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In economics, the gross domestic product (GDP) is a measure of the amount of the economic production of a particular territory in financial capital terms during a specific time period. 1 Definition
GDP is defined as the total value of all goods and services produced within that territory during a specified period (most commonly, per year). GDP differs from gross national product in excluding inter-country income transfers, in effect attributing to a territory the product generated within it rather than the incomes received in it.
Whereas nominal GDP refers to the total amount of money spent on GDP, real GDP refers to an effort to correct this number for the effects of inflation in order to estimate the sum of the actual quantity of goods and services making up GDP. The former is sometimes called "money GDP," while the latter is termed "constant-price" or "inflation-corrected" GDP -- or "GDP in base-year prices" (where the base year is chosen arbitrarily). See real vs. nominal in economics.
A common equation for GDP is:
- GDP = consumption + investment + exports - imports
Aggregate expenditures are calculated in a similar way, although the aggregate expenditures formula does not account for unplanned investment (left over inventory at the end of the reporting cycle) and is more commonly used by economic theorists.
GDPs of different countries may be compared by converting their value in national currency according to either
- current currency exchange rate: GDP calculated by exchange rates prevailing on international currency market s
- purchasing power parity exchange rate: GDP calculated by purchasing power parity (PPP) of each currency relative to a selected standard (usually the United States dollar).
The relative ranking of countries may differ dramatically between the two approaches.
The purchasing power parity method accounts for the relative effective domestic purchasing power of the average producer or consumer within an economy. This can be a better indicator of the living standards of less-developed countries because it compensates for the weakness of local currencies in world markets.
The current exchange rate method converts the value of goods and services using global currency exchange rates. This can offer better indications of a country's international purchasing power and relative economic power.
For more information see measures of national income.
2 Problems
Although GDP is widely used by economists, its value as an indicator has also been the subject of controversy. Criticisms of GDP include:
- Very often different calculations of the GDP are confused among each other. One should especially regard whether it is calculated by purchasing power parity method or current exchange rate method.
- GDP, as a measure of economic size, fails to measure well-being and standard of living accurately.
- GDP doesn't take into account the black economy, non-monetary economy such as barterBarter is a simple form of trade where goods or services are exchanged for a certain amount of other goods or services, i. there is no money involved in the transaction. Barter trade was common in societies where no monetary system existed or in economiesing, volunteerA volunteer noun is a person who performs or offers to perform a service out of his or her own free will, often without payment. The year 2001 was the International Year of the Volunteer. People may volunteer verb to perform charitable work. Some voluntee work, or informal creation of wealth, such as unpaid childcareChildcare is the act of caring for and supervising minor children. It is traditional in western society for children to be looked after by one or both of their parents, but the need for two-job households means that childcare is often delegated, at least provided by non-working parentsA homemaker is a person whose prime occupation is to care for their family and home. The term homemaker is used in preference to either housewife or househusband because it is inclusive, defines the role in terms of activities, rather than relation to ano, or production of goods taking place at home. Hence, in countries with major business transactions occurring informally, portions of local economy are not easily registered, resulting in inaccurate or abnormally low GDP figures.
- GDP doesn't measure the sustainability of growthBefore the widespread use of the term sustainable industries, the terms sustainable economy and sustainable development were prevalent. Their popularization started with the United Nations Conference for Environment and Development (the Earth Summit) in 1, as a country may achieve a temporary high GDP by over-exploiting natural resources.
- GDP counts work that produces no net gain, and does not account for negative externalitiesAn externality occurs in economics when a decision (e. to wear obnoxious perfume or to dress up in nice clothes) causes costs or benefits to individuals or groups other than the person making the decision. In other words, the decision-maker does not bear. For example, if a factory pollutes a river, that boosts GDP, and when the taxpayers pay to have it cleaned up, that boosts GDP again. See parable of the broken windowThe parable of the broken window was created by Frederic Bastiat in his 1850 essay That Which is Seen and That Which is Not Seen to illuminate the notion of hidden costs a. opportunity costs). This idea is not to be confused with the supposed sociological.
- GDP also does not tell us the actual distribution of the wealth of a country. Certain groups of people within a country might not be benefiting from its economic wealth. A high GDP could be the result of a case of a few very wealthy people contributing to the economy, while most of its citizens live at or below the subsistence level.
In spite of the problems with GDP as an economic measurement, concrete proposals for a replacement metric have been difficult to generate. A proposed substitute known as the Genuine Progress Indicator (GPI) has been promoted by the Green Party of Canada. How exactly to determine GPI is uncertain, however; one possible formula was devised by Redefining Progress, a San Francisco policy research group.
