10/29/2014 Gross domestic product - Wikipedia, the free encyclopedia

http://en.wikipedia.org/wiki/Gross_domestic_product 1/23
A map of world economies by size of GDP (nominal) in $US,
CIA World Factbook, 2012.
[1]
Gross domestic product
From Wikipedia, the free encyclopedia
Gross domestic product (GDP) is defined
by OECD as "an aggregate measure of
production equal to the sum of the gross
values added of all resident institutional units
engaged in production (plus any taxes, and
minus any subsidies, on products not
included in the value of their outputs)."
[2]
GDP estimates are commonly used to
measure the economic performance of a
whole country or region, but can also
measure the relative contribution of an
industry sector. This is possible because
GDP is a measure of 'value added' rather than sales; it adds each firm's value added (the value of its output
minus the value of goods that are used up in producing it). For example, a firm buys steel and adds value to
it by producing a car; double counting would occur if GDP added together the value of the steel and the
value of the car.
[3]
Because it is based on value added, GDP also increases when an enterprise reduces its
use of materials or other resources ('intermediate consumption') to produce the same output.
The more familiar use of GDP estimates is to calculate the growth of the economy from year to year (and
recently from quarter to quarter). The pattern of GDP growth is held to indicate the success or failure of
economic policy and to determine whether an economy is 'in recession'.
Contents
1 History
2 Determining GDP
2.1 Production approach
2.2 Income approach
2.3 Expenditure approach
2.3.1 Components of GDP by expenditure
2.3.2 Examples of GDP component variables
3 GDP vs GNI
3.1 International standards
3.2 National measurement
3.3 Interest rates
4 Nominal GDP and adjustments to GDP
5 Cross-border comparison and PPP
10/29/2014 Gross domestic product - Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Gross_domestic_product 2/23
6 Per unit GDP
7 Standard of living and GDP
8 Externalities
9 Limitations and criticisms
10 Lists of countries by their GDP
11 List of newer approaches to the measurement of (economic) progress
12 See also
13 Notes and references
14 Further reading
15 External links
15.1 Global
15.2 Data
15.3 Articles and books
History
The concept of GDP was first developed by Simon Kuznets for a US Congress report in 1934.
[4]
In this
report, Kuznets warned against its use as a measure of welfare (see below under limitations and criticisms).
After the Bretton Woods conference in 1944, GDP became the main tool for measuring a country's
economy.
[5]
At that time Gross National Product (GNP) was the preferred estimate, which differed from
GDP in that it measured production by a country's citizens at home and abroad rather than its 'resident
institutional units' (see OECD definition above). The switch to GDP came in the 1990s.
The history of the concept of GDP should be distinguished from the history of changes in ways of
estimating it. The value added by firms is relatively easy to calculate from their accounts, but the value
added by the public sector, by financial industries, and by intangible asset creation is more complex. These
activities are increasingly important in developed economies, and the international conventions governing
their estimation and their inclusion or exclusion in GDP regularly change in an attempt to keep up with
industrial advances. In the words of one academic economist "The actual number for GDP is therefore the
product of a vast patchwork of statistics and a complicated set of processes carried out on the raw data to fit
them to the conceptual framework."
[6]
Angus Maddison calculated historical GDP figures going back to 1830 and before.
Determining GDP
GDP can be determined in three ways, all of which should, in principle, give the same result. They are the
production (or output or value added) approach, the income approach, or the expenditure approach.
10/29/2014 Gross domestic product - Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Gross_domestic_product 3/23
Gross Value Added Structure [1]
(http://www.bluenomics.com/#!data/national
_accounts_gdp/gdp_production_approach/str
ucture_of_gross_value_added_by_sectors_gv
a_/structure_of_gross_value_added_by_secto
rs_gva_annual_of_gdp%7Cchart/line$countri
es=usa&sorting=list//title)
The most direct of the three is the production approach, which sums the outputs of every class of enterprise
to arrive at the total. The expenditure approach works on the principle that all of the product must be bought
by somebody, therefore the value of the total product must be equal to people's total expenditures in buying
things. The income approach works on the principle that the incomes of the productive factors ("producers,"
colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all
producers' incomes.
[7]
Production approach
This approach mirrors the OECD definition given above.
1. Estimate the gross value of domestic output out of the many various economic activities;
2. Determine the intermediate consumption, i.e., the cost of material, supplies and services used to
produce final goods or services.
3. Deduct intermediate consumption from gross value to obtain the gross value added.
Gross value added = gross value of output value of
intermediate consumption.
Value of output = value of the total sales of goods and
services plus value of changes in the inventories.
The sum of the gross value added in the various economic
activities is known as "GDP at factor cost".
GDP at factor cost plus indirect taxes less subsidies on
products = "GDP at producer price".
For measuring output of domestic product, economic
activities (i.e. industries) are classified into various sectors.
After classifying economic activities, the output of each
sector is calculated by any of the following two methods:
1. By multiplying the output of each sector by their respective
market price and adding them together
2. By collecting data on gross sales and inventories from the
records of companies and adding them together
The gross value of all sectors is then added to get the gross value added (GVA) at factor cost. Subtracting
each sector's intermediate consumption from gross output gives the GDP at factor cost. Adding indirect tax
minus subsidies in GDP at factor cost gives the "GDP at producer prices".
Income approach
The second way of estimating GDP is to use "the sum of primary incomes distributed by resident producer
units".
[2]
10/29/2014 Gross domestic product - Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Gross_domestic_product 4/23
Countries by 2012 GDP (nominal) per capita.
[8]
over $102,400
$51,200102,400
$25,60051,200
$12,80025,600
$6,40012,800
$3,2006,400
$1,6003,200
$8001,600
$400800
below $400
unavailable
GDP (PPP) per capita (World bank, 2012).
If GDP is calculated this way it is sometimes called gross domestic income (GDI), or GDP (I). GDI should
provide the same amount as the expenditure method described later. (By definition, GDI = GDP. In
practice, however, measurement errors will make the
two figures slightly off when reported by national
statistical agencies.)
This method measures GDP by adding incomes that
firms pay households for factors of production they hire
- wages for labour, interest for capital, rent for land and
profits for entrepreneurship.
The US "National Income and Expenditure Accounts"
divide incomes into five categories:
1. Wages, salaries, and supplementary labour income
2. Corporate profits
3. Interest and miscellaneous investment income
4. Farmers' incomes
5. Income from non-farm unincorporated businesses
These five income components sum to net domestic income
at factor cost.
Two adjustments must be made to get GDP:
1. Indirect taxes minus subsidies are added to get from
factor cost to market prices.
2. Depreciation (or capital consumption allowance) is
added to get from net domestic product to gross
domestic product.
Total income can be subdivided according to various schemes, leading to various formulae for GDP
measured by the income approach. A common one is:
GDP = compensation of employees + gross operating surplus + gross mixed income + taxes less
subsidies on production and imports
GDP = COE + GOS + GMI + T
P & M
S
P & M
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.
10/29/2014 Gross domestic product - Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Gross_domestic_product 5/23
Nominal GDP Income Approach [2]
(http://www.bluenomics.com/#!data/national
_accounts_gdp/gdp_income_approach/structu
re_of_gdp_income_approach/structure_of_gd
p_income_approach_annual_of_total%7Ccha
rt/line$countries=united_kingdom&sorting=l
ist//title&min=631152000000)
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; it is the income of all of the factors of
production in society. It 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).
Total factor income is also sometimes expressed as:
Total factor income = employee compensation + corporate
profits + proprietor's income + rental income + net interest
[9]
Yet another formula for GDP by the income method is:
where R : rents
I : interests
P : profits
SA : statistical adjustments (corporate income taxes,
dividends, undistributed corporate profits)
W : wages.
Expenditure approach
The third way to estimate GDP is to calculate the sum of the
final uses of goods and services (all uses except intermediate
consumption) measured in purchasers' prices.
[2]
In economics, most things produced are produced for sale and
then sold. Therefore, measuring the total expenditure of
money used to buy things is a way of measuring production.
This is known as the expenditure method of calculating GDP. Note that if you knit yourself a sweater, it is
production but does not get counted as GDP because it is never sold. Sweater-knitting is a small part of the
economy, but if one counts some major activities such as child-rearing (generally unpaid) as production,
GDP ceases to be an accurate indicator of production. Similarly, if there is a long term shift from non-
market provision of services (for example cooking, cleaning, child rearing, do-it yourself repairs) to market
provision of services, then this trend toward increased market provision of services may mask a dramatic
decrease in actual domestic production, resulting in overly optimistic and inflated reported GDP. This is
particularly a problem for economies which have shifted from production economies to service economies.
Components of GDP by expenditure
GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports (X
M).