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"GDP" redirects here. For other uses, see GDP (disambiguation).
CIA World Factbook 2007 figures of total nominal GDP (top) compared to PPP-adjusted GDP (bottom).
World map showing GDP PPP Per capita.
The gross domestic product, or GDP, of a country is one of the ways of measuring the size of its economy. GDP is defined as the total market value of all final goods and services produced within a given country in a given period of time (usually a calendar year). It is also considered the sum of value added at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time, and it is given a money value.
The most common approach to measuring and understanding GDP is the expenditure method:
"Gross" means depreciation of capital stock is not subtracted. If we substitute gross investment by net investment (which is gross investment minus depreciation) in the equation above, then we obtain the formula for net domestic product. Consumption and investment in this equation are expenditure on final goods and services. The exports minus imports part of the equation (often called net exports) then adjusts this by subtracting the part of this expenditure not produced domestically (the imports), and adding back in domestic area (the exports).
Economists (since Keynes) have preferred to split the general consumption term into two parts; private consumption, and public sector (or government) spending. Two advantages of dividing total consumption this way in theoretical macroeconomics are:
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GDP can be contrasted with GNP or gross national product, which the United States used in its national accounts until 1992. The difference is that GNP includes net foreign income (the current account) rather than net exports (the balance of trade). Simplified, GNP adds net foreign investment income compared to GDP.
GDP (or GDI - Gross Domestic Income) is concerned with the region in which income is generated. It is the market value of all the output produced in a nation in one year. GDP focuses on where the output is produced rather than who produced it. GDP measures all, disregarding the firms\' nationality.
In contrast, GNP (or GNI - Gross National Income) is a measure of the value of the output produced by the "nationals" of a region. GNP focuses on who owns the production. For example, in the United States, GNP measures the value of output produced by American firms, regardless of where the firms are located.
Each of the variables C, I, G and XM (where GDP = C + I + G + (X-M) as above)
(Note: * GDP is sometimes also referred to as Y in reference to a GDP graph)
It is important to understand the meaning of each variable precisely in order to:
Examples of C, I, G, & NX: If you spend money to renovate your hotel so that occupancy rates increase, that is private investment, but if you buy shares in a consortium to do the same thing 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 the hotel is your private home your renovation spending would be measured as Consumption, but if a government agency is converting the hotel into an office for civil servants the renovation spending would be measured as part of public sector spending (G).
If the renovation involves the purchase of a chandelier from abroad, that spending would also be counted as an increase in imports, so that NX would fall and the total GDP is affected by the purchase. (This highlights the fact that GDP is intended to measure domestic production rather than total consumption or spending. Spending is really a convenient means of estimating production.)
If you are paid to manufacture the chandelier to hang in a foreign hotel the situation would be reversed, and the payment you receive would be counted in NX (positively, as an export). Again, we see that GDP is attempting to measure production through the means of expenditure; if the chandelier you produced had been bought domestically it would have been included in the GDP figures (in C or I) when purchased by a consumer or a business, but because it was exported it is necessary to \'correct\' the amount consumed domestically to give the amount produced domestically. (As in Gross Domestic Product.)
World map showing GDP real growth rates for 2007.
Calculating real prices allows economists to determine if production increased or decreased, regardless of changes in the purchasing power of the currency.
Another way of measuring GDP is to measure the total income payable in the GDP income accounts. In this situation, one will sometimes hear of Gross Domestic Income (GDI), rather than Gross Domestic Product. This should provide the same figure as the expenditure method described above. (By definition, GDI=GDP. In practice, however, measurement errors will make the two figures slightly off when reported by national statistical agencies.)
The formula for GDP measured using the income approach, called GDP(I), is:
The sum of COE, GOS and GMI is called total factor income, and 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).
Another formula can be written as this:
where R = rents
I = interests
P = profits
SA = statistical adjustments (corporate income taxes, dividends, undistributed corporate profits)
W = wages
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.
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All or part of this article may be confusing or unclear. Please help clarify the article. Suggestions may be on the talk page. (September 2007) |
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).
GDP can measure spending on all goods and services. GDP can also measure all income earned.
Net interest expense is a transfer payment in all sectors except the financial sector. Net interest expenses in the financial sector is seen as production and value added and is added to GDP.
The level of GDP in different countries may be compared by converting their value in national currency according to either
The relative ranking of countries may differ dramatically between the two approaches.
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.
World GDP per capita changed very little for most of human history before the industrial revolution. (Note the empty areas mean no data, not very low levels. There are data for the years 1, 1000, 1500, 1600, 1700, 1820, 1900, and 2003.)
GDP per capita is often used as an indicator of standard of living in an economy. While this approach has advantages, many criticisms of GDP focus on its use as a sole indicator of standard of living.
The major advantages to using GDP per capita as an indicator of standard of living are that it is measured frequently, widely and consistently; frequently in that most countries provide information on GDP on a quarterly basis (which allows a user to spot trends more quickly), widely in that some measure of GDP is available for practically every country in the world (allowing crude comparisons between the standard of living in different countries), and consistently in that the technical definitions used within GDP are relatively consistent between countries, and so there can be confidence that the same thing is being measured in each country.
The major disadvantage of using GDP as an indicator of standard of living is that it is not, strictly speaking, a measure of standard of living. GDP is intended to be a measure of particular types of economic activity within a country. Nothing about the definition of GDP suggests that it is necessarily a measure of standard of living. For instance, in an extreme example, a country which exported 100 per cent of its production and imported nothing would still have a high GDP, but a very poor standard of living.
The argument in favor of using GDP is not that it is a good indicator of standard of living, but rather that (all other things being equal) standard of living tends to increase when GDP per capita increases. This makes GDP a proxy for standard of living, rather than a direct measure of it. GDP per capita can also be seen as a proxy of labor productivity. As the productivity of the workers increases, employers must compete for them by paying higher wages. Conversely, if productivity is low, then wages must be low or the businesses will not be able to make a profit.
There are a number of controversies about this use of GDP.
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All or part of this article may be confusing or unclear. Please help clarify the article. Suggestions may be on the talk page. (September 2007) |
GDP is widely used by economists to gauge the health of an economy, as its variations are relatively quickly identified. However, its value as an indicator for the standard of living is considered to be limited. Criticisms of how the GDP is used include:
The gross national product includes air pollution and advertising for cigarettes and ambulances to clear our highways of carnage. It counts special locks for our doors and jails for the people who break them. GNP includes the destruction of the redwoods and the death of Lake Superior. It grows with the production of napalm, and missiles and nuclear warheads... it does not allow for the health of our families, the quality of their education, or the joy of their play. It is indifferent to the decency of our factories and the safety of our streets alike. It does not include the beauty of our poetry or the strength of our marriages, or the intelligence of our public debate or the integrity of our public officials. It measures everything, in short, except that which makes life worthwhile.
The second critic, Simon Kuznets the inventor of the GDP, in his very first report to the US Congress in 1934 said Simon Kuznets, 1934. "National Income, 1929-1932". 73rd US Congress, 2d session, Senate document no. 124, page 7. http://library.bea.gov/u?/NI_reports,539
:...the welfare of a nation [can] scarcely be inferred from a measure of national income...In 1962, Kuznets statedSimon Kuznets. "How To Judge Quality". The New Republic, October 20, 1962:
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.
GPI attempts to address many of the above criticisms by taking the same raw information supplied for GDP and then adjusts for income distribution, adds for the value of household and volunteer work, and subtracts for crime and pollution.
HDI uses GDP as a part of its calculation and then factors in indicators of life expectancy and education levels.
Many nations calculate a sum of all assets in a nation, but this again does not account for future obligations such as environmental degradation, asset bubbles, and debt.
Nations such as Bhutan have advocated this as a standard of living. (Bhutan claims to be the world\'s happiest nation.) It puts the well being of individuals on top of the nation\'s development agenda.
Scientists have posited a theory that uses height as a reflection of how well (or badly) a country is doing in terms of diet, wealth, quality of housing, pollution, disease, and stress. They believe that a higher average height indicates a higher standard of living. The evidence for this has been outlined in the Time Magazine article "A Tall Story for Our Time," October 14, 1996.
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