Economic benefit

The economic benefit is the difference between the net worth of a year with respect to the net worth of the previous year.

Economic benefit

Economic benefit is a concept that is widely extended and used in the economic sphere, both at the macroeconomic and microeconomic levels, which is related to the difference between income and costs derived from a certain economic activity.

From a broader point of view and closer to the macroeconomic vision, the economic benefit is understood as an increase in the wealth of a particular country or region, which experiences a certain level of progress that has a positive impact on its inhabitants. At this level, the most widespread form of measurement of economic benefit is the Gross Domestic Product (GDP).

The concept of economic benefit is usually related to that of creating wealth or value in a country, for example. It is also common at this level to refer to this concept as “utility” or “utilities”. In this sense, one of the clearest premises when creating companies and undertaking businesses is the search for income for the owners or shareholders and to maximize profits in the future. That is, we would be talking about the bases of the concept of business profit.

Economic benefit formula

The economic benefit reflects this change in wealth or the level of earnings in certain periods, comparing them and trying to represent if there has been some type of value creation. For this reason, a comparison or subtraction is usually made between the equity of each period to observe these possible changes:

Economic benefit = Equity (period X) – Equity (period X-1)

On the other hand, it is necessary to talk about the accounting profit : the way in which the economic profit is represented at a practical level in the profit and loss account of a company. This type of benefit reflects the difference between income and expenses for a period.

Accounting profit = Income – expenses

Difference between accounting and economic profit

The benefit that we most often refer to in business today is then calculated by finding out the difference produced by subtracting some costs from total income derived from carrying out a production of a good or service and giving it a sale on the market. In that sense, this concept is also especially present as it could not be otherwise in fields such as accounting and microeconomics.

When entering into economic operations or activities, agents (individuals, companies or even nations) assume that in order to obtain profits they will have to face significant costs or relative expenses of production and distribution characteristic of said activity. The existence of a benefit or not will depend as indicated above on whether the income obtained is greater than said costs.

The way in which companies formally reflect their profit is through the income statement , formerly known as the "profit and loss" account. It is one of the four financial statements present in a company’s accounting.

In cascade format, this account reaches the final result or profit through a breakdown of income from which expenses derived from economic activities undertaken and corresponding taxes are subtracted.