Gross domestic product
Gross domestic product (GDP) is a monetary measure of the market value[2] of all the final goods and services produced and rendered in a specific time period by a country[3] or countries.[4][5][6] GDP is more often used by the government of a single country to measure its economic health.[3] Due to its complex and subjective nature, this measure is often revised before being considered a reliable indicator.[7]
"GDP" redirects here. For other uses, see GDP (disambiguation).
GDP definitions are maintained by several 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)".[8] 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 (say a quarter or a year)."[9]
GDP (nominal) per capita does not 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.[10] Total GDP can also be broken down into the contribution of each industry or sector of the economy.[11] The ratio of GDP to the total population of the region is the per capita GDP (also called the Mean Standard of Living).
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. 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.[12] 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.
For example, the GDP of Germany in 2023 was 4100 Billion Euro, which included about 10% of taxes like the value-added tax.[13][14]
Nominal GDP and adjustments to GDP[edit]
The raw GDP figure as given by the equations above is called the nominal, historical, or current, GDP. When one compares GDP figures from one year to another, it is desirable to compensate for changes in the value of money – for the effects of inflation or deflation. 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 a base year.
For example, suppose a country's GDP in 1990 was $100 million and its GDP in 2000 was $300 million. Suppose also that inflation had halved the value of its currency over that period. To meaningfully compare its GDP in 2000 to its GDP in 1990, we could multiply the GDP in 2000 by one-half, to make it relative to 1990 as a base year. The result would be that the GDP in 2000 equals $300 million × 1⁄2 = $150 million, in 1990 monetary terms. We would see that the country's GDP had realistically increased 50 percent over that period, not 200 percent, 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 consumer price index, which measures inflation or deflation in the price of household consumer goods, the GDP deflator measures changes in the prices of all domestically produced goods and services in an economy including investment goods and government services, as well as household consumption goods.[35]
Constant-GDP figures allow us to calculate a GDP growth rate, which indicates how much a country's production has increased (or decreased, if the growth rate is negative) compared to the previous year.
Another thing that it may be desirable to account for is population growth. If a country's GDP doubled over a certain period, but its population tripled, the increase in GDP may not mean that the standard of living increased for the country's residents; the average person in the country is producing less than they were before. Per-capita GDP is a measure to account for population growth.
GDP per capita is often used as an indicator of living standards.[36]
The major advantage of GDP per capita as an indicator of the standard of living is that it is measured frequently, widely, and consistently. It is measured frequently in that most countries provide information on GDP every quarter, allowing trends to be seen quickly. It is measured widely in that some measure of GDP is available for almost every country in the world, allowing inter-country comparisons. It is measured consistently in that the technical definition of GDP is relatively consistent among countries.
GDP does not include several factors that influence the standard of living. In particular, it fails to account for:
It can be argued that GDP per capita as an indicator of standard of living is correlated with these factors, capturing them indirectly.[36][40] As a result, GDP per capita as a standard of living is a continued usage because most people have a fairly accurate idea of what it is and know it is tough to come up with quantitative measures for such constructs as happiness, quality of life, and well-being.[36]
Limitations and criticisms[edit]
Limitations at introduction[edit]
Simon Kuznets, the economist who developed the first comprehensive set of measures of national income, stated in his second report to the U.S. Congress in 1937, in a section titled "Uses and Abuses of National Income Measurements":[17]
Problems with GDP data[edit]
A peer-reviewed study published in the Journal of Political Economy in October 2022 found signs of manipulation of economic growth statistics in the majority of countries.[88] According to the study, this mainly applied to countries that were governed semi-authoritarian/authoritarian or did not have a functioning separation of powers. The study took the annual growth in the brightness of lights at night, as measured by satellites, and compared it to officially reported economic growth. Authoritarian states had consistently higher reported growth in GDP than their growth in night lights would suggest. An effect that also cannot be explained by different economic structures, sector composition or other factors. Incorrect growth statistics can also falsify indicators such as GDP or GDP per capita.[89]
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