in which it is used (Ayal & Karras, 1998).
If the economy’s numerous sectors wish to acquire more than what the economy is capable of producing with its limited resources, the overall level of output prices are likely to rise as consumers struggle for the accessible supply of goods and services. However, this surfeit demand for output may persuade producers to step up production by using obtainable resources more intensively, by attaining new ones using their build-up financial resources, or by borrowing from the government.
The nation’s authentic capital stock rises with business investment spending. Normally, investment spending transpires in the business sector when several business firms use existing resources to produce capital goods for other businesses that, then, use them for the production of consumer goods and services.
Reference List
Ayal, Eliezer B.; Karras, G. (1998). Components of economic freedom and growth: an empirical study. The Journal of Developing Areas, Vol.32, No.3, 327-338. Publisher: Western Illinois University
Boettke, P. J. (2001). What Went Wrong with Economics? Critical Review Vol. 11, No. 1, P. 35. p. 58
Kazee, J. (2010). The roles of government in business and nation building. Web.