Gross Domestic Product

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Gross Domestic Product

As a measure of the aggregate level of economic activity, gross domestic product (GDP) is the main indicator used to monitor the state of an economy. GDP growth, commonly referred to as economic growth, is thus of great interest to policymakers for the conduct of fiscal and monetary policy. It is also widely used to measure productivity of an economy.

GDP is defined as the value-added of all goods and services produced in a given period of time within a country. The measurement of GDP can be approached from three angles: value added by industry, final expenditures, and factor incomes.

Value added created by industry (output less inputs purchased from other producers);
Expenditures by consumers, businesses on investment goods, government on goods and services, and foreigners for exports (minus expenditures by domestic residents on imports); and
Incomes generated in production, operating surplus generated by business and compensation of employees.

GDP is usually expressed in terms of current prices in national currency units, or in real terms (real GDP) after removing the effects of price change to reflect the volume of production in the economy. For international comparisons, GDP is also expressed in a common currency such as U.S. dollars using purchasing power parity exchange rates.

Up to the 1980s, the term gross national product (GNP) was more commonly used than GDP. The former, more correctly called gross national income (GNI), includes incomes of residents of a country earned abroad and excludes incomes from domestic production sent abroad. In contrast, GDP includes only domestically produced incomes. GNI in combination with GDP are often expressed in per capita terms and used as measures of living standards of the nation.

National income accounting (the methodologies to measure GNI and GDP) originated in the 1930s and 1940s with the work of Simon Kuznets in the United States and Richard Stone in the United Kingdom. A detailed history of national accounting is found in Andre Vanoli’s work A History of National Accounting (2005). Since the 1950s, the United Nations, working with other international organizations such as the International Monetary Fund, World Bank, and Organization for Economic Cooperation and Development, has coordinated the development of international standards for the national accounts. The current international standard was last issued in 1993. These standards evolve over time with the world economies, and a new edition of the standard will be released in 2008. The International Association for Research in Income and Wealth was founded in 1947 for the advancement of knowledge related to national accounting. The publications of this Association, including the journal Review of Income and Wealth, document the evolution of the field.

GDP is not a measure of economic welfare. It does not incorporate into its official estimates environmental degradation and resources depletion, nor the value of leisure. Neither does it take into account the influence on income inequality and economic insecurity on well-being.