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[[Image:Gdp nominThe
gross domestic product
(
GDP) or
gross domestic income
(
GDI) is a basic measure of a country's overall
economic performance. 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, 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.World Bank, Statistical Manual >>
National Accounts >>
GDP – final output, retrieved October
2009.
Example: the expenditure method:
- GDP = private
consumption + gross
investment + government
spending + (exports − imports), or
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.
"Domestic" means that GDP measures production that takes place
within the country's borders. In the expenditure-method equation
given above, the exports-minus-imports term is necessary in order
to null out expenditures on things not produced in the country
(imports) and add in things produced but not sold in the country
(exports).
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:
- Private consumption is a central concern of
welfare economics. The private
investment and trade portions of the economy are ultimately
directed (in mainstream economic models) to increases in long-term
private consumption.
- If separated from endogenous private consumption,
government consumption can be treated as exogenous, so that different government spending
levels can be considered within a meaningful macroeconomic
framework.
Gross domestic product comes under the heading of
national accounts, which is a subject in
macroeconomics. Economic measurement
is called
econometrics.
Determining GDP
Product approach
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 method
In contemporary economies, most things produced are produced for
sale, and sold. Therefore, measuring the total expenditure of money
used to buy things is a way of measuring production. This is known
as the expenditure method of calculating GDP. Note that if you knit
yourself a sweater, it is production but does not get counted as
GDP because it is never sold. Sweater-knitting is a small part of
the economy, but if one counts some major activities such as
child-rearing (generally unpaid) as production, GDP ceases to be an
accurate indicator of production.
Components of GDP by expenditure
GDP (Y) is a sum of
Consumption
(C),
Investment (I),
Government
Spending (G) and
Net Exports (X - M).
- Y = C + I +
G + (X − M)
Here is a description of each GDP component:
- C (consumption) is normally the largest GDP
component, consisting of private household expenditures in the
economy. These personal expenditures falls under one of the
following categories: durable goods,
non-durable goods, and services. Examples include food, rent,
jewelry, gasoline, and medical expenses but does not include the
purchase of new housing.
- I (investment) includes business investment in
plant, equipment, inventory, and structures, and 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
stocks is a swapping of deeds, a transfer of claims on future production, not
directly an expenditure on products.
- G (government spending) is the sum of government expenditures on final goods and services. It includes salaries
of public servants, purchase 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.
- 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,
G, and
I 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.)
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]."
Examples of GDP component variables
C,
I,
G, and
NX(net exports): If a person spends money to
renovate a hotel to increase occupancy rates, the spending
represents private investment, but if he buys shares in a
consortium to execute the renovation, it is
saving. The former is included when measuring GDP (in
I), the latter is not. However, when the
consortium conducted its own expenditure on renovation, that
expenditure would be included in GDP.
If a hotel is a private home, spending for renovation would be
measured as
consumption, but if a government
agency converts the hotel into an office for civil servants, the
spending would be included in the public sector spending, or
G.
If the renovation involves the purchase of a
chandelier from abroad, that spending would
becounted as
C,
G, or
I (depending on whether a private individual, the
government, or a business is doing the renovation), but then
counted again as an import and subtracted from the GDP so that GDP
counts only goods produced within the country.
If a domestic producer is paid to make the chandelier for a foreign
hotel, the payment would not be counted as
C,
G, or
I, but would be counted as
an export.
Income method
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.)
Total income can be subdivided according to various schemes,
leading to various formulae for GDP measured by the income
approach. A common one is:
- GDP = compensation of
employees + gross operating
surplus + gross mixed income
+ taxes less subsidies on production and imports
- GDP = COE +
GOS + GMI + TP &
M - SP & M
- 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 at
factor cost to GDP(I).
Total factor income is also sometimes expressed as:
- Total factor income = Employee compensation + Corporate
profits + Proprieter's income + Rental income + Net
interest
Yet another formula for GDP by the income method is:
- GDP = R + I + P + SA + W
where R : rents
I : interests
P : profits
SA : statistical adjustments (corporate income taxes, dividends,
undistributed corporate profits)
W : wages
Note the mnemonic, "ripsaw".
The production boundary
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.
"One of the fundamental questions
that must be addressed in preparing the national economic accounts
is how to define the production boundary – that is, what parts of
the myriad human activities are to be included in or excluded from
the measure of the economic production."
All output for market is at least in theory included within the
boundary. Market output is defined as that which is sold for
"economically significant" prices; economically significantprices
are "prices which have a significant influence on the amounts
producers are willing to supply and purchasers wish to buy."An
exception is that illegal goods and services are often excluded
even if they are sold at economically significant prices (Australia
and the United States exclude them).
This leaves non-market output. It is partly excluded and partly
included. First, "natural processes without human involvment or
direction" are excluded.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."
Within the limits so far described, the boundary is further
constricted by "functional considerations."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.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.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.
- Goods and services produced for own-use by businesses are
attempted to be included.
- An example of this kind of production would be a machine
constructed by an engineering firm for use in its own plant.
- Renovations and upkeep by an individual to a home that she owns
and occupies are included.
- The value of the upkeep is estimated as the rent that she could
charge for the home if she did not occupy it herself.
- This is the largest item of production for own use by an
individual (as opposed to a business) that the compilers include in
GDP.
- Agricultural production for consumption by oneself or one's
household is included.
- Services (such as chequeing-account maintenance and services to
borrowers) provided by banks and other financial institutions
without charge or for a fee that does not reflect their full value
have a value imputed to them by the compilers and are
included.
- The financial institutions provide these services by giving the
customer a less advantageous interest rate than they would if the
services were absent; the value imputed to these services by the
compilers is the difference between the interest rate of the
account with the services and the interest rate of a similar
account that does not have the services.
- According to the United States Bureau for Economic Analysis,
this is one of the largest imputed items in the GDP.
GDP vs GNP
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.The relationship between United
States GDP and GNP is shown in table 1.7.5 of the
National
Income and Product Accounts [1549].
Year-over-year real GNP growth in the United States in 2007 was
3.2%.
International standards
The
international standard for measuring GDP is contained in the book
System of
National Accounts (1993), which was prepared by
representatives of the International Monetary Fund
, European Union,
Organization
for Economic Co-operation and Development, United Nations and World Bank. The publication is normally
referred to as SNA93 to distinguish it from the previous edition
published in 1968 (called SNA68) .
SNA93 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
Within each country GDP is normally measured by a national
government statistical agency, as private sector organizations
normally do not have access to the information required (especially
information on expenditure and production by governments).
Interest rates
Net interest expense is a
transfer
payment in all sectors except the financial sector. Net
interest expenses in the financial sector are seen as
production and
value
added and are added to GDP.
Adjustments to GDP
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.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.
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 comparison
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 ranking of countries may differ significantly based on which
method is used.
- The current exchange rate method converts the value of
goods and services using global currency exchange rates. The method can offer better
indications of a country's international purchasing power and
relative economic strength. For instance, if 10% of GDP is being
spent on buying hi-tech foreign arms, the
number of weapons purchased is entirely governed by current
exchange rates, since arms are a traded product bought on the
international market. There is no meaningful 'local' price distinct
from the international price for high technology goods.
- 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.
There is a clear pattern of the
purchasing power parity
method decreasing the disparity in GDP between high and low
income (GDP) countries, as compared to the
current exchange
rate method. This finding is called the
Penn effect.
For more information, see
Measures of national
income and output.
Standard of living and GDP
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.
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 country. Nothing
about the definition of GDP suggests that 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 economy
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.
- Underground economy – Official GDP estimates
may not take into account the underground economy, in which
transactions contributing to production, such as illegal trade and
tax-avoiding activities, are unreported, causing GDP to be
underestimated.
- Non-monetary economy – GDP omits economies
where no money comes into play at all, resulting in inaccurate or
abnormally low GDP figures. For example, in countries with major
business transactions occurring informally, portions of local
economy are not easily registered. Bartering may be more prominent than the
use of money, even extending to services (I helped you build your
house ten years ago, so now you help me).
- 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.
- Quality improvements and inclusion of new
products – By not adjusting for quality improvements and
new products, GDP understates true economic growth. For instance,
although computers today are less expensive and more powerful than
computers from the past, GDP treats them as the same products by
only accounting for the monetary value. The introduction of new
products is also difficult to measure accurately and is not
reflected in GDP despite the fact that it may increase the standard
of living. For example, even the richest person from 1900 could not
purchase standard products, such as antibiotics and cell phones,
that an average consumer can buy today, since such modern
conveniences did not exist back then.
- 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.
- Cross-border comparisons of GDP can be inaccurate as they do
not take into account local differences in the quality of goods,
even when adjusted for purchasing power parity. This type
of adjustment to an exchange rate is controversial because of the
difficulties of finding comparable baskets of goods to compare
purchasing power across countries. For instance, people in country
A may consume the same number of locally produced apples as in
country B, but apples in country A are of a more tasty variety.
This difference in material well being will not show up in GDP
statistics. This is especially true for goods that are not traded
globally, such as housing.
- Transfer pricing on
cross-border trades between associated companies may distort import
and export measures .
- 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.
Among other criticisms, he stated the following:
The GDP framework cannot tell us whether final goods and services that were produced
during a particular period of time are a reflection of real wealth
expansion, or a reflection of capital consumption.
He goes on:
For instance, if a government embarks on the building
of a pyramid, which adds absolutely nothing to the well-being of
individuals, the GDP framework will regard this as economic
growth.
In reality, however, the building of the pyramid will
divert real funding from wealth-generating activities, thereby
stifling the production of wealth.
Austrian economists are critical of the basic idea of attempting to
quantify national output. Shostak quotes Austrian economist Ludwig
von Mises:
The attempt to determine in money the wealth of a
nation or the whole mankind are as childish as the mystic efforts
to solve the riddles of the universe by worrying about the
dimension of the pyramid of Cheops.
Simon Kuznets in his very first report
to the US Congress in 1934 said:
...the welfare of a nation [can] scarcely be inferred
from a measure of national income...
In 1962, Kuznets stated:
Distinctions must be kept in mind between quantity and
quality of growth, between costs and returns, and between the short
and long run.
Goals for more growth should specify more growth of
what and for what.
Alternatives to GDP
- 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.
- 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:
- European Quality of
Life Survey - The survey, first published in 2005, assessed
quality of life across European countries through a series of
questions on overall subjective life satisfaction,
satisfaction with different aspects of life, and sets of questions
used to calculate deficits of time, loving, being and having.
- Gross
national happiness - The Centre for Bhutanese Studies in
Bhutan
is working on a complex set of subjective and
objective indicators to measure 'national happiness' in various
domains (living standards, health, education, eco-system diversity
and resilience, cultural vitality and diversity, time use and
balance, good governance, community vitality and psychological
well-being). This set of indicators would be used to assess
progress towards gross national happiness, which they have already
identified as being the nation's priority, above GDP.
- Happy Planet Index - The
happy planet index (HPI) is an index of human well-being and
environmental impact, introduced by the New Economics Foundation (NEF) in
2006. It measures the environmental efficiency with which human
well-being is achieved within a given country or group. Human
well-being is defined in terms of subjective life satisfaction
and life expectancy while
environmental impact is defined by the Ecological Footprint.
Lists of countries by their GDP
See also
Bibliography
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 Accounts. Retrieved November
2009. In depth explanations of how GDP and other national accounts
items are determined.
References
- This calculation can be seen in United Kingdom, Annual Abstract of Statistics, 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).
- Thayer Watkins, San José State University Department of
Economics, "Gross Domestic Product from the Transactions Table
for an Economy", commentary to first table, " Transactions
Table for an Economy". (Page retrieved November 2009.)
- Concepts and Methods of the United States National Income
and Product Accounts, chap. 2.
- United States Bureau of Economic Analysis, A guide to the National Income and Product Accounts of
the United States, 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.
- BEA, Concepts and Methods of the United States National
Income and Product Accounts, p 12.
- Australian National Accounts: Concepts, Sources and
Methods, 2000, sections 3.5 and 4.15.
- This and the following statement on entitlement to compensation
are from Australian National Accounts: Concepts, Sources and
Methods, 2000, section 4.6.
- Concepts and Methods of the United States National Income
and Product Accounts, page 2-2.
- Concepts and Methods of the United States National Income
and Product Accounts, page 2-2.
- Australian National Accounts: Concepts, Sources and
Methods, 2000, section 4.4.
- Concepts and Methods of the United States National Income
and Product Accounts, page 2-2; and Australian National
Accounts: Concepts, Sources and Methods, 2000, section
4.4.
- Concepts and Methods of the United States National Income
and Product Accounts, page 2-4.
- Concepts and Methods of the United States National Income
and Product Accounts, page 2-4.
- Concepts and Methods of the United States National Income
and Product Accounts, page 2-5.
- United States, Bureau of Economic Analysis, Glossary, "GDP", retrieved November 2009.
- Statistical Abstract
of the United States 2008. Tables 623 and 647
- http://mises.org/story/770
- Simon Kuznets, 1934. "National Income, 1929-1932". 73rd US
Congress, 2d session, Senate document no. 124, page 7.
http://library.bea.gov/u?/SOD,888
- Simon Kuznets. "How To Judge Quality". The New Republic,
October 20, 1962
External links
Global
Data
Articles and books
- What's
wrong with the GDP?
- Limitations of GDP Statistics by Schenk, Robert.
- whether output and CPI inflation are mismeasured,
by Nouriel Roubini and David Backus, in Lectures in
Macroeconomics
- "Measurement of the Aggregate Economy", chapter
22 of Dr. Roger A. McCain's Essential Principles of Economics: A Hypermedia
Text
- Growth, Accumulation, Crisis: With New
Macroeconomic Data for Sweden 1800-2000 by Rodney
Edvinsson
- Clifford Cobb, Ted Halstead and Jonathan Rowe. "If the GDP is
up, why is America down?" The Atlantic Monthly, vol. 276, no. 4,
October 1995, pages 59–78.
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