GROSS DOMESTIC PRODUCT (GDP) is a monetary measure of the market
value of all final goods and services produced in a period (quarterly
or yearly) of time . Nominal GDP estimates are commonly used to
determine the economic performance of a whole country or region, and
to make international comparisons. Nominal
GDP per capita
* 1 Definition * 2 History
* 3 Determining gross domestic product (GDP)
* 3.1 Production approach * 3.2 Income approach
* 3.3 Expenditure approach
* 3.3.1 Components of GDP by expenditure
* 4 GDP vs GNI
* 4.1 International standards * 4.2 National measurement
* 5 Nominal GDP and adjustments to GDP * 6 Cross-border comparison and purchasing power parity * 7 Standard of living and GDP: Wealth distribution and externalities
* 8 Limitations and criticisms
* 8.1 Limitations at introduction * 8.2 Further criticisms * 8.3 Proposals to overcome GDP limitations
* 9 Lists of countries by their GDP * 10 See also * 11 Notes and references * 12 Further reading
* 13 External links
* 13.1 Global * 13.2 Data * 13.3 Articles and books
Total GDP can also be broken down into the contribution of each industry or sector of the economy. The ratio of GDP to the total population of the region is the per capita GDP and the same is called Mean Standard of Living. GDP is considered the "world's most powerful statistical indicator of national development and progress" .
William Petty came up with a basic concept of GDP to defend landlords
against unfair taxation during warfare between the Dutch and the
English between 1652 and 1674.
Charles Davenant developed the method
further in 1695. The modern 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
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."
DETERMINING GROSS DOMESTIC PRODUCT (GDP)
A supply and demand diagram, illustrating the effects of an increase in demand .
* History * Types * Classification
* History of economics * Economic history (academic study) * Schools of economics
* Concepts * Theory * Techniques
* Economists * Publications (journals )
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* v * t * e
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 speculated 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.
This approach mirrors the
* Estimate the gross value of domestic output out of the many various economic activities; * Determine the , 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 = 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 inventory.
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 GVA at factor cost. Adding indirect tax minus subsidies in GVA at factor cost gives the "GVA at producer prices".
List of countries by GDP (PPP) per capita
> $64,000 $32,000 – 64,000 $16,000 – 32,000 $8,000 – 16,000 $4,000 – 8,000 $2,000 – 4,000 $1,000 – 2,000 $500 – 1,000 < $500 unavailable
U.S GDP computed on the income basis
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: GDP = compensation of employees + gross operating surplus + gross mixed income + taxes less subsidies on production and imports GDP = COE + GOS + GMI + TP & M – SP 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
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.
Market goods which are produced are purchased by someone. In the case where a good is produced and unsold, the standard accounting convention is that the producer has bought the good from themselves. Therefore, measuring the total expenditure used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP.
Components Of GDP By Expenditure
U.S. GDP computed on the expenditure basis.
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:
* C (CONSUMPTION) is normally the largest GDP component in the economy, consisting of private expenditures in the economy (household final consumption expenditure ). These personal expenditures fall under one of the following categories: durable goods , nondurable goods, and services. Examples include food, rent, jewelry, gasoline, and medical expenses, but not the purchase of new housing. * I (INVESTMENT) includes, for instance, business investment in equipment, but does not include exchanges of existing assets. Examples include construction of a new mine , purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in investment. In contrast to its colloquial meaning, "investment" in GDP does not mean purchases of financial products . Buying financial products is classed as 'saving ', as opposed to investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or stocks is a swapping of deeds , a transfer of claims on future production, not directly an expenditure on products. * G (GOVERNMENT SPENDING) is the sum of government expenditures on final goods and services. It includes salaries of public servants , purchases of weapons for the military and any investment expenditure by a government. It does not include any transfer payments , such as social security or unemployment benefits . * X (EXPORTS) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added. * M (IMPORTS) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.
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 ."
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.
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 .
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
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.
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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
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 PURCHASING POWER PARITY
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.
* CURRENT CURRENCY EXCHANGE RATE is the exchange rate in the
international foreign exchange market .
* PURCHASING POWER PARITY EXCHANGE RATE is the exchange rate based
on the purchasing power parity (PPP) of a currency relative to a
selected standard (usually the
United States dollar
The ranking of countries may differ significantly based on which method is used.
* The current exchange rate method converts the value of goods and services using global currency exchange rates . The method can offer better indications of a country's international purchasing power. For instance, if 10% of GDP is being spent on buying hi-tech foreign arms , the number of weapons purchased is entirely governed by current exchange rates, since arms are a traded product bought on the international market. There is no meaningful 'local' price distinct from the international price for high technology goods. The PPP method of GDP conversion is more relevant to non-traded goods and services. In the above example if hi-tech weapons are to be produced internally their amount will be governed by GDP(PPP) rather than nominal GDP.
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 .
STANDARD OF LIVING AND GDP: WEALTH DISTRIBUTION AND EXTERNALITIES
GDP per capita
The major advantage of
GDP per capita
GDP does not include several factors that influence the standard of living. In particular, it fails to account for:
* EXTERNALITIES –
It can be argued that
GDP per capita
LIMITATIONS AND CRITICISMS
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LIMITATIONS AT INTRODUCTION
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.
Ever since the development of GDP, multiple observers have pointed out limitations of using GDP as the overarching measure of economic and social progress.
Many environmentalists argue that GDP is a poor measure of social progress because it does not take into account harm to the environment .
Although a high or rising level of GDP is often associated with increased economic and social progress within a country, a number of scholars have pointed out that this does not necessarily play out in many instances. For example, Jean Drèze and Amartya Sen have pointed out that an increase in GDP or in GDP growth does not necessarily lead to a higher standard of living, particularly in areas such as healthcare and education. Another important area that does not necessarily improve along with GDP is political liberty, which is most notable in China, where GDP growth is strong yet political liberties are heavily restricted.
GDP does not account for the distribution of income among the
residents of a country, because GDP is merely an aggregate measure. An
economy may be highly developed or growing rapidly, but also contain a
wide gap between the rich and the poor in a society. These
inequalities often occur on the lines of race, ethnicity, gender,
religion, or other minority status within countries. This can lead to
misleading characterizations of economic well-being if the income
distribution is heavily skewed toward the high end, as the poorer
residents will not directly benefit from the overall level of wealth
and income generated in their country. Even
GDP per capita
GDP does not take into account the value of household and other unpaid work . Some, including Martha Nussbaum , argue that this value should be included in measuring GDP, as household labor is largely a substitute for goods and services that would otherwise be purchased for value. Even under conservative estimates, the value of unpaid labor in Australia has been calculated to be over 50% of the country's GDP. A later study analyzed this value in other countries, with results ranging from a low of about 15% in Canada (using conservative estimates) to high of nearly 70% in the United Kingdom (using more liberal estimates). For the United States, the value was estimated to be between about 20% on the low end to nearly 50% on the high end, depending on the methodology being used. Because many public policies are shaped by GDP calculations and by the related field of national accounts , the non-inclusion of unpaid work in calculating GDP can create distortions in public policy, and some economists have advocated for changes in the way public policies are formed and implemented.
The UK's Natural Capital Committee highlighted the shortcomings of GDP in its advice to the UK Government in 2013, pointing out that GDP "focuses 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".
PROPOSALS TO OVERCOME GDP LIMITATIONS
In response to these and other limitations of using GDP, alternative approaches have emerged.
* In the 1980s,
Amartya Sen and
Martha Nussbaum developed the
capability approach , which focuses on the functional capabilities
enjoyed by people within a country, rather than the aggregate wealth
held within a country. These capabilities consist of the functions
that a person is able to achieve.
* In 1990
Mahbub ul Haq , a Pakistani Economist at the United
Nations, introduced the
Human Development Index
LISTS OF COUNTRIES BY THEIR GDP
Lists of countries by GDP
List of countries by GDP (nominal)
Annual average GDP growth
NOTES AND REFERENCES
* ^ A B "GDP (Official Exchange Rate)" (PDF).
* ^ World Bank, Statistical Manual >> National Accounts >>
GDP–final output Archived 2010-04-16 at the
* ^ HM Treasury, Background information on GDP and GDP deflator
Some of the complications involved in comparing national accounts
from different years are explained in this
* ^ http://www2.econ.iastate.edu/classes/econ355/choi/gdp.htm * ^ "How Real GDP per Capita Affects the Standard of Living". Study.com. * ^ Simon Kuznets. "How To Judge Quality". The New Republic, October 20, 1962 * ^ The Virtues of Ignoring GDP http://www.thebrokeronline.eu/Articles/The-virtues-of-ignoring-GDP * ^ The Rise and Fall of G.D.P. https://www.nytimes.com/2010/05/16/magazine/16GDP-t.html?pagewanted=all * ^ Drèze, Jean; Sen, Amartya (2013). An uncertain glory India and its contradictions. Princeton: Princeton University Press. ISBN 9781400848775 . * ^ "China Country Report Freedom in the World 2012". freedomhouse.org. * ^ Nussbaum, Martha C. (2013). Creating capabilities : the human development approach. Cambridge, Mass.: Belknap Press of Harvard University Press. ISBN 0674072359 . * ^ Blades, François Lequiller, Derek (2006). Understanding national accounts (Reprint. ed.). Paris: OECD. p. 112. ISBN 978-92-64-02566-0 . * ^ "Incorporating Estimates of Household Production of Non-Market Services into International Comparisons of Material Well-Being". * ^ "National Income Accounting and Public Policy" (PDF). * ^ "National Accounts: A Practical Introduction" (PDF). * ^ Shahani, Severine Deneulin ; Lila (2009). An Introduction to the Human Development and Capability : Approach (1. ed.). London: Earthscan Ltd. ISBN 9781844078066 . * ^ " Gross National Happiness (GNH) - A New Socioeconomic Development Policy Framework - A Policy White Paper - The American Pursuit of Unhappiness - Med Jones, IIM". Iim-edu.org. 10 January 2005. * ^ Happiness Ministry in Dubai http://www.thenational.ae/opinion/comment/the-happiness-portfolio-is-no-laughing-matter Happiness Ministry in Dubai Check url= value (help ). Missing or empty title= (help ) * ^ "Harvard Kennedy School Report to US Congressman 21st Century GDP: National Indicators for a New Era" (PDF). * ^ "GDP and beyond: Measuring progress in a changing world". European Union. 2009. Retrieved 2012-02-26. * ^ "Bhutan GNH Index"
* Coyle, Diane (2014). GDP: A Brief but Affectionate History.
Princeton University Press
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