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Gdp nominal and ppp 2005 world map single colour

CIA World Factbook 2008 figures of total nominal GDP (bottom) compared to PPP-adjusted GDP (top)

GDP nominal per capita world map IMF 2008

Countries by 2008 GDP (nominal) per capita (IMF, October 2008 estimate)

GDP PPP Per Capita IMF 2008

GDP (PPP) per capita

The gross domestic product (GDP) or gross domestic income (GDI) is a basic measure of a country's overall economic output. It is the market value of all final goods and services made within the borders of a country in a year. It is often positively correlated with the standard of living,[1] though its use as a stand-in for measuring the standard of living has come under increasing criticism and many countries are actively exploring alternative measures to GDP for that purpose.[2] GDP can be determined in three ways, all of which should in principle give the same result. They are the product (or output) approach, the income approach, and the expenditure approach. The most direct of the three is the product 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.[3]

Example: the expenditure method:


GDP = C + Inv + G + \left ( eX - iM \right )

In the name "Gross Domestic Product,"
"Gross" means that GDP measures production regardless of the various uses to which that production can be put. Production can be used for immediate consumption, for investment in new fixed assets or inventories, or for replacing depreciated fixed assets. If depreciation of fixed assets is subtracted from GDP, the result is called the Net domestic product; it is a measure of how much product is available for consumption or adding to the nation's wealth. In the above formula for GDP by the expenditure method, if net investment (which is gross investment minus depreciation) is substituted for gross investment, then net domestic product is obtained.


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:



Determining GDPEdit

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Product approachEdit

Usually in this approach the economy is broken down into classes of enterprise: agriculture, construction, manufacturing, etc. Their outputs are estimated largely on the basis of surveys which businesses fill out. To avoid "double-counting" in cases where the output of one enterprise is not a final good, but serves as input into another enterprise, either only final goods outputs must be counted, or a "value-added" approach must be taken, where what is counted is not the total value output by an enterprise, but its value-added: the difference between the value of its output and the value of its input.

Gross Value Added = Sum of values added by all enterprises = Sales of goods - purchase of intermediate goods to produce the goods sold

Depending on how gross value added has been calculated, it may be necessary to make an adjustment to it before it can be considered equal to GDP. This is because GDP is the market value of goods and services – the price paid by the customer – but the price received by the producer may be different than this if the government taxes or subsidises the product. For example, if there is a sales tax:

Producer's price + sales tax = market price

If taxes and subsidies have not already been computed as part of GVA, we must compute GDP as:

GDP = GVA + Taxes on products - Subsidies on products


Expenditure methodEdit


Components of GDP by expenditureEdit



Here is a description of each GDP component:



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, below]."[6]

Examples of GDP component variablesEdit





File:Gdp real growth rate 2007 CIA Factbook.PNG

Income methodEdit

Another way of measuring GDP is to measure total income. 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 above. (By definition, GDI = GDP. In practice, however, measurement errors will make the two figures slightly off when reported by national statistical agencies.)


GDP = COE + GOS + GMI + TP & M - SP & M
  • Compensation of employees (COE) measures the total renumeration to employees for work done. It includes wages and salaries, as well as employer contributions to social security and other such programs.


Total factor income is also sometimes expressed as:

Total factor income = Employee compensation + Corporate profits + Proprieter's income + Rental income + Net interest[7]


GDP = R + I + P + SA + W

where R : rents
I : interests
P : profits
W : wages
Note the mnemonic, "ripsaw".

The production boundaryEdit

Not all useful human activity is counted in GDP. Indeed, not everything that economists recognise as "production" is counted in GDP. The economists who compile GDP readily admit even the latter point. However, it raises several questions: What does GDP actually measure? Is it a useful figure? Does it mean what most people think it means?

The economists who compile national accounts speak of a "production boundary" that delimits what will be counted as GDP.


This leaves non-market output. It is partly excluded and partly included. First, "natural processes without human involvment or direction" are excluded.[10] Also, there must be a person or institution that owns or is entitled to compensation for the product. An example of what is included and excluded by these criteria is given by the United States' national accounts agency: "the growth of trees in an uncultivated forest is not included in production, but the harvesting of the trees from that forest is included."[11]

Within the limits so far described, the boundary is further constricted by "functional considerations."[12] The Australian Bureau for Statistics explains this: "The national accounts are primarily constructed to assist governments and others to make market-based macroeconomic policy decisions, including analysis of markets and factors affecting market performance, such as inflation and unemployment." Consequently, production that is, according to them, "relatively independent and isolated from markets," or "difficult to value in an economically meaningful way" [ie., difficult to put a price on] is excluded.[13] Thus excluded are services provided by people to members of their own families free of charge, such as child rearing, meal preparation, cleaning, transportation, entertainment of family members, emotional support, care of the elderly.[14] Most other production for own (or one's family's) use is also excluided, with two notable exceptions which are given in the list later in this section.

Nonmarket outputs that are included within the boundary are listed below. Since, by definition, they do not have a market price, the complilers of GDP must impute a value to them, usually either the cost of the goods and services used to produce them, or the value of a similar item that is sold on the market.

  • Goods and services provided by governments and non-profit organisations free of charge or for economically insignficant prices are included. The value of these goods and services is estimated as equal to their cost of production.[15]

GDP vs GNPEdit

GDP can be contrasted with gross national product (GNP) or gross national income (GNI). The difference is that GDP defines its scope according to location, while GNP defines its scope according to ownership. GDP is product produced within a country's borders; GNP 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, but foreign ownership makes GDP and GNP 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 GNP; on the other hand, production by an enterprise located outside the country, but owned by one of its citizens, counts as part of its GNP but not its GDP.

To take the United States as an example, the U.S.'s GNP is the value of output produced by American-owned firms, regardless of where the firms are located.

Gross national income (GNI) equals GDI plus income receipts from the rest of the world minus income payments to the rest of the world.

In 1991, the United States switched from using GNP to using GDP as its primary measure of production.[18] The relationship between United States GDP and GNP is shown in table 1.7.5 of the National Income and Product Accounts [1].

Year-over-year real GNP growth in the United States in 2007 was 3.2%.

International standardsEdit



Template:Expand section

National measurementEdit


Main article: National agencies responsible for GDP measurement

Interest ratesEdit


Adjustments to GDPEdit

When comparing GDP figures from one year to another, it is desirable to compensate for changes in the value of money – inflation or deflation. The raw GDP figure as given by the equations above is called the nominal, or historical, or current, GDP. To make it more meaningful for year-to-year comparisons, it may be multiplied by the ratio between the value of money in the year the GDP was measured and the value of money in some base year. For example, suppose a country's GDP in 1990 was $100 million and its GDP in 2000 was $300 million; but suppose that inflation had halved the value of its currency over that period. To meaningfully compare its 2000 GDP to its 1990 GDP we could multiply the 2000 GDP by one-half, to make it relative to 1990 as a base year. The result would be that the 2000 GDP equals $300 million x one-half = $150 million, in 1990 monetary terms. We would see that the country's GDP had, realistically, increased by 1.5 times over that period, not 3 times, as it might appear from the raw GDP data. The GDP adjusted for changes in money-value in this way is called the real, or constant, GDP.

The factor used to convert GDP from current to constant values in this way is called the GDP deflator. Unlike the Consumer price index, which measures inflation (or deflation – rarely!) in the price of household consumer goods, the GDP deflator measures changes in the prices all domestically produced goods and services in an economy – including investment goods and government services, as well as household consumption goods.[19]

Constant-GDP figures allow us to calculate a GDP growth rate, which tells us how much a country's production has increased (or decreased, if the growth rate is negative) compared to the previous year.

Real GDP growth rate for year n = [(Real GDP in year n) - (Real GDP in year n - 1)]/ (Real GDP in year n - 1)

Another thing that it may be desirable to compensate for is population growth. If a country's GDP doubled over some period but its population tripled, the increase in GDP may not be deemed such a great accomplishment: the average person in the country is producing less than they were before. Per-capita GDP is the measure compensated for population growth.

Cross-border comparisonEdit

The level of GDP in different countries may be compared by converting their value in national currency according to either the current currency exchange rate, or the purchase power parity exchange rate.


  • The purchasing power parity method accounts for the relative effective domestic purchasing power of the average producer or consumer within an economy. The method can provide a better indicator of the living standards of less developed countries, because it compensates for the weakness of local currencies in the international markets. For example, India ranks 12th by nominal GDP, but fourth by PPP. The PPP method of GDP conversion is more relevant to non-traded goods and services.


For more information, see Measures of national income and output.

Standard of living and GDPEdit

GDP per capita is not a measurement of the standard of living in an economy. However, it is often used as such an indicator, on the rationale that all citizens would benefit from their country's increased economic production. Similarly, GDP per capita is not a measure of personal income. GDP may increase while incomes for the majority of a country's citizens may even decrease or change disproportionally. For example, in the US from 1990 to 2006 the earnings (adjusted for inflation) of individual workers, in private industry and services, increased by less than 0.5% per year while GDP (adjusted for inflation) increased about 3.6% per year over the same period.[20]

The major advantage of GDP per capita as an indicator of standard of living is that it is measured frequently, widely and consistently. It is measured frequently in that most countries provide information on GDP on a quarterly basis, which allows a user to spot trends regularly. It is measured widely in that some measure of GDP is available for almost every country in the world, allowing comparisons to be made between countries. It is measured consistently in that the technical definition of GDP is relatively consistent among countries.

The major disadvantage 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 particular country. Nothing about the definition of GDP suggests 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 the standard of living, but that, all other things being equal, the standard of living tends to increase when GDP per capita increases. As such, GDP can be a proxy for the standard of living, rather than a direct measure. The sometimes use of GDP per capita as a proxy of labor productivity is also problemmatic.

Limitations of GDP to judge the health of an economyEdit

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. Not only that, but if the aim of economic activity is to produce ecologically sustainable increases in the overall human standard of living, GDP is a perverse measurement; it treats loss of ecosystem services as a benefit instead of a cost. Other criticisms of how the GDP is used include:

  • Wealth distribution – GDP does not take disparity in incomes between the rich and poor into account. However, numerous Nobel-prize winning economists have disputed the importance of income inequality as a factor in improving long-term economic growth. In fact, short term increases in income inequality may even lead to long term decreases in income inequality. See income inequality metrics for discussion of a variety of inequality-based economic measures.
  • Non-market transactions – GDP excludes activities that are not provided through the market, such as household production and volunteer or unpaid services. As a result, GDP is understated. Unpaid work conducted on 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. Shedding some doubt on this claim, however, is the theory that won economist Douglass North the Nobel Prize in 1993. North argued that the creation and strengthening of the patent system, by encouraging private invention and enterprise, became the fundamental catalyst behind the Industrial Revolution in England.
  • GDP also ignores subsistence production.
  • 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.
  • 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.
  • Externalities – GDP ignores externalities or economic bads such as damage to the environment. By counting goods which increase utility but not deducting bads or accounting for the negative effects of higher production, such as more pollution, GDP is overstating economic welfare. The Genuine Progress Indicator is thus proposed by ecological economists and green economists as a substitute for GDP. In countries highly dependent on resource extraction or with high ecological footprints the disparities between GDP and GPI can be very large, indicating ecological overshoot. Some environmental costs, such as cleaning up oil spills are included in GDP.
  • 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.
  • 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. For this reason, economists comparing multiple countries usually use a varied basket of goods.
  • Transfer pricing on cross-border trades between associated companies may distort import and export measures[citation 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.
  • Austrian economist critique – Criticisms of GDP figures were expressed by Austrian economist Frank Shostak.[21] Among other criticisms, he stated the following:
    He goes on:
    Austrian economists are critical of the basic idea of attempting to quantify national output. Shostak quotes Austrian economist Ludwig von Mises:

Simon Kuznets in his very first report to the US Congress in 1934 said:[22]

...the welfare of a nation [can] scarcely be inferred from a measure of national income...
In 1962, Kuznets stated:[23]

Alternatives to GDPEdit

  • 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 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.
  • Gini coefficient - The Gini coefficient measures the disparity of income within a nation.
  • Wealth estimates - The World Bank has developed a system for combining monetary wealth with intangible wealth (institutions and human capital) and environmental capital.[24]
  • Private Product Remaining - Murray Newton Rothbard and other Austrian economists argue that because government spending is taken from productive sectors and produces goods that consumers do not want, it is a burden on the economy and thus should be deducted. In his book, America's Great Depression, Rothbard argues that even government surpluses from taxation should be deducted to create an estimate of PPR.

Some people have looked beyond standard of living at a broader sense of quality of life or well-being:


Lists of countries by their GDPEdit

See alsoEdit


Australian Bureau for Statistics, Australian National Accounts: Concepts, Sources and Mathods, 2000. Retrieved November 2009. In depth explanations of how GDP and other national accounts items are determined.

United States Department of Commerce, Bureau of Economic Analysis, Concepts and Methods of the United States National Income and Product AccountsPDF. Retrieved November 2009. In depth explanations of how GDP and other national accounts items are determined.


  1. Sullivan, Arthur; Steven M. Sheffrin (1996). Economics: Principles in action, 57, 305, Upper Saddle River, New Jersey 074589: Pearson Prentice Hall.
  2. French President seeks alternatives to GDP, The Guardian 14-09-2009.
    European Parliament, Policy Department Economic and Scientific Policy: Beyond GDP StudyPDF
  3. World Bank, Statistical Manual >> National Accounts >> GDP – final output, retrieved October 2009.
    User's guide: Background information on GDP and GDP deflator. HM Treasury.
    Measuring the Economy: A Primer on GDP and the National Income and Product Accounts. (PDF) Bureau of Economic Analysis.
  4. This calculation can be seen in United Kingdom, Annual Abstract of StatisticsPDF, 2008, p 254, Table 16.2 "gross domestic product and national income, current prices," near the top of the table. The United States appears to already include taxes minus subsidies in GVA, and thus equate it directly to GDP (BEA, Concepts and Methods of the National Income and Product Accounts of the United States, section 2-9).
  6. Concepts and Methods of the United States National Income and Product Accounts, chap. 2.
  7. United States Bureau of Economic Analysis, A guide to the National Income and Product Accounts of the United StatesPDF, page 5; retrieved November 2009. Another term, "business current transfer payments," may be added. Also, the document indicates that Capital Consumption Adjustment (CCAdj) and Inventory Valuation Adjustment (IVA) are applied to the proprieter's income and corporate profits terms; and CCAdj is applied to rental income.
  8. BEA, Concepts and Methods of the United States National Income and Product Accounts, p 12.
  9. Australian National Accounts: Concepts, Sources and Methods, 2000, sections 3.5 and 4.15.
  13. Australian National Accounts: Concepts, Sources and Methods, 2000, section 4.4.
  18. United States, Bureau of Economic Analysis, Glossary, "GDP", retrieved November 2009.
  19. HM Treasury, Background information on GDP and GDP deflator
    Some of the complications involved in comparing national accounts from different years are suggested in this World Bank document.
  20. Statistical Abstract of the United States 2008. Tables 623 and 647
  22. Simon Kuznets, 1934. "National Income, 1929-1932". 73rd US Congress, 2d session, Senate document no. 124, page 7.,888
  23. Simon Kuznets. "How To Judge Quality". The New Republic, October 20, 1962
  24. World Bank wealth estimates.
  25. First European Quality of Life Survey.

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