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16-September-2008 16:15:08 - domestic product GDP redirects here. For other uses, see GDP disambiguation. Map of countries by 2007 GDP nominal per capita IMF, April 2008. Map of countries by 2007 GDP nominal per capita IMF, April 2008. CIA World Factbook 2007 figures of total nominal GDP top compared to PPP-adjusted GDP bottom. CIA World Factbook 2007 figures of total nominal GDP top compared to PPP-adjusted GDP bottom. World map showing GDP PPP per capita. World map showing GDP PPP per capita. The gross domestic product GDP or gross domestic income GDI is one of the measures of national income and output for a given country's economy. GDP is defined as the total market value of all final goods and services produced within the 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: GDP = consumption + gross investment + government spending + exports - imports, or, GDP = C + I + G + X-M. Gross means depreciation of capital stock is not subtracted. If net investment which is gross investment minus depreciation is substituted for gross investment in the equation above, then the formula for net domestic product 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 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,citation needed so that different government spending levels can be considered within a meaningful macroeconomic framework. Contents 1 GDP vs GNP 2 Measuring GDP 2.1 The components of GDP 2.2 Examples of GDP component variables 2.3 Types of GDP and GDP growth 2.4 The GDP income account 3 Measurement 3.1 International standards 3.2 National measurement 3.3 Interest rates 4 Cross-border comparison 5 Standard of living and GDP 6 Limitations of GDP to judge the health of an economy 6.1 Alternatives to GDP 7 Lists of countries by their GDP 8 See also 9 References 10 External links 10.1 Global 10.2 Data 10.3 Articles and books GDP vs GNP GDP can be contrasted with gross national product GNP, or gross national income, GNI, 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. Put simply, GNP adds net foreign investment income compared to GDP. United States GDP, GNP and GNI Gross National Income can be compared at EconStats 1. GDP 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 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. Measuring GDP The components of GDP 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 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 investments by business or households 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. 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. 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. 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 deeds, and not part of real production 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 other nations' 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 either Keynesian or neoclassical macroeconomics. Examples of GDP component variables Examples of C, I, G, and 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. For example, if a hotel is a private home then 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 the manufacture of a chandelier to hang in a foreign hotel the situation would be reversed, and the payment received would be counted in NX positively, as an export. Again, GDP is attempting to measure 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 give the amount produced domestically. As in Gross Domestic Product. Types of GDP and GDP growth World map showing GDP real growth rates for 2007. World map showing GDP real growth rates for 2007. Current GDP is GDP expressed in the current prices of the period being measured Nominal GDP growth is GDP growth in nominal prices unadjusted for price changes. Real GDP growth is GDP growth adjusted for price changes. Calculating the real GDP growth allows economists to determine if production increased or decreased, regardless of changes in the purchasing power of the currency. The GDP income account Another way of measuring GDP is to measure the total income payable in the GDP income accounts. In this situation, Gross Domestic Income GDI is sometimes used 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 GDPI, 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 GDPI. Another formula can be written as this: 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 Measurement 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 ion 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. Main article: National agencies responsible for GDP measurement Interest rates 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. Cross-border comparison The level of GDP in different countries may be compared by converting their value in national currency according to either current currency exchange rate: GDP calculated by exchange rates prevailing on international currency markets purchasing power parity exchange rate: GDP calculated by purchasing power parity PPP of each currency relative to a selected standard usually the United States dollar. The relative ranking of countries may differ dramatically between the two approaches. The current exchange rate method converts the value of goods and services using global currency exchange rates. This can offer better indications of a countries international purchasing power and relative economic strength. 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 purchasing power parity method accounts for the relative effective domestic purchasing power of the average producer or consumer within an economy. This can be a better indicator of the living standards of less-developed countries because it compensates for the weakness of local currencies in world markets. For example, India ranks 13th by GDP but 4th by PPP. The PPP method of GDP conversion is most 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 effect. For more information see Measures of national income and output. Standard of living and GDP World GDP per capita in 1990 Geary-Khamis dollars 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. World GDP per capita in 1990 Geary-Khamis dollars 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, the rationale being that all citizens would benefit from their countries increased economic production. 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. Limitations of GDP to judge the health of an economy 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: Wealth distribution - GDP does not take disparity in incomes between the rich and poor into account. See income inequality metrics for discussion of a variety of complementary economic measures. Voluntary work - GNP ignores voluntary work, such as domestic work. Free and Open Source Software such as Linux 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 software 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 Waring 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. GDP also ignores subsistence productiondubious - discuss. 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 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 living or discretionary income per capita better measure the human utility of economic activity. See uneconomic growth. 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. This is not always the case; durable goods are often more difficult to produce than flimsy goods, and consumers have a financial incentive to find the cheapest long-term option. With goods that are undergoing rapid change, such as in fashion or high technology, the short lifespan may increase customer satisfaction by allowing them to have newer products. Externalities - GDP ignores externalities such as damage to the environment. GDP even views externalities as positive if work/production is required in response to the externalities. Sustainability of growth - GDP does not measure the sustainability of growth. A country may achieve a temporarily high GDP by over-exploiting natural resources or by misallocating investment. For example, the large deposits of phosphates gave the people of Nauru 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 bubble, 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. Black market - Official GDP estimates may not take into account the black market, where the money spent is not registered, and the non-monetary economy, 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. 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. 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. 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 on cross-border trades between associated companies may distort import and export measurescitation needed. As a measure of actual sale prices, GDP does not capture the economic surplus between the price paid and subjective value received, and can therefore underestimate aggregate utility. Simon Kuznets the inventor of the GDP, in his very first report to the US Congress in 1934 said1: ...the welfare of a nation can scarcely be inferred from a measure of national income... In 1962, Kuznets stated2: 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 HDI HDI uses GDP as a part of its calculation and then factors in indicators of life expectancy and education levels. Genuine Progress Indicator GPI or Index of Sustainable Economic Welfare ISEW The GPI and the similar 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. Wealth Estimates The World Bank has developed a system for combining monetary wealth with intangible wealth institutions and human capital and environmental capital.3 Some people have looked beyond standard of living at a broader sense of quality of life or well-being. European Quality of Life Survey This survey, the first wave of which was published in 2005, assessed quality of life across European countries through a series of questions on overall subjective life satisfaction, satisfaction with different aspects of life, and sets of questions used to calculate deficits of time, loving, being and having.4 Gross National Happiness The Centre for Bhutanese Studies in Bhutan is currently 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 HPI is an index of human well-being and environmental impact, introduced by the New Economics Foundation NEF, in July 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 satisfaction and life expectancy. Lists of countries by their GDP List of countries by GDP nominal, per capita 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 countries by future GDP estimates PPP, per capita, nominal List of countries by past GDP PPP, nominal See also Eco-sufficiency Economic growth Economic reports GDP deflator Genuine Progress Indicator GPI GNP Green Gross Domestic Product Gross national happiness Gross Output Gross regional domestic product Gross value added Human Development Index Happy Planet Index HPI Income inequality metrics Intermediate consumption Measures of national income and output National accounts Natural gross domestic product Purchasing Power Parity Value added v d e Economic classification of countries Developed country · Developing country · Least developed country · High income country · Newly industrialized country · Heavily Indebted Poor Countries Worlds Theory First World · Second World · Third World · Fourth World Lists of countries GDP per capita List of countries by GDP nominal, per capita · List of countries by GDP PPP, per capita, per hour Human Development Index List of countries by Human Development Index Human Poverty Index List of countries by percentage of population living in poverty Literacy rate List of countries by literacy rate References ^ 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 ^ Simon Kuznets. How To Judge Quality. The New Republic, October 20, 1962 ^ World Bank wealth estimates. ^ First European Quality of Life Survey. External links Global Australian Bureau of Statistics Manual on GDP measurement GDP-indexed bonds GDP scaled maps Euro area GDP growth rate since 1996 as compared to the Bank Rate since 2000 World Development Indicators WDI Economist Country Briefings UN Statistical Databases Data Bureau of Economic Analysis: Official United States GDP data Historicalstatistics.org: Links to historical statistics on GDP for different countries and regions Complete listing of countries by GDP: Current Exchange Rate Method Purchasing Power Parity Method Historical US GDP 1790 to 2005 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. Retrieved from http://en..org/wiki/Gross_domestic_product Categories: National accounts | Index numbers | Gross Domestic ProductHidden categories: All articles with statements | Articles with statements since March 2008 | articles needing clarification | All pages needing cleanup | Articles with disputed statements from June 2008 | Articles with statements since February 2007 Views Article Discussion this page History Personal tools Log in / create account Navigation Main page Contents Featured content Current events Random article Search Go Search Interaction Community portal Recent changes Contact Donate to Help Toolbox What links here Related changes Upload file Special pages Printable version Permanent link Cite this page Languages Afrikaans العربية Aragonés AzÉ™rbaycan БеларуÑ?каÑ? тарашкевіца Bosanski БългарÑ?ки Català Česky Cymraeg Dansk Deutsch Eesti Ελληνικά Español Esperanto Euskara Ù?ارسی Français Galego í•œêµì–´ Hrvatski Ido Bahasa Indonesia Ã?slenska Italiano עברית Latina LatvieÅ¡u Lietuvių Magyar МакедонÑ?ки मराठी Mìng-dĕ̤ng-ngṳ̄ Монгол Nederlands Plattdüütsch Polski Português Română РуÑ?Ñ?кий Sicilianu Simple English SlovenÄ?ina SlovenÅ¡Ä?ina СрпÑ?ки / Srpski Suomi Tagalog தமிழà¯? ไทย Tiếng Việt Türkçe Удмурт УкраїнÑ?ька اردو Vèneto ä¸æ–‡ This page was last modified on 13 August 2008, at 20:01
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