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Gross domestic product
From Wikipedia, the free encyclopedia

This article is about GDP in the context of economics. For other uses, see GDP (disambiguation).
IMF 2005 figures of total nominal GDP (top) compared to PPP-adjusted GDP (bottom).
A region's gross domestic product, or GDP, is one of the ways of measuring the size of its economy. The GDP of a country is defined as the total market value of all final goods and services produced within a 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.
The most common approach to measuring and understanding GDP is the expenditure method:
GDP = consumption + investment + (government spending) + (exports − imports), or, GDP = C + I + G + (X-M)
"Gross" means depreciation of capital stock is not included. With depreciation, with net investment instead of gross investment, it is the net domestic product. Consumption and investment in this equation are the expenditure on final goods and services. The exports minus imports part of the equation (often called cumulative 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:
Private consumption is a central concern of welfare economics. 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 private consumption, government consumption can be treated as exogenous, so that different government spending levels can be considered within a meaningful macroeconomic framework.
GDP can be contrasted with GNP or gross national product, which the United States used in its national accounts until 1992. The two terms GDP and GNP are almost identical - and yet entirely different; GDP (or GDI - Gross Domestic Income) being concerned with the region in which income is generated. That is, what is the market value of all the output produced in a nation, the United States, for example, in one year. GDP concerns itself with where the output is produced and not who produced it. Meanwhile, GNP (or GNI - Gross National Income) is a measure of the accrual of income or the value of the output, produced by the "nationals" of a region. GNP concerns itself with who "owns" the production. If we take the USA as an example again, GNP measures the value of output produced by American firms, regardless of where the firms are located. This compares to GDP which is concerned with where the production takes place and not if the company is an American firm or not (assuming that a firm can be defined as American in an economic world where most large firms are actually global groups).
Contents[hide]
1 Measuring GDP
1.1 The components of GDP
1.2 Examples of GDP component variables
1.3 Types of GDP and GDP growth
1.4 The GDP income account
2 Measurement
2.1 International standards
2.2 National measurement
2.3 Interest rates
3 Cross-border comparison
4 GDP and standard of living
5 Criticisms and limitations
6 Lists of countries by their GDP
7 See also
8 References
9 External links
9.1 Global
9.2 Data
9.3 Articles and books
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[edit] Measuring GDP

[edit] The components of GDP
Each of the variables C, I, G and NX (where GDP = C + I + G + (X-M) as above):
(Note: * GDP is sometimes also referred to as Y in reference to a GDP graph)
C is private consumption in the economy. This includes most personal expenditures of households such as food, rent, medical expenses and so on but does not include new housing.
I is defined as business investments in capital. Examples of investment by a business include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households on new houses is also included in Investment. Unlike general meaning, 'Investment' in GDP is meant very specifically as non-financial product purchases. 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 bond or a share of stock, this transfer payment is excluded from the GDP sum. Although such purchases would be called investments in normal speech, from the total-economy point of view, this is simply swapping of deeds, and not part of the real economy or the GDP formula.
G is the sum of government expenditures 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 payments, such as social security or unemployment benefits.
X is gross exports. GDP captures the amount a country produces, including goods and services produced for overseas consumption, therefore exports are added.
M is 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.
It is important to understand the meaning of each variable precisely in order to:
Read national accounts.
Understand Keynesian or neo-classical macroeconomics.

[edit] Examples of GDP component variables
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 unaffected 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.)

[edit] Types of GDP and GDP growth
1) Current GDP is GDP expressed in the current prices of the period being measured
2) Nominal GDP growth is GDP growth in nominal prices (unadjusted for price changes).
3) Real GDP growth is GDP growth adjusted for price changes. Calculating real prices allows economists to determine if production increased or decreased, regardless of changes in the purchasing power of the currency.

[edit] The GDP income account
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:
GDP = Compensation of employees + Gross operating surplus + 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 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, 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:
GDP = R + I + P + SA + W
where R = rentsI = interestsP = profitsSA = statistical adjustments (corporate income taxes, dividends, undistributed corporate profits)W = wages

[edit] Measurement

[edit] 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

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