Gross domestic product
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
5 National measurement
6 Nominal GDP and adjustments to GDP
7 Cross-border comparison and purchasing power parity
8 Standard of living and GDP:
9.1 Limitations at introduction 9.2 Further criticisms 9.3 Proposals to overcome GDP limitations
10 Lists of countries by their GDP 11 See also 12 Notes and references 13 Further reading 14 External links
14.1 Global 14.2 Data 14.3 Articles and books
A supply and demand diagram, illustrating the effects of an increase in demand
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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 speculated
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
This approach mirrors the
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 = 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". Income approach 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 is equal to 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 & M
Compensation of employees (COE) measures the total remuneration to employees for work done. It includes wages and salaries, as well as employer contributions to social security and other such programs. Gross operating surplus (GOS) is the surplus due to owners of incorporated businesses. Often called profits, although only a subset of total costs are subtracted from gross output to calculate GOS. Gross mixed income (GMI) is the same measure as GOS, but for unincorporated businesses. This often includes most small businesses.
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
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. 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 [see income method, below]." 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. 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. National measurement Main article: National agencies responsible for GDP measurement
List of countries by GDP (PPP) per capita
Countries by 2015 GDP (nominal) 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
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). 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) − (Real GDP in year n − 1)] / (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
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:
It can be argued that
GDP per capita
This section needs expansion. You can help by adding to it. (February 2012)
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
Many environmentalists argue that GDP is a poor measure of social
progress because it does not take into account harm to the
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
In the 1980s,
Lists of countries by their GDP
Lists of countries by GDP List of countries by GDP (nominal), (per capita) List of continents by GDP (nominal) List of countries by GDP (PPP), (per capita), (per hour) List of countries by GDP (real) growth rate, (per capita) List of countries by GDP sector composition List of IMF ranked countries by past and projected GDP (PPP), (per capita), (nominal)
Annual average GDP growth
Chained volume series
Circular flow of income
Gross regional product
Gross regional domestic product
Gross state product
Gross value added
Gross world product
List of countries by average wage
List of countries by household income
List of countries by GDP (nominal)
List of countries by GDP (nominal)
Notes and references
^ a b "GDP (Official Exchange Rate)" (PDF). World Bank. Retrieved
August 24, 2015.
^ a b c "OECD". Retrieved 14 August 2014.
^ Callen, Tim. "Gross Domestic Product: An Economy's All". IMF.
Retrieved 3 June 2016.
^ Dawson, Graham (2006).
Coyle, Diane (2014). GDP: A Brief but Affectionate History. Princeton, NJ: Princeton University Press. ISBN 978-0-691-15679-8. Australian Bureau for Statistics, Australian National Accounts: Concepts, Sources and Methods, 2000. Retrieved November 2009. In depth explanations of how GDP and other national accounts items are determined. United States Department of Commerce, Bureau of Economic Analysis, "Concepts and Methods of the United States National Income and Product Accounts" (PDF). . Retrieved November 2009. In depth explanations of how GDP and other national accounts items are determined.
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Australian Bureau of Statistics Manual on GDP measurement
Bureau of Economic Analysis: Official United States GDP data
Historicalstatistics.org: Links to historical statistics on GDP for
different countries and regions, maintained by the Department of
Economic History at Stockholm University.
Articles and books
Library resources about Gross domestic product
Resources in your library
Gross Domestic Product: An Economy’s All, International Monetary
Stiglitz JE, Sen A, Fitoussi J-P. Mismeasuring our Lives: Why GDP
Doesn't Add Up, New Press, New York, 2010
What's wrong with the GDP?
Whether output and
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