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(Wikipedia) - Gross domestic product   (Redirected from GDP) "GDP" redirects here. For other uses, see GDP (disambiguation).A map of world economies by size of GDP (nominal) in $US, CIA World Factbook, 2012.

Gross domestic product (GDP) is defined by OECD as "an aggregate measure of production equal to the sum of the gross values added of all resident institutional units engaged in production (plus any taxes, and minus any subsidies, on products not included in the value of their outputs)."

GDP estimates are commonly used to measure the economic performance of a whole country or region, but can also measure the relative contribution of an industry sector. This is possible because GDP is a measure of ''value added'' rather than sales; it adds each firm''s value added (the value of its output minus the value of goods that are used up in producing it). For example, a firm buys steel and adds value to it by producing a car; double counting would occur if GDP added together the value of the steel and the value of the car. Because it is based on value added, GDP also increases when an enterprise reduces its use of materials or other resources (''intermediate consumption'') to produce the same output.

The more familiar use of GDP estimates is to calculate the growth of the economy from year to year (and recently from quarter to quarter). The pattern of GDP growth is held to indicate the success or failure of economic policy and to determine whether an economy is ''in recession''.


This section requires expansion. (March 2011)

The concept of GDP was first developed by Simon Kuznets for a US Congress report in 1934. In this report, Kuznets warned against its use as a measure of welfare (see below under limitations and criticisms). After the Bretton Woods conference in 1944, GDP became the main tool for measuring a country''s economy. At that time Gross National Product (GNP) was the preferred estimate, which differed from GDP in that it measured production by a country''s citizens at home and abroad rather than its ''resident institutional units'' (see OECD definition above). The switch to GDP came in the 1990s.

The history of the concept of GDP should be distinguished from the history of changes in ways of estimating it. The value added by firms is relatively easy to calculate from their accounts, but the value added by the public sector, by financial industries, and by intangible asset creation is more complex. These activities are increasingly important in developed economies, and the international conventions governing their estimation and their inclusion or exclusion in GDP regularly change in an attempt to keep up with industrial advances. In the words of one academic economist "The actual number for GDP is therefore the product of a vast patchwork of statistics and a complicated set of processes carried out on the raw data to fit them to the conceptual framework."

Angus Maddison calculated historical GDP figures going back to 1830 and before.

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GDP can be determined in three ways, all of which should, in principle, give the same result. They are the production (or output or value added) approach, the income approach, or the expenditure approach.

The most direct of the three is the production approach, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people''s total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors ("producers," colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers'' incomes.

Production approach

This approach mirrors the OECD definition given above.

  • Estimate the gross value of domestic output out of the many various economic activities;
  • Determine the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services.
  • Deduct intermediate consumption from gross value to obtain the gross value added.
  • Gross Value Added Structure

    Gross value added = gross value of output – value of intermediate consumption.

    Value of output = value of the total sales of goods and services plus value of changes in the inventories.

    The sum of the gross value added in the various economic activities is known as "GDP at factor cost".

    GDP at factor cost plus indirect taxes less subsidies on products = "GDP at producer price".

    For measuring output of domestic product, economic activities (i.e. industries) are classified into various sectors. After classifying economic activities, the output of each sector is calculated by any of the following two methods:

  • By multiplying the output of each sector by their respective market price and adding them together
  • By collecting data on gross sales and inventories from the records of companies and adding them together
  • The gross value of all sectors is then added to get the gross value added (GVA) at factor cost. Subtracting each sector''s intermediate consumption from gross output gives the GDP at factor cost. Adding indirect tax minus subsidies in GDP at factor cost gives the "GDP at producer prices".

    Income approachCountries by 2012 GDP (nominal) per capita.
      over $102,400   $51,200–102,400   $25,600–51,200   $12,800–25,600   $6,400–12,800   $3,200–6,400   $1,600–3,200   $800–1,600   $400–800   below $400   unavailable
    GDP (PPP) per capita (World bank, 2012).

    The second way of estimating GDP is to use "the sum of primary incomes distributed by resident producer units".

    If GDP is calculated this way it is sometimes called gross domestic income (GDI), or GDP (I). GDI should provide the same amount as the expenditure method described later. (By definition, GDI = GDP. In practice, however, measurement errors will make the two figures slightly off when reported by national statistical agencies.)

    This method measures GDP by adding incomes that firms pay households for factors of production they hire - wages for labour, interest for capital, rent for land and profits for entrepreneurship.

    The US "National Income and Expenditure Accounts" divide incomes into five categories:

  • Wages, salaries, and supplementary labour income
  • Corporate profits
  • Interest and miscellaneous investment income
  • Farmers'' incomes
  • Income from non-farm unincorporated businesses
  • These five income components sum to net domestic income at factor cost.

    Two adjustments must be made to get GDP:

  • Indirect taxes minus subsidies are added to get from factor cost to market prices.
  • Depreciation (or capital consumption allowance) is added to get from net domestic product to gross domestic product.
  • Total income can be subdivided according to various schemes, leading to various formulae for GDP measured by the income approach. A common one is:

    Nominal GDP Income Approach GDP = compensation of employees + gross operating surplus + gross mixed income + taxes less subsidies on production and imports GDP = COE + GOS + GMI + TP & M – SP & M

    The sum of COE, GOS and GMI is called total factor income; it is the income of all of the factors of production in society. It measures the value of GDP at factor (basic) prices. The difference between basic prices and final prices (those used in the expenditure calculation) is the total taxes and subsidies that the government has levied or paid on that production. So adding taxes less subsidies on production and imports converts GDP at factor cost to GDP(I).

    Total factor income is also sometimes expressed as:

    Total factor income = employee compensation + corporate profits + proprietor''s income + rental income + net interest

    Yet another formula for GDP by the income method is:

    where R : rents I : interests P : profits SA : statistical adjustments (corporate income taxes, dividends, undistributed corporate profits) W : wages.

    Expenditure approach

    The third way to estimate GDP is to calculate the sum of the final uses of goods and services (all uses except intermediate consumption) measured in purchasers'' prices.

    In economics, most things produced are produced for sale and then sold. Therefore, measuring the total expenditure of money used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP. Note that if you knit yourself a sweater, it is production but does not get counted as GDP because it is never sold. Sweater-knitting is a small part of the economy, but if one counts some major activities such as child-rearing (generally unpaid) as production, GDP ceases to be an accurate indicator of production. Similarly, if there is a long term shift from non-market provision of services (for example cooking, cleaning, child rearing, do-it yourself repairs) to market provision of services, then this trend toward increased market provision of services may mask a dramatic decrease in actual domestic production, resulting in overly optimistic and inflated reported GDP. This is particularly a problem for economies which have shifted from production economies to service economies.

    Components of GDP by expenditureComponents of U.S. GDPNominal GDP Expenditure Approach

    GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports (X – M).

    Y = C + I + G + (X − M)

    Here is a description of each GDP component:

    A fully equivalent definition is that GDP (Y) is the sum of final consumption expenditure (FCE), gross capital formation (GCF), and net exports (X – M).

    Y = FCE + GCF+ (X − M)

    FCE can then be further broken down by three sectors (households, governments and non-profit institutions serving households) and GCF by five sectors (non-financial corporations, financial corporations, households, governments and non-profit institutions serving households). The advantage of this second definition is that expenditure is systematically broken down, firstly, by type of final use (final consumption or capital formation) and, secondly, by sectors making the expenditure, whereas the first definition partly follows a mixed delimitation concept by type of final use and sector.

    Note that C, G, and I are expenditures on final goods and services; expenditures on intermediate goods and services do not count. (Intermediate goods and services are those used by businesses to produce other goods and services within the accounting year. )

    According to the U.S. Bureau of Economic Analysis, which is responsible for calculating the national accounts in the United States, "In general, the source data for the expenditures components are considered more reliable than those for the income components ."

    Examples of GDP component variables

    C, I, G, and NX(net exports): If a person spends money to renovate a hotel to increase occupancy rates, the spending represents private investment, but if he buys shares in a consortium to execute the renovation, it is saving. The former is included when measuring GDP (in I), the latter is not. However, when the consortium conducted its own expenditure on renovation, that expenditure would be included in GDP.

    If a hotel is a private home, spending for renovation would be measured as consumption, but if a government agency converts the hotel into an office for civil servants, the spending would be included in the public sector spending, or G.

    If the renovation involves the purchase of a chandelier from abroad, that spending would be counted as C, G, or I (depending on whether a private individual, the government, or a business is doing the renovation), but then counted again as an import and subtracted from the GDP so that GDP counts only goods produced within the country.

    If a domestic producer is paid to make the chandelier for a foreign hotel, the payment would not be counted as C, G, or I, but would be counted as an export.

    GDP real growth rates for 2010.

    A "production boundary" delimits what will be counted as GDP.

    "One of the fundamental questions that must be addressed in preparing the national economic accounts is how to define the production boundary–that is, what parts of the myriad human activities are to be included in or excluded from the measure of the economic production."

    All output for market is at least in theory included within the boundary. Market output is defined as that which is sold for "economically significant" prices; economically significant prices are "prices which have a significant influence on the amounts producers are willing to supply and purchasers wish to buy." An exception is that illegal goods and services are often excluded even if they are sold at economically significant prices (Australia and the United States exclude them).

    This leaves non-market output. It is partly excluded and partly included. First, "natural processes without human involvement or direction" are excluded. Also, there must be a person or institution that owns or is entitled to compensation for the product. An example of what is included and excluded by these criteria is given by the United States'' national accounts agency: "the growth of trees in an uncultivated forest is not included in production, but the harvesting of the trees from that forest is included."

    Within the limits so far described, the boundary is further constricted by "functional considerations." The Australian Bureau for Statistics explains this: "The national accounts are primarily constructed to assist governments and others to make market-based macroeconomic policy decisions, including analysis of markets and factors affecting market performance, such as inflation and unemployment." Consequently, production that is, according to them, "relatively independent and isolated from markets," or "difficult to value in an economically meaningful way" is excluded. Thus excluded are services provided by people to members of their own families free of charge, such as child rearing, meal preparation, cleaning, transportation, entertainment of family members, emotional support, care of the elderly. Most other production for own (or one''s family''s) use is also excluded, with two notable exceptions which are given in the list later in this section.

    Non-market outputs that are included within the boundary are listed below. Since, by definition, they do not have a market price, the compilers of GDP must impute a value to them, usually either the cost of the goods and services used to produce them, or the value of a similar item that is sold on the market.

    GDP vs GNI

    GDP can be contrasted with gross national product (GNP) or, as it is now known, gross national income (GNI). The difference is that GDP defines its scope according to location, while GNI defines its scope according to ownership. In a global context, world GDP and world GNI are, therefore, equivalent terms.

    GDP is product produced within a country''s borders; GNI is product produced by enterprises owned by a country''s citizens. The two would be the same if all of the productive enterprises in a country were owned by its own citizens, and those citizens did not own productive enterprises in any other countries. In practice, however, foreign ownership makes GDP and GNI non-identical. Production within a country''s borders, but by an enterprise owned by somebody outside the country, counts as part of its GDP but not its GNI; on the other hand, production by an enterprise located outside the country, but owned by one of its citizens, counts as part of its GNI but not its GDP.

    For example, the GNI of the USA is the value of output produced by American-owned firms, regardless of where the firms are located. Similarly, if a country becomes increasingly in debt, and spends large amounts of income servicing this debt this will be reflected in a decreased GNI but not a decreased GDP. Similarly, if a country sells off its resources to entities outside their country this will also be reflected over time in decreased GNI, but not decreased GDP. This would make the use of GDP more attractive for politicians in countries with increasing national debt and decreasing assets.

    Gross national income (GNI) equals GDP plus income receipts from the rest of the world minus income payments to the rest of the world.

    Structure of Nominal GNI

    In 1991, the United States switched from using GNP to using GDP as its primary measure of production. The relationship between United States GDP and GNP is shown in table 1.7.5 of the National Income and Product Accounts.

    International standards

    The international standard for measuring GDP is contained in the book System of National Accounts (1993), which was prepared by representatives of the International Monetary Fund, European Union, Organization for Economic Co-operation and Development, United Nations and World Bank. The publication is normally referred to as SNA93 to distinguish it from the previous edition published in 1968 (called SNA68)

    SNA93 provides a set of rules and procedures for the measurement of national accounts. The standards are designed to be flexible, to allow for differences in local statistical needs and conditions.

    This section requires expansion. (August 2009)
    National measurement

    Within each country GDP is normally measured by a national government statistical agency, as private sector organizations normally do not have access to the information required (especially information on expenditure and production by governments).

    Main article: National agencies responsible for GDP measurement Interest rates

    Net interest expense is a transfer payment in all sectors except the financial sector. Net interest expenses in the financial sector are seen as production and value added and are added to GDP.

    Nominal GDP and adjustments to GDP

    The raw GDP figure as given by the equations above is called the nominal, historical, or current, GDP. When one compares GDP figures from one year to another, it is desirable to compensate for changes in the value of money – i.e., for the effects of inflation or deflation. To make it more meaningful for year-to-year comparisons, it may be multiplied by the ratio between the value of money in the year the GDP was measured and the value of money in a base year.

    For example, suppose a country''s GDP in 1990 was $100 million and its GDP in 2000 was $300 million. Suppose also that inflation had halved the value of its currency over that period. To meaningfully compare its GDP in 2000 to its GDP in 1990, we could multiply the GDP in 2000 by one-half, to make it relative to 1990 as a base year. The result would be that the GDP in 2000 equals $300 million × one-half = $150 million, in 1990 monetary terms. We would see that the country''s GDP had realistically increased 50 percent over that period, not 200 percent, as it might appear from the raw GDP data. The GDP adjusted for changes in money value in this way is called the real, or constant, GDP.

    The factor used to convert GDP from current to constant values in this way is called the GDP deflator. Unlike consumer price index, which measures inflation or deflation in the price of household consumer goods, the GDP deflator measures changes in the prices of all domestically produced goods and services in an economy including investment goods and government services, as well as household consumption goods.

    Constant-GDP figures allow us to calculate a GDP growth rate, which indicates how much a country''s production has increased (or decreased, if the growth rate is negative) compared to the previous year.

    Real GDP growth rate for year n = / (Real GDP in year n − 1)

    Another thing that it may be desirable to account for is population growth. If a country''s GDP doubled over a certain period, but its population tripled, the increase in GDP may not mean that the standard of living increased for the country''s residents; the average person in the country is producing less than they were before. Per-capita GDP is a measure to account for population growth.

    Cross-border comparison and PPP

    The level of GDP in different countries may be compared by converting their value in national currency according to either the current currency exchange rate, or the purchasing power parity exchange rate.

    The ranking of countries may differ significantly based on which method is used.

    There is a clear pattern of the purchasing power parity method decreasing the disparity in GDP between high and low income (GDP) countries, as compared to the current exchange rate method. This finding is called the Penn effect.

    For more information, see Measures of national income and output.

    Per unit GDP

    GDP is an aggregate figure which does not consider differing sizes of nations. Therefore, GDP can be stated as GDP per capita (per person) in which total GDP is divided by the resident population on a given date, GDP per citizen where total GDP is divided by the numbers of citizens residing in the country on a given date, and less commonly GDP per unit of a resource input, such as GDP per GJ of energy or Gross domestic product per barrel. GDP per citizen in the above case is pretty similar to GDP per capita in most nations, however, in nations with very high proportions of temporary foreign workers like in Persian Gulf nations, the two figures can be vastly different.

    GDP per capita (current USD) 2008 2009 2010 2011 2012
     United States of America 46,760 45,305 46,612 48,112 49,641
     United Kingdom 43,147 35,331 36,238 38,974 39,090

    Source:Helgi Library, World Bank

    Standard of living and GDP

    GDP per capita is not a measurement of the standard of living in an economy; however, it is often used as such an indicator, on the rationale that all citizens would benefit from their country''s increased economic production. Similarly, GDP per capita is not a measure of personal income. GDP may increase while real incomes for the majority decline. The major advantage of GDP per capita as an indicator of standard of living is that it is measured frequently, widely, and consistently. It is measured frequently in that most countries provide information on GDP on a quarterly basis, allowing trends to be seen quickly. It is measured widely in that some measure of GDP is available for almost every country in the world, allowing inter-country comparisons. It is measured consistently in that the technical definition of GDP is relatively consistent among countries.

    The major disadvantage is that it is not a measure of standard of living. GDP is intended to be a measure of total national economic activity—a separate concept.

    The argument for using GDP as a standard-of-living proxy is not that it is a good indicator of the absolute level of standard of living, but that living standards tend to move with per-capita GDP, so that changes in living standards are readily detected through changes in GDP.


    GDP is widely used by economists to gauge economic recession and recovery and an economy''s general monetary ability to address externalities. It is not meant to measure externalities. It serves as a general metric for a nominal monetary standard of living and is not adjusted for costs of living within a region. GDP is a neutral measure which merely shows an economy''s general ability to pay for externalities such as social and environmental concerns. Examples of externalities include:

    Limitations and criticisms
    This section requires expansion. (February 2012)

    Simon Kuznets, the economist who developed the first comprehensive set of measures of national income, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses of National Income Measurements":

    The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification.

    All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.

    In 1962, Kuznets stated:

    Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.

    Austrian School economist Frank Shostak has argued that GDP is an empty abstraction devoid of any link to the real world, and, therefore, has little or no value in economic analysis. Says Shostak:

    The GDP framework cannot tell us whether final goods and services that were produced during a particular period of time are a reflection of real wealth expansion, or a reflection of capital consumption. For instance, if a government embarks on the building of a pyramid, which adds absolutely nothing to the well-being of individuals, the GDP framework will regard this as economic growth. In reality, however, the building of the pyramid will divert real funding from wealth-generating activities, thereby stifling the production of wealth.

    So what are we to make out of the periodical pronouncements that the economy, as depicted by real GDP, grew by a particular percentage? All we can say is that this percentage has nothing to do with real economic growth and that it most likely mirrors the pace of monetary pumping. We can thus conclude that the GDP framework is an empty abstraction devoid of any link to the real world.

    The UK''s Natural Capital Committee highlighted the shortcomings of GDP in its advice to the UK Government in 2013, pointing out that GDP "focusses on flows, not stocks. As a result an economy can run down its assets yet, at the same time, record high levels of GDP growth, until a point is reached where the depleted assets act as a check on future growth". They then went on to say that "it is apparent that the recorded GDP growth rate overstates the sustainable growth rate. Broader measures of wellbeing and wealth are needed for this and there is a danger that short-term decisions based solely on what is currently measured by national accounts may prove to be costly in the long-term".

    Many environmentalists argue that GDP is a poor measure of social progress because it does not take into account harm to the environment.

    In 1989 Herman Daly and John B. Cobb developed the Index of Sustainable Economic Welfare (ISEW), which they proposed as a more valid measure of socio-economic progress, by taking into account various other factors such as consumption of non-renewable resources and degradation of the environment.

    India and China have the largest population in the world and hence has the greatest potential in productivity due to the fact that the value of a product is measured as the value of service that can be obtained by the holder in exchange for that product. ( Units per man hour)

    Lists of countries by their GDP List of newer approaches to the measurement of (economic) progress

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    See Also:Gross domestic product

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