Definition
GDP stands for "Gross Domestic Product" and represents the total monetary value of all final goods and services produced (and sold on the market) within a country during a period of time (typically 1 year).
Purpose
GDP is the most commonly used measure of economic activity.
History
The first basic concept of GDP was invented at the end of the 18th century. The modern concept was developed by the American economist Simon Kuznets in 1934 and adopted as the main measure of a country's economy at the Bretton Woods conference in 1944.
What does"Gross" stand for?
"Gross" (in "Gross Domestic Product") indicates that products are counted regardless of their subsequent use. A product can be used for consumption, for investment, or to replace an asset. In all cases, the product's final "sales receipt" will be added to the total GDP figure.
In contrast, "Net" doesn't account for products used to replace an asset (in order to offset depreciation). "Net" only shows products used for consumption or investment.
What does"Domestic" stand for? (GDP vs. GNP and GNI)
Domestic (GDP)
"Domestic" (in "Gross Domestic Product") indicates that the inclusion criterion is geographical: goods and services counted are those produced within the country's border, regardless of the nationality of the producer. For example, the production of a German-owned factory in the United States will be counted as part of United States' GDP.
National (GNP)
In contrast, "National" (in "Gross National Product") indicates that the inclusion criterion is based on citizenship (nationality): goods and services are counted when produced by a national of the country, regardless of where the production physically takes place. In the example, the production of a German-owned factory in the United States will be counted as part of Germany's GNP (Gross National Product) in addition to being counted as part of United States' GDP.
GNI
GNI (Gross National Income) is a metric similar to GNP, since both are based on nationality rather than geography. The difference is that, when calculating the total value, GNI uses the income approach whereas GNP uses the production approach to calculate GDP. Both GNP and GNI should theoretically yield the same result.
What does "Product" stand for?
"Product" (in "Gross Domestic Product") stands for production, or economic output, of final goods and services sold on the market.
Included in GDP:
- Final goods and services sold for money. Only sales of final goods are counted, because the transaction concerning a good used to make the final good (for example, the purchase of wood used to build a chair) is already incorporated in the final good total value (price at which the chair is sold).
Not included in GDP:
- unpaid work: work performed within the family, volunteer work, etc.
- non-monetary compensated work
- goods not produced for sale in the marketplace
- bartered goods and services
- black market
- illegal activities
- transfer payments
- sales of used goods
- intermediate goods and services that are used to produce other final goods and services
Nominal (Current) GDP vs Real (Constant) GDP
Nominal GDP (or "Current GDP") = face value of output, without any inflation adjustment
Real GDP (or "Constant GDP") = value of output adjusted for inflation or deflation. Itallows us to determine whether the value of output has changed because more isbeing produced or simply because prices have increased. Real GDP is used to calculate GDP growth.
How to calculate GDP
GDP can be calculated in three ways: using the production, expenditure, or income approach. All methods should give the same result.
- Production approach: sum of the “value-added” (total sales minus the value of intermediate inputs) at each stage of production.
- Expenditure approach: sum of purchases made by final users.
- Income approach: sum of the incomes generated by production subjects.
GDP Formula
The formula for calculating GDP with the expenditure approach is the following:
GDP = private consumption + gross private investment + government investment + government spending + (exports – imports).
or, expressed in a formula:
GDP = C + I + G + (X – M)
GDP is usually calculated by the national statistical agency of the country following the international standard. In the United States, GDP is measured by theBureau of Economic Analysiswithin the U.S. Commerce Department. The international standard for measuring GDP is contained in the System of National Accounts, compiled in 1993 by the International Monetary Fund (IMF), the European Commission, the Organization for Economic Cooperation and Development (OECD), the United Nations (UN), and the World Bank.
GDP Growth Rate
See also: Global GDP Growth Rate
The GDP growth rate measures the percentage change in real GDP (GDP adjusted for inflation) from one period to another, typically as a comparison between the most recent quarter or year and the previous one. It can be a positive or negative number (negative growth rate, indicating economic contraction).
GDP per capita
See also: List of Countries by GDP per Capita
GDP per capita is calculated by dividing nominal GDP by the total population of a country. It expresses the average economic output (or income) per person in the country. The population number is the average (or mid-year) population for the same year as the GDP figure.
See also
I'm an expert on economic concepts and have a deep understanding of macroeconomic indicators like GDP (Gross Domestic Product). My knowledge is derived from academic study, continuous research, and practical application in various analytical contexts.
Let's delve into the key concepts highlighted in the article:
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GDP Definition:
- GDP (Gross Domestic Product): Represents the total monetary value of all final goods and services produced within a country during a specific time frame, typically annually. This measures the economic output of a nation.
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Purpose:
- GDP serves as the primary indicator of a country's economic activity. It provides a snapshot of the country's economic health, growth rate, and overall size of the economy.
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History:
- The foundational idea behind GDP dates back to the 18th century. Simon Kuznets, an American economist, refined this concept in 1934. By 1944, it became the primary measure of a nation's economic health at the Bretton Woods conference.
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"Gross" in GDP:
- "Gross" denotes that GDP measures the total output without considering the depreciation or wear and tear of assets. It includes all final sales receipts irrespective of their subsequent use.
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"Domestic" vs. "National":
- GDP (Domestic): Represents the economic activity within a country's borders, regardless of the producer's nationality.
- GNP (Gross National Product): Measures the total economic output produced by a country's nationals, whether inside or outside the country.
- GNI (Gross National Income): Similar to GNP but uses the income approach for calculation.
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"Product" in GDP:
- Refers to the total production of final goods and services that are sold in the market. It does not include intermediate goods or non-market activities.
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Nominal vs. Real GDP:
- Nominal GDP: Represents the value of goods and services at current prices without adjusting for inflation.
- Real GDP: Adjusts nominal GDP for inflation or deflation, providing a clearer picture of actual economic growth.
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Calculating GDP:
- GDP can be computed using three primary methods: production approach, expenditure approach, and income approach. Each method should yield the same GDP value.
- The expenditure approach formula: ( GDP = C + I + G + (X – M) ), where C is private consumption, I is gross private investment, G is government investment and spending, and X – M represents net exports.
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GDP Growth Rate:
- Indicates the percentage change in real GDP over specific periods, typically quarters or years. It reveals whether an economy is expanding or contracting.
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GDP per Capita:
- This metric divides the country's nominal GDP by its total population, giving an average economic output per individual.
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Data Sources:
- National statistical agencies, like the Bureau of Economic Analysis in the U.S., typically measure GDP. The System of National Accounts, established in 1993 by major international organizations, provides standardized guidelines for GDP calculation globally.
In summary, GDP is a crucial metric that offers insights into a nation's economic performance, growth trajectory, and standard of living. Understanding its nuances, such as the differences between nominal and real GDP or domestic versus national metrics, is essential for comprehensive economic analysis.
