The
gross domestic product (
GDP) or
gross domestic income (
GDI) is a basic measure of a country's economic performance and is the market value of all final goods and services made within the borders of a country in a year . It is a fundamental measurement of production and is very often positively correlated with the
standard of livingStandard of living is generally measured by standards such as real income per person and poverty rate. Other measures such as access and quality of health care, income growth inequality and educational standards are also used. Examples are access to certain goods , or measures of health such as...
, though its use as a stand-in for measuring progress in increasing the standard of living has come under increasing criticism and many countries are actively exploring alternative measures. GDP can be defined in three ways, all of which are conceptually identical. First, it is equal to the total expenditures for all
final goodIn economics final goods are goods that are ultimately consumed rather than used in the production of another good. For example, a car sold to a consumer is a final good; the components such as tires sold to the car manufacturer are not; they are intermediate goods used to make the final good.When...
s and services produced within the country in a stipulated period of time (usually a 365-day
yearA year is the amount of time it takes the Earth to make one revolution around the Sun...
). Second, it is equal to the sum of the
value addedIn economics, the difference between cost of materials and labor to produce a product, and the sale price of a product is the value added. In national accounts used in macroeconomics, it refers to the contribution of the factors of production, i.e., land, labor, and capital goods, to raising the...
at every stage of production (the intermediate stages) by all the industries within a country, plus taxes less subsidies on products, in the period. Third, it is equal to the sum of the income generated by production in the country in the period—that is,
compensation of employeesCompensation of employees is a statistical term used in national accounts, Balance of Payments statistics and sometimes in corporate accounts as well...
,
taxes on production and importsThe term indirect tax has more than one meaning.In the colloquial sense, an indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax...
less
subsidiesA subsidy is a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or simply to encourage it to hire more...
, and
gross operating surplusGross operating surplus 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 the GOS...
(or profits).
The most common approach to measuring and quantifying GDP is the expenditure method:
- GDP = private consumption
Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally consumption is defined by opposition to production. But the precise definition can vary because different schools of economists define production quite differently...
+ gross investment + government spendingGovernment spending or government expenditure is classified by economists into three main types. Government purchases of goods and services for current use are classed as government consumption. Government purchases of goods and services intended to create future benefits, such as infrastructure...
+ (exportIn economics, an export is any good or commodity, transported from one country to another country in a legitimate fashion, typically for use in trade. Export goods or services are provided to foreign consumers by domestic producers. Export is an important part of international trade...
s − importAn import is any good or service brought in from one country to another country in a legitimate fashion, typically for use in trade. It is a good that is brought in from another country for sale. Import goods or services are provided to domestic consumers by foreign producers...
s), or,
GDP = C + I + G + (X − M).
"Gross" means that
depreciationDepreciation is a term used in accounting, economics and finance to spread the cost of an asset over the span of several years.In simple words we can say that depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or...
of capital stock is
not subtracted out of GDP. If net investment (which is gross investment minus depreciation) is substituted for gross investment in the equation above, then the formula for
net domestic productThe net domestic product equals the gross domestic product minus depreciation on a country's capital goods.Net domestic product accounts for capital that has been consumed over the year in the form of housing, vehicle, or machinery deterioration...
is obtained. 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) adjusts this by subtracting the part of this expenditure not produced domestically (the imports), and adding back in domestic area (the exports).
Economists (since
KeynesJohn Maynard Keynes, 1st Baron Keynes, CB was a British economist whose ideas have been a central influence on modern macroeconomics, both in theory and practice...
) have preferred to split the general consumption term into two parts; private consumption, and
public sectorThe public sector is a part of the state that deals with the delivery of goods and services by and for the government, whether national, regional or local/municipal....
(or government) spending. Two advantages of dividing total consumption this way in theoretical
macroeconomicsMacroeconomics is a branch of economics that deals with the performance, structure, and behavior of a national or regional economy as a whole. Along with microeconomics, macroeconomics is one of the two most general fields in economics. It is the study of the behavior and decision-making of entire...
are:
- Private consumption is a central concern of welfare economics
Welfare economics is a branch of economics that uses microeconomic techniques to simultaneously determine allocative efficiency within an economy and the income distribution associated with it. It analyzes social welfare, however measured, in terms of economic activities of the individuals that...
. The private investment and trade portions of the economy are ultimately directed (in mainstream economic models) to increases in long-term private consumption.
- If separated from endogenous
In an economic model, a parameter or variable is said to be endogenous when there is a correlation between the parameter or variable and the error term...
private consumption, government consumption can be treated as exogenous, so that different government spending levels can be considered within a meaningful macroeconomic framework.
Components of GDP
GDP (Y) is a sum of
Consumption (C),
Investment (I),
Government Spending (G) and
Net Exports (X - M). This results in the common macroeconomics formula
Y =
C +
I +
G +
(X − M). Here is a description of each GDP component:
- C (consumption) is normally the largest GDP component, consisting of private household expenditures in the economy. These personal expenditures falls under one of the following categories: durable goods, non-durable goods, and services. Examples include food, rent, jewelry, gasoline, and medical expenses but does not include the purchase of new housing.
- I (investment) includes business investment in plant, equipment, inventory, and structures, and does not include exchanges of existing assets. Examples include construction of a new mine
Mining is the extraction of valuable minerals or other geological materials from the earth, usually from an ore body, vein or seam. Materials recovered by mining include base metals, precious metals, iron, uranium, coal, diamonds, limestone, oil shale, rock salt and potash...
, 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 productsIn economics, a financial market is a mechanism that allows people to easily buy and sell financial securities , commodities , and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis.Financial markets have evolved significantly over...
. Buying financial products is classed as 'saving', as opposed to investment. The distinction is (in theory) clear: if money is converted into goods or services, it is investment; but, if you buy a bondIn finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest and/or to repay the principal at a later date, termed maturity...
or a share of stockIn the investment world, a share of stock represents a share of ownership in a corporation ....
, this transfer paymentIn economics, a transfer payment is a redistribution of income in the market system. These payments are considered to be nonexhaustive because they do not directly absorb resources or create output...
is excluded from the GDP sum. That is because the stocks and bonds affect the financial capital which in turn affects the production and sales which in turn affects the investments. So stocks and bonds indirectly affect the GDP. Although such purchases would be called investments in normal speech, from the total-economy point of view, this is simply swapping of deedA deed is a signed and usually sealed legal instrument in writing used to grant a right. Deeds have historically been part of the broader category of instruments under seal, requiring only the affixing of a common seal to render them valid. Today, however, deeds are instruments in solemn form...
s, and not part of realIn economics, nominal value refers to any price or value expressed in money of the day, as opposed to real value, which adjusts for the effect of inflation. Examples include a bundle of commodities, such as gross domestic product, and income. For a series of nominal values in successive years,...
production or the GDP formula.
- G (government spending) is the sum of government expenditures
Government spending or government expenditure is classified by economists into three main types. Government purchases of goods and services for current use are classed as government consumption. Government purchases of goods and services intended to create future benefits, such as infrastructure...
on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer paymentIn economics, a transfer payment is a redistribution of income in the market system. These payments are considered to be nonexhaustive because they do not directly absorb resources or create output...
s, such as social securitySocial security is primarily a social insurance program providing social protection, or protection against socially recognized conditions, including poverty, old age, disability, unemployment and others. Social security may refer to:...
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
Supply and demand is an economic model based on price, utility and quantity in a market. It concludes that in a competitive market, price will function to equalize the quantity demanded by consumers, and the quantity supplied by producers, resulting in an economic equilibrium of price and...
as domestic.
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 buy 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
chandelierA chandelier is a branched decorative ceiling-mounted light fixture with two or more arms bearing lights. Chandeliers are often ornate, containing dozens of lamps and complex arrays of glass or crystal prisms to illuminate a room with refracted light....
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. Such notion highlights the fact that GDP is intended to measure domestic
productionIn microeconomics, industrial organization is the field which describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
rather than total consumption or spending. Spending provides a convenient means of estimating production.
If a domestic producer is paid to make the chandelier for a foreign hotel, the situation would be reversed, and the payment would be counted in
NX (positively, as an export). Again, GDP measures production through the means of expenditure. If the chandelier 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 assess the domestic production, as in gross domestic
product.
Types of GDP and GDP growth
- Current GDP is GDP expressed in the current prices of the period being measured
- Nominal GDP is the production of goods and services valued at current prices.
- Real GDP is the production of goods and services valued at a constant price level (ie: not affected by changes in the value of money)
Calculating the real GDP growth allows economists to determine if production increased or decreased, regardless of changes in the purchasing power of the currency.
GDP income account
Another way of measuring GDP is to measure the total income payable in the GDP income accounts. In such situation, gross domestic income (GDI) may be used rather than gross domestic product. GDI should provide the same amount 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:
- GDP = compensation of employees
Compensation of employees is a statistical term used in national accounts, Balance of Payments statistics and sometimes in corporate accounts as well...
+ gross operating surplusGross operating surplus 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 the GOS...
+ gross mixed income + taxes, less subsidies on production and imports
- 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
Social security is primarily a social insurance program providing social protection, or protection against socially recognized conditions, including poverty, old age, disability, unemployment and others. Social security may refer to:...
and other such programs.
- Gross operating surplus (GOS) is the surplus due to owners of incorporated businesses. Often called profits
Accounting profit is the difference between price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.A key difficulty in measuring profit is in defining costs...
, 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, 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 costFactor cost or national income by type of income is a measure of national income or output based on the cost of factors of production, instead of market prices. This allows the effect of any subsidy or indirect tax to be removed from the final measure....
to GDP(I).
Another formula can be written as follows:
- GDP = R + I + P + SA + W
where R : rents
I : interests
P : profits
SA : statistical adjustments (corporate income taxes, dividends, undistributed corporate profits)
W : wages
GDP vs GNP
GDP can be contrasted with
gross national productA variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product , gross national product , and net national income ....
(
GNP, or
gross national incomeGross national income ' comprises the total value produced within a country , together with its income received from other countries , less similar payments made to other countries....
,
GNI), which the
United StatesThe United States of America is a federal constitutional republic comprising fifty states and a federal district...
used in its national accounts until 1992. The difference is that GNP includes net foreign income (the current account) rather than net exports and imports (the
balance of tradeThe balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports...
). Put simply, GNP adds net foreign investment income, unlike GDP.
United States GDP, GNP and GNI (gross national income) can be compared at
EconStats http://www.econstats.com/gdp/gdp__q10.htm.
GDP is concerned with the region in which income is generated. It is the
market valueMarket value is the price at which an asset would trade in a competitive Walrasian auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may differ in some...
of all the output produced in a
nationA nation is a body of people who share a real or imagined common history, culture, language or ethnic origin. The development and conceptualization of the nation is closely related to the development of modern industrial states and nationalist movements in Europe in the 18th and 19th centuries,...
in one year. GDP focuses on where the output is produced rather than who produced it. GDP measures all domestic production, disregarding the producing entities' nationalities.
In contrast, GNP is a measure of the value of the output produced by the "
nationalsNationality is the relationship between a person and their state of origin, culture, association, affiliation and/or loyalty. Nationality affords the state jurisdiction over the person and affords the person the protection of the state....
" 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. Year-over-year real GNP growth in the year 2007 was 3.2%.
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 FundThe International Monetary Fund is an international organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rates and the balance of payments...
,
European UnionThe European Union is an economic and political union of 27 Member States, located primarily in Europe. Committed to regional integration, the EU was established by the Treaty of Maastricht on 1 November 1993 upon the foundations of the pre-existing European Economic Community...
, Organization for Economic Co-operation and Development,
United NationsThe United Nations is an international organization whose stated aims are facilitating cooperation in international law, international security, economic development, social progress, human rights, and the achieving of world peace...
and
World BankThe World Bank is an international financial institution that provides leveraged loans to poorer countries for capital programs, tied to neoliberal market restructurings...
. 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
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).
Interest rates
Net interest expense is a
transfer paymentIn economics, a transfer payment is a redistribution of income in the market system. These payments are considered to be nonexhaustive because they do not directly absorb resources or create output...
in all sectors except the financial sector. Net interest expenses in the financial sector are seen as
productionMass production is the production of large amounts of standardized products, including and especially on assembly lines...
and
value addedIn economics, the difference between cost of materials and labor to produce a product, and the sale price of a product is the value added. In national accounts used in macroeconomics, it refers to the contribution of the factors of production, i.e., land, labor, and capital goods, to raising the...
and are added to GDP.
Three approaches to measuring GDP (macroeconomics)
1. Expenditures approach:
The total spending on all final goods and services (Consumption goods and services (C) + Gross Investments (I) + Government Purchases (G) + (Exports (X) - Imports (M))
GDP = C + I + G + (X-M)
2. Income approach (NI = National Income)
Using the income approach, GDP is calculated by adding up the factor incomes to the factors of production in the society. These include
Employee compensation + Corporate profits + Proprietor's Income + Rental income + Net Interest
3. Value added approach:
The value of sales of goods - purchase of intermediate goods to produce the goods sold.
Cross-border comparison
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 purchase power parity exchange rate.
- Current currency exchange rate is the exchange rate in the international currency market.
- Purchasing power parity exchange rate is the exchange rate based on the purchasing power parity
The purchasing power parity theory uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power...
(PPP) of a currency relative to a selected standard (usually the United States dollarThe United States dollar is the unit of currency of the United States. The U.S. dollar is normally abbreviated as the dollar sign, $, or as USD or US$ to distinguish it from other dollar-denominated currencies and from others that use the $ symbol. It is divided into 100 cents .The U.S...
).
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 and relative economic strength. For instance, if 10% of GDP is being spent on buying hi-tech foreign arms
A weapon is a tool used to apply force for the purpose of hunting, attack, self-defense, or defense in combat.Weapons can be as simple as a club, or as complex as an intercontinental ballistic missile, and include those that damage individual or group morale.-Prehistoric weapons:Very simple weapon...
, 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 purchasing power parity method accounts for the relative effective domestic purchasing power of the average producer or consumer within an economy. The method can provide a better indicator of the living standards of less developed countries, because it compensates for the weakness of local currencies in the international markets. For example, India ranks 12th by nominal GDP, but fourth by PPP. The PPP method of GDP conversion is more relevant to non-traded goods and services.
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 effectThe Penn effect is the economic finding that real income ratios between high and low income countries are systematically exaggerated by GDP conversion at market exchange rates...
.
For more information, see
Measures of national income and outputA variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product , gross national product , and net national income ....
.
Standard of living and GDP
GDP per capita is not a measurement of the
standard of livingStandard of living is generally measured by standards such as real income per person and poverty rate. Other measures such as access and quality of health care, income growth inequality and educational standards are also used. Examples are access to certain goods , or measures of health such as...
in an
economyAn economic system is the system of production, distribution and consumption of goods and services of an economy. Alternatively, it is the set of principles and techniques by which problems of economics are addressed, such as the economic problem of scarcity through allocation of finite productive...
. 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 incomes for the majority of a country's citizens may even decrease or change disproportionally. For example, in the US from 1990 to 2006 the earnings (adjusted for inflation) of individual workers, in private industry and services, increased by less than 0.5% per year while GDP (adjusted for inflation)increased about 3.6% per year over the same period.
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, which allows a user to spot trends regularly. It is measured widely in that some measure of GDP is available for almost every
countryIn geography, a country is a geographical region. The term is often applied to a political division or the territory of a state, or to a smaller, or former, political division of a geographical region...
in the
worldWorld is a highly common name for the planet Earth, but it was originally used to mean the sum of human civilization living on it, specifically human experience, history, or the 'human condition' in general....
, allowing a comparison between the standard of living in different countries. It is measured consistently in that the technical definition of GDP is relatively consistent among countries.
The major disadvantage 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 the standard of living, but that, all other things being equal, the standard of living tends to increase when GDP per capita increases. As such, GDP can be a
proxyIn statistics, a proxy variable is something that is probably not in itself of any great interest, but from which a variable of interest can be obtained...
for the standard of living, rather than a direct measure. GDP per capita can also be seen as a proxy of labor
productivityProductivity is a measure of output from a production process, per unit of input. For example, labor productivity is typically measured as a ratio of output per labor-hour, an input. Productivity may be conceived of as a metric of the technical or engineering efficiency of production. As such, the...
. As the productivity of the workers increases, employers would offer higher wages to employ better workers. Conversely, if productivity is low, then wages must be low, or the businesses will not be able to make a profit.
Limitations of GDP to judge the health of an economy
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 livingStandard of living is generally measured by standards such as real income per person and poverty rate. Other measures such as access and quality of health care, income growth inequality and educational standards are also used. Examples are access to certain goods , or measures of health such as...
is considered to be limited. Not only that, but if the aim of economic activity is to produce ecologically sustainable increases in the overall human standard of living, GDP is a perverse measurement; it treats loss of ecosystem services as a benefit instead of a cost. Other criticisms of how the GDP is used include:
- Wealth distribution – GDP does not take disparity in incomes between the rich and poor into account. However, numerous Nobel-prize winning economists have disputed the importance of income inequality as a factor in improving long-term economic growth. In fact, short term increases in income inequality may even lead to long term decreases in income inequality. See income inequality metrics
The concept of inequality is distinct from that of poverty and fairness . Income inequality metrics or income distribution metrics are used by social scientists to measure the distribution of income, and economic inequality among the participants in a particular economy, such as that of a specific...
for discussion of a variety of inequality-based economic measures.
- Non-market transactions – GDP excludes activities that are not provided through the market, such as household production and volunteer or unpaid services. As a result, GDP is understated. Unpaid work conducted on Free and Open Source Software
Foss may refer toPeople*Foss , people with the last name Foss*Foss Shanahan , New Zealand diplomat*Foss Westcott , English bishopFiction*Tom Foss, fictional character from Kyle XYPlaces...
(such as LinuxLinux is a generic term referring to Unix-like computer operating systems based on the Linux kernel. Their development is one of the most prominent examples of free and open source software collaboration; typically all the underlying source code can be used, freely modified, and redistributed,...
) contribute nothing to GDP, but it was estimated that it would have cost more than a billion US dollars for a commercial company to develop. Also, if Free and Open Source Software became identical to its proprietary softwareProprietary software is any computer software with restrictions on use or private modification, or with restrictions judged to be excessive on copying or publishing of modified or unmodified versions. The term proprietary software is thus the opposite of free software, generally speaking...
counterparts, and the nation producing the propriety software stops buying proprietary software and switches to Free and Open Source Software, then the GDP of this nation would reduce, however there would be no reduction in economic production or standard of living. The work of New Zealand economist Marilyn WaringMarilyn Waring, CNZM is a New Zealand feminist, an activist for "female human rights", an author and an academic. She holds a Ph.D. in political economy. A member of the conservative National Party, she became at 22 the youngest member of the New Zealand Parliament in 1975, for Raglan...
has highlighted that if a concerted attempt to factor in unpaid work were made, then it would in part undo the injustices of unpaid (and in some cases, slave) labour, and also provide the political transparency and accountability necessary for democracy. Shedding some doubt on this claim, however, is the theory that won economist Douglass North the Nobel Prize in 1993. North argued that the creation and strengthening of the patent system, by encouraging private invention and enterprise, became the fundamental catalyst behind the Industrial Revolution in England.
- Underground economy – Official GDP estimates may not take into account the underground economy
The underground economy or black market is a market where all commerce is conducted without regard to taxation, law or regulations of trade. The term is also often known as the underdog, shadow economy, black economy, parallel economy or phantom trades.In modern societies the underground economy...
, in which transactions contributing to production, such as illegal trade and tax-avoiding activities, are unreported, causing GDP to be underestimated.
- Non-monetary economy – GDP omits economies where no money comes into play at all, resulting in inaccurate or abnormally low GDP figures. For example, in countries with major business transactions occurring informally, portions of local economy are not easily registered. Bartering may be more prominent than the use of money, even extending to services (I helped you build your house ten years ago, so now you help me).
- GDP also ignores subsistence production.
- Quality of goods – People may buy cheap, low-durability goods over and over again, or they may buy high-durability goods less often. It is possible that the monetary value of the items sold in the first case is higher than that in the second case, in which case a higher GDP is simply the result of greater inefficiency and waste.
- Quality improvements and inclusion of new products – By not adjusting for quality improvements and new products, GDP understates true economic growth. For instance, although computers today are less expensive and more powerful than computers from the past, GDP treats them as the same products by only accounting for the monetary value. The introduction of new products is also difficult to measure accurately and is not reflected in GDP despite the fact that it may increase the standard of living. For example, even the richest person from 1900 could not purchase standard products, such as antibiotics and cell phones, that an average consumer can buy today, since such modern conveniences did not exist back then.
- What is being produced – GDP counts work that produces no net change or that results from repairing harm. For example, rebuilding after a natural disaster or war may produce a considerable amount of economic activity and thus boost GDP. The economic value of health care
Health care , is the treatment and management of illness, and the preservation of health through services offered by the medical, dental, complementary and alternative medicine, pharmaceutical, clinical laboratory sciences , nursing, and allied health professions...
is another classic example—it may raise GDP if many people are sick and they are receiving expensive treatment, but it is not a desirable situation. Alternative economic measures, such as the standard of livingStandard of living is generally measured by standards such as real income per person and poverty rate. Other measures such as access and quality of health care, income growth inequality and educational standards are also used. Examples are access to certain goods , or measures of health such as...
or discretionary income per capita better measure the human utilityIn economics, utility is a measure of the relative satisfaction from, or desirability of, consumption of various goods and services. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain economic behavior in terms of attempts to increase one's utility...
of economic activity. See uneconomic growthUneconomic growth, in human development theory, welfare economics , and some forms of ecological economics, is economic growth that reflects or creates a decline in the quality of life. The concept is attributed to the economist Herman Daly, though other theorists can also be credited for the...
.
- Externalities – GDP ignores externalities or economic bads such as damage to the environment. By counting goods which increase utility but not deducting bads or accounting for the negative effects of higher production, such as more pollution, GDP is overstating economic welfare. The Genuine Progress Indicator
The genuine progress indicator is a concept in green economics and welfare economics that has been suggested to replace gross domestic product as a metric of economic growth....
is thus proposed by ecological economists and green economists as a substitute for GDP. In countries highly dependent on resource extraction or with high ecological footprints the disparities between GDP and GPI can be very large, indicating ecological overshoot. Some environmental costs, such as cleaning up oil spills are included in GDP.
- Sustainability of growth – GDP does not measure the sustainability of growth
Image:Sustainable development.svg|right|300px|thumb|Scheme of sustainable development: at the confluence of three constituent parts.poly 138 194 148 219 164 240 182 257 219 277 263 291 261 311 264 331 272 351 283 366 300 383 316 394 287 408 261 417 224 424 182 426 154 423 119 415 87 403...
. A country may achieve a temporarily high GDP by over-exploiting natural resources or by misallocating investment. For example, the large deposits of phosphateA phosphate, an inorganic chemical, is a salt of phosphoric acid. In organic chemistry, a phosphate, or organophosphate, is an ester of phosphoric acid. Organic phosphates are important in biochemistry and biogeochemistry or ecology. Inorganic phosphates are mined to obtain phosphorus for use in...
s gave the people of NauruNauru , officially the Republic of Nauru and formerly known as Pleasant Island, is an island nation in Micronesia in the South Pacific. Its nearest neighbor is Banaba Island in Kiribati, 300 km to the east...
one of the highest per capita incomes on earth, but since 1989 their standard of living has declined sharply as the supply has run out. Oil-rich states can sustain high GDPs without industrializing, but this high level would no longer be sustainable if the oil runs out. Economies experiencing an economic bubbleAn economic bubble is “trade in high volumes at prices that are considerably at variance with intrinsic values”...
, such as a housing bubble or stock bubble, or a low private-saving rate tend to appear to grow faster owing to higher consumption, mortgaging their futures for present growth. Economic growth at the expense of environmental degradation can end up costing dearly to clean up; GDP does not account for this.
- One main problem in estimating GDP growth over time is that the purchasing power of money varies in different proportion for different goods, so when the GDP figure is deflated over time, GDP growth can vary greatly depending on the basket of goods used and the relative proportions used to deflate the GDP figure. For example, in the past 80 years the GDP per capita of the United States if measured by purchasing power of potatoes, did not grow significantly. But if it is measured by the purchasing power of eggs, it grew several times. For this reason, economists comparing multiple countries usually use a varied basket of goods.
- Cross-border comparisons of GDP can be inaccurate as they do not take into account local differences in the quality of goods, even when adjusted for purchasing power parity
The purchasing power parity theory uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power...
. This type of adjustment to an exchange rate is controversial because of the difficulties of finding comparable baskets of goods to compare purchasing power across countries. For instance, people in country A may consume the same number of locally produced apples as in country B, but apples in country A are of a more tasty variety. This difference in material well being will not show up in GDP statistics. This is especially true for goods that are not traded globally, such as housing.
- Transfer pricing
Transfer pricing refers to the pricing of contributions transferred within an organization. For example, goods from the production division may be sold to the marketing division, or goods from a parent company may be sold to a foreign subsidiary. Since the prices are set within an organisation...
on cross-border trades between associated companies may distort import and export measures.
- As a measure of actual sale prices, GDP does not capture the economic surplus
The term surplus is used in economics for several related quantities. The consumer surplus is the amount that consumers benefit by being able to purchase a product for a price that is less than they would be willing to pay...
between the price paid and subjective value received, and can therefore underestimate aggregate utilityIn economics, utility is a measure of the relative satisfaction from, or desirability of, consumption of various goods and services. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain economic behavior in terms of attempts to increase one's utility...
.
- Austrian economist critique – Criticisms of GDP figures were expressed by Austrian economist Frank Shostak. Among other criticisms, he stated the following:
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.
He goes on: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.
Austrian economists are critical of the basic idea of attempting to quantify national output. Shostak quotes Austrian economist Ludwig von Mises:The attempt to determine in money the wealth of a nation or the whole mankind are as childish as the mystic efforts to solve the riddles of the universe by worrying about the dimension of the pyramid of Cheops.
Simon KuznetsSimon Smith Kuznets was a Russian American economist at the Wharton School of the University of Pennsylvania who won the 1971 Nobel Memorial Prize in Economic Sciences "for his empirically founded interpretation of economic growth which has led to new and deepened insight into the economic and...
in his very first report to the US Congress in 1934 said:
...the welfare of a nation [can] scarcely be inferred from a measure of national income...
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.
Alternatives to GDP
- Human development index
The Human Development Index is an index used to rank countries by level of "human development", which usually also implies whether a country is developed, developing, or underdeveloped.-Summary:...
(HDI) - HDI uses GDP as a part of its calculation and then factors in indicators of life expectancy and education levels.
- Genuine progress indicator
The genuine progress indicator is a concept in green economics and welfare economics that has been suggested to replace gross domestic product as a metric of economic growth....
(GPI) or Index of Sustainable Economic WelfareThe Index of Sustainable Economic Welfare is an economic indicator intended to replace the gross domestic product.Rather than simply adding together all expenditures like the gross domestic product, consumer expenditure is balanced by such factors as income distribution and cost associated with...
(ISEW) - The GPI and the ISEW attempt to address many of the above criticisms by taking the same raw information supplied for GDP and then adjust for income distribution, add for the value of household and volunteer work, and subtract for crime and pollution.
- Gini coefficient
The Gini coefficient is a measure of statistical dispersion developed by the Italian statistician Corrado Gini and published in his 1912 paper "Variability and Mutability" . It is commonly used as a measure of inequality of income or wealth...
- The Gini coefficient measures the disparity of income within a nation.
- Wealth estimates - The World Bank
The World Bank is an international financial institution that provides leveraged loans to poorer countries for capital programs, tied to neoliberal market restructurings...
has developed a system for combining monetary wealth with intangible wealth (institutions and human capital) and environmental capital.
- Private product remaining
Private Product Remaining or PPR is a means of national income accounting similar to, but providing a more accurate assessment than, the more commonly encountered GNP. Since government is financed through taxation and any resulting output is not sold on the market, there's no way to place a...
- Murray Newton Rothbard and other Austrian economists argue that because government spending is taken from productive sectors and produces goods that consumers do not want, it is a burden on the economy and thus should be deducted. In his book, America's Great DepressionAmerica's Great Depression is a 1963 treatise on the 1930s Great Depression and its root causes, written by Austrian School economist and author Murray Rothbard. The fifth edition was released in 2000.-Brief summary:...
, Rothbard argues that even government surpluses from taxation should be deducted to create an estimate of PPR.
Some people have looked beyond standard of living at a broader sense of
quality of lifeThe term quality of life is used to evaluate the general well-being of individuals and societies. The term is used in a wide range of contexts, including the fields of international development, healthcare, and political science. Quality of life should not be confused with the concept of...
or well-being:
- European Quality of Life Survey - The survey, first published in 2005, assessed quality of life across European countries through a series of questions on overall subjective life satisfaction
Subjective life satisfaction is a measure of an individual's perceived level of well-being and happiness. It is frequently assessed in surveys, by asking individuals how satisfied they are with their own lives...
, satisfaction with different aspects of life, and sets of questions used to calculate deficits of time, loving, being and having.
- Gross national happiness
The concept of gross national happiness is an attempt to define quality of life in more holistic and psychological terms than gross national product....
- The Centre for Bhutanese Studies in BhutanThe Kingdom of Bhutan is a landlocked nation in South Asia, located at the eastern end of the Himalaya Mountains and is bordered to the south, east and west by the Republic of India and to the north by People's Republic of China. Bhutan is separated from the nearby state of Nepal to the west by...
is working on a complex set of subjective and objective indicators to measure 'national happiness' in various domains (living standards, health, education, eco-system diversity and resilience, cultural vitality and diversity, time use and balance, good governance, community vitality and psychological well-being). This set of indicators would be used to assess progress towards gross national happiness, which they have already identified as being the nation's priority, above GDP.
- Happy Planet Index
The Happy Planet Index is an index of human well-being and environmental impact that was introduced by the New Economics Foundation in July 2006. The index is designed to challenge well-established indices of countries’ development, such as Gross Domestic Product and the Human Development Index...
- The happy planet index (HPI) is an index of human well-being and environmental impact, introduced by the New Economics FoundationThe New Economics Foundation is an independent British think-tank.NEF was founded in 1986 by the leaders of The Other Economic Summit with the aim of working for a "new model of wealth creation, based on equality, diversity and economic stability"...
(NEF) in 2006. It measures the environmental efficiency with which human well-being is achieved within a given country or group. Human well-being is defined in terms of subjective life satisfactionSubjective life satisfaction is a measure of an individual's perceived level of well-being and happiness. It is frequently assessed in surveys, by asking individuals how satisfied they are with their own lives...
and life expectancyLife expectancy is the expected number of years of life remaining at a given age. It is denoted by e
x, which means the average number of subsequent years of life for someone now aged x, according to a particular mortality experience...
while environmental impact is defined by the Ecological FootprintThe ecological footprint is a measure of human demand on the Earth's ecosystems. It compares human demand with planet Earth's ecological capacity to regenerate. It represents the amount of biologically productive land and sea area needed to regenerate the resources a human population consumes and...
.
Lists of countries by their GDP
See also
- Eco-sufficiency
Eco-sufficiency requires a reduction of the level of production/consumption in those parts of the world with the highest standards of living beyond reducing the use of natural resources as well as waste and emissions per unit of production/consumption...
- Economic growth
Economic growth is a term used to indicate the increase of total GDP. It is often measured as the rate of change of gross domestic product . Economic growth refers only to the quantity of goods and services produced; it says nothing about the way in which they are produced...
- Economic reports
- GDP deflator
In economics, the GDP deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy...
- Genuine progress indicator
The genuine progress indicator is a concept in green economics and welfare economics that has been suggested to replace gross domestic product as a metric of economic growth....
(GPI)
- Gini coefficient
The Gini coefficient is a measure of statistical dispersion developed by the Italian statistician Corrado Gini and published in his 1912 paper "Variability and Mutability" . It is commonly used as a measure of inequality of income or wealth...
- Gross domestic income
The Gross Domestic Income is the total income received by all sectors of an economy within a nation. It includes the sum of all wages, profits, and taxes, minus subsidies. Since all income is derived from production , the gross domestic income of a country should exactly equal its gross domestic...
- Gross domestic product per barrel
Energy efficiency as it relates to oil usage can be described by the gross domestic product per barrel of oil used . The original data for this is taken from two sources, the and the List of countries by GDP article from wikipedia...
- Green gross domestic product
The green gross domestic product is an index of economic growth with the environmental consequences of that growth factored in.In 2004, Wen Jiabao, the Chinese premier, announced that the green GDP index would replace the Chinese GDP index itself as a performance measure for government and party...
- GNP
- Gross national happiness
The concept of gross national happiness is an attempt to define quality of life in more holistic and psychological terms than gross national product....
- Gross national income
Gross national income ' comprises the total value produced within a country , together with its income received from other countries , less similar payments made to other countries....
- Gross output
Gross Output is an economic concept used in national accounts such as the United Nations System of National Accounts and the US National Income and Product Accounts...
- Gross regional domestic product
Gross Regional Domestic Product or Gross Domestic Product of Region is a subnational gross domestic product for measuring the size of that region's economy. It "is the aggregate of gross value added of all resident producer units in the region...
- Gross state product
Gross state product is a measurement of the economic output of a state or province. It is the sum of all value added by industries within the state and serves as a counterpart to the gross domestic product or GDP....
- Gross value added
Gross Value Added or GVA is a measure in economics of the value of goods and services produced in an area or sector of an economy.-Relationship to Gross Domestic Product:...
- Gross world product
Gross world product is the total gross national product of all the countries in the world. This also equals the total gross domestic product. See measures of national income and output for more details. The per capita GWP in 2008 was approximately $10,500 US dollars...
- Human development index
The Human Development Index is an index used to rank countries by level of "human development", which usually also implies whether a country is developed, developing, or underdeveloped.-Summary:...
- Income inequality metrics
The concept of inequality is distinct from that of poverty and fairness . Income inequality metrics or income distribution metrics are used by social scientists to measure the distribution of income, and economic inequality among the participants in a particular economy, such as that of a specific...
- Intermediate consumption
Intermediate consumption is an economic concept used in national accounts, such as the United Nations System of National Accounts and the US National Income and Product Accounts ....
- International Ranking of Household Income
Household Income is by and large the most comprehensive measure of a country's citizens material well-being. It includes not just income from employment, but every form of income, including all retirement income, near cash government transfers , and investment gains...
- List of Average Wages per Country
- Measures of national income and output
A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including gross domestic product , gross national product , and net national income ....
- Measuring GDP
Gross domestic product, GDP, is defined as the total value of all goods and services produced within that territory during a given year. GDP is designed to measure the market value of production that flows through the economy....
- Misery index (economics)
The misery index is an economic indicator, created by economist Arthur Okun, and found by adding the unemployment rate to the inflation rate. It is assumed that both a higher rate of unemployment and a worsening of inflation create economic and social costs for a country.
- National accounts
National accounts or national account systems provide a complete and consistent conceptual framework for measuring the economic activity of a nation . These include detailed underlying measures that rely on double-entry accounting...
- National average salary
The National Average Salary is the mean salary for the working population of a nation. It is calculated by summing all the annual salaries of all persons in work and dividing the total by the number of workers...
- National Income and Product Accounts
National Income and Product Accounts use double-entry accounting to report the monetary value and sources of output produced in a country and the distribution of incomes that production generates...
- Natural gross domestic product
- Purchasing power parity
The purchasing power parity theory uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power...
- Real gross domestic product
- Value added
In economics, the difference between cost of materials and labor to produce a product, and the sale price of a product is the value added. In national accounts used in macroeconomics, it refers to the contribution of the factors of production, i.e., land, labor, and capital goods, to raising the...
Global
Data
Articles and books
- What's wrong with the GDP?
- Limitations of GDP Statistics by Schenk, Robert.
- whether output and CPI inflation are mismeasured, by Nouriel Roubini and David Backus, in Lectures in Macroeconomics
- "Measurement of the Aggregate Economy", chapter 22 of Dr. Roger A. McCain's Essential Principles of Economics: A Hypermedia Text
- Growth, Accumulation, Crisis: With New Macroeconomic Data for Sweden 1800-2000 by Rodney Edvinsson
- Clifford Cobb, Ted Halstead and Jonathan Rowe. "If the GDP is up, why is America down?" The Atlantic Monthly, vol. 276, no. 4, October 1995, pages 59–78.