The most widely used measure of economic growth is the strength of the currency.

A map of world economies by size of GDP [nominal] in USD, World Bank, 2014.[1]

Gross domestic product [GDP] is a monetary measure of the market value of all the final goods and services produced and sold [not resold] in a specific time period by countries.[2][3] Due to its complex and subjective nature this measure is often revised before being considered a reliable indicator. GDP [nominal] per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore, using a basis of GDP per capita at purchasing power parity [PPP] may be more useful when comparing living standards between nations, while nominal GDP is more useful comparing national economies on the international market.[4] Total GDP can also be broken down into the contribution of each industry or sector of the economy.[5] The ratio of GDP to the total population of the region is the per capita GDP [also called the Mean Standard of Living].

GDP definitions are maintained by a number of national and international economic organizations. The Organisation for Economic Co-operation and Development [OECD] defines GDP as "an aggregate measure of production equal to the sum of the gross values added of all resident and institutional units engaged in production and services [plus any taxes, and minus any subsidies, on products not included in the value of their outputs]".[6] An IMF publication states that, "GDP measures the monetary value of final goods and services—that are bought by the final user—produced in a country in a given period of time [say a quarter or a year]."[7]

GDP is often used as a metric for international comparisons as well as a broad measure of economic progress. It is often considered to be the "world's most powerful statistical indicator of national development and progress".[8] However, critics of the growth imperative often argue that GDP measures were never intended to measure progress, and leave out key other externalities, such as resource extraction, environmental impact and unpaid domestic work.[9] Critics frequently propose alternative economic models such as doughnut economics which use other measures of success or alternative indicators such as the OECD's Better Life Index as better approaches to measuring the effect of the economy on human development and well being.

History[edit]

U.S. YoY Quarterly gross domestic product growth rate

William Petty came up with a basic concept of GDP to attack landlords against unfair taxation during warfare between the Dutch and the English between 1654 and 1676.[clarification needed][10] Charles Davenant developed the method further in 1695.[11] The modern concept of GDP was first developed by Simon Kuznets for a 1934 U.S. Congress report, where he warned against its use as a measure of welfare [see below under limitations and criticisms].[12] After the Bretton Woods conference in 1944, GDP became the main tool for measuring a country's economy.[13] 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 from GNP to GDP in the United States occurred in 1991. The role that measurements of GDP played in World War II was crucial to the subsequent political acceptance of GDP values as indicators of national development and progress.[14] A crucial role was played here by the U.S. Department of Commerce under Milton Gilbert where ideas from Kuznets were embedded into institutions.

The history of the concept of GDP should be distinguished from the history of changes in many 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."[15]

GDP became truly global in 1993 when China officially adopted it as its indicator of economic performance. Previously, China had relied on a Marxist-inspired national accounting system.[16]

Determining gross domestic product [GDP][edit]

An infographic explaining how GDP is calculated in the UK

GDP can be determined in three ways, all of which should, theoretically, give the same result. They are the production [or output or value added] approach, the income approach, and the speculated expenditure approach. It is representative of the total output and income within an economy.

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.[17]

Production approach[edit]

Also known as the Value Added Approach, it calculates how much value is contributed at each stage of production.

This approach mirrors the OECD[Organisation for Economic Co-operation and Development] 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 inventory.

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 value of output of all sectors is then added to get the gross value of output at factor cost. Subtracting each sector's intermediate consumption from gross output value gives the GVA [=GDP] at factor cost. Adding indirect tax minus subsidies to GVA [GDP] at factor cost gives the "GVA [GDP] at producer prices".

Income approach[edit]

The second way of estimating GDP is to use "the sum of primary incomes distributed by resident producer units".[6]

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 is equal to 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:

• 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; 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[I] at factor cost to GDP[I] at final prices.

Total factor income is also sometimes expressed as:

Expenditure approach[edit]

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.[6]

Market goods that are produced are purchased by someone. In the case where a good is produced and unsold, the standard accounting convention is that the producer has bought the good from themselves. Therefore, measuring the total expenditure used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP.

Components of GDP by expenditure[edit]

U.S. GDP computed on the expenditure basis.

GDP [Y] is the sum of consumption [C], investment [I], government Expenditures [G] and net exports [X – M].

Here is a description of each GDP component:

• C [consumption] is normally the largest GDP component in the economy, consisting of private expenditures in the economy [household final consumption expenditure]. These personal expenditures fall under one of the following categories: durable goods, nondurable goods, and services. Examples include food, rent, jewelry, gasoline, and medical expenses, but not the purchase of new housing.
• I [investment] includes, for instance, business investment in equipment, but does not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households [not government] 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. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or companies' equity shares is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products; buying an existing building will involve a positive investment by the buyer and a negative investment by the seller, netting to zero overall investment.
• G [government spending] is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchases 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. Analyses outside the USA will often treat government investment as part of investment rather than government spending.
• X [exports] represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.
• M [imports] represents 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.

Note that C, I, and G are expenditures on final goods and services; expenditures on intermediate goods and services do not count. [Intermediate goods and services are those used by businesses to produce other goods and services within the accounting year.[19]] So for example if a car manufacturer buys auto parts, assembles the car and sells it, only the final car sold is counted towards the GDP. Meanwhile, if a person buys replacement auto parts to install them on their car, those are counted towards the GDP.

According to the U.S. Bureau of Economic Analysis, which is responsible for calculating the national accounts in the United States, "In general, the source data for the expenditures components are considered more reliable than those for the income components [see income method, above]."[20]

GDP and GNI[edit]

GDP can be contrasted with gross national product [GNP] or, as it is now known, gross national income [GNI]. The difference is that GDP defines its scope according to location, while GNI defines its scope according to ownership. In a global context, world GDP and world GNI are, therefore, equivalent terms.

GDP is product produced within a country's borders; GNI is product produced by enterprises owned by a country's citizens. The two would be the same if all of the productive enterprises in a country were owned by its own citizens, and those citizens did not own productive enterprises in any other countries. In practice, however, foreign ownership makes GDP and GNI non-identical. Production within a country's borders, but by an enterprise owned by somebody outside the country, counts as part of its GDP but not its GNI; on the other hand, production by an enterprise located outside the country, but owned by one of its citizens, counts as part of its GNI but not its GDP.

For example, the GNI of the USA is the value of output produced by American-owned firms, regardless of where the firms are located. Similarly, if a country becomes increasingly in debt, and spends large amounts of income servicing this debt this will be reflected in a decreased GNI but not a decreased GDP. Similarly, if a country sells off its resources to entities outside their country this will also be reflected over time in decreased GNI, but not decreased GDP. This would make the use of GDP more attractive for politicians in countries with increasing national debt and decreasing assets.

Gross national income [GNI] equals GDP plus income receipts from the rest of the world minus income payments to the rest of the world.[21]

In 1991, the United States switched from using GNP to using GDP as its primary measure of production.[22] The relationship between United States GDP and GNP is shown in table 1.7.5 of the National Income and Product Accounts.[23]

International standards[edit]

The international standard for measuring GDP is contained in the book System of National Accounts [2008], which was prepared by representatives of the International Monetary Fund, European Union, Organisation for Economic Co-operation and Development, United Nations and World Bank. The publication is normally referred to as SNA2008 to distinguish it from the previous edition published in 1993 [SNA93] or 1968 [called SNA68] [24]

SNA2008 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[edit]

Countries or territories by GDP [PPP] per capita in 2022.