Gross domestic product

Gross domestic product (GDP) is the monetary value of the final goods and services produced within a geographic area during a specified period. It is one of the principal measures of the size and economic activity of an economy.

GDP can be measured using production, expenditure, or income approaches.

A simplified representation is:

$\text{GDP}=\text{Value of Final Output Produced Within an Economy}$

GDP is commonly reported for quarters and years and can be expressed in nominal or real terms.

Expenditure approach

Under the expenditure approach, GDP is measured as the sum of expenditure on final goods and services.

A simplified identity is:

$Y=C+I+G+(X-M)$

where:

• $Y$ = GDP;
• $C$ = household consumption expenditure;
• $I$ = investment;
• $G$ = government expenditure on final goods and services;
• $X$ = exports;
• $M$ = imports.

The term $(X-M)$ represents net exports.

Imports are subtracted because they are included in consumption, investment, or government expenditure but are not produced domestically.

Production approach

Under the production approach, GDP is calculated from the value added generated by producers across the economy.

A simplified relationship is:

$\text{GDP}=\sum \text{Gross Value Added}+\text{Taxes on Products}-\text{Subsidies on Products}$

Gross value added is the value of output less intermediate consumption.

A simplified representation is:

$\text{Gross Value Added}=\text{Output}-\text{Intermediate Consumption}$

This approach allows economic activity to be measured across different industries and sectors.

Income approach

The income approach measures GDP through the incomes generated by production.

These can include:

• compensation of employees;
• operating surplus;
• mixed income;
• taxes on production and imports, less subsidies.

A simplified representation is:

$\text{GDP}=\text{Compensation}+\text{Operating Surplus}+\text{Mixed Income}+\text{Net Taxes on Production and Imports}$

The precise accounting treatment depends on the applicable national-accounts framework.

Nominal GDP

Nominal GDP measures economic output using prices prevailing during the period being measured.

A simplified representation is:

$\text{Nominal GDP}=\sum (P_t{Q}_t)$

where:

• $P_t$ = price during period $t$;
• $Q_t$ = quantity of output during period $t$.

Nominal GDP can increase because of higher production, higher prices, or both.

Real GDP

Real GDP measures changes in the volume of economic production after removing the effects of changes in prices.

A simplified representation is:

$\text{Real GDP}=\text{GDP Measured at Constant or Chain-Linked Prices}$

Real GDP is commonly used to assess changes in the volume of economic activity over time.

A simplified relationship is:

$\text{Real GDP Growth}\approx \text{Change in Economic Output Volume}$

The precise calculation depends on the national statistical methodology.

GDP growth

GDP growth measures the change in GDP between two periods.

For real GDP, a simplified growth-rate calculation is:

$\text{GDP Growth Rate}=\frac{Y_t-Y_{t-1}}{Y_{t-1}}\times 100$

where:

• $Y_t$ = GDP in the current period;
• $Y_{t-1}$ = GDP in the previous comparable period.

Year-on-year growth compares GDP with the corresponding period of the previous year.

Quarter-on-quarter growth compares GDP with the immediately preceding quarter, subject to the statistical treatment of seasonal effects.

GDP per capita

GDP per capita is GDP divided by the population of the relevant geographic area.

A simplified formula is:

$\text{GDP per Capita}=\frac{\text{GDP}}{\text{Population}}$

GDP per capita is commonly used as an indicator of average economic output or income relative to population size.

It does not represent the actual income received by each individual.

GDP and economic welfare

GDP measures economic production but is not a comprehensive measure of economic welfare.

GDP does not directly measure factors such as:

• income distribution;
• unpaid household work;
• leisure;
• environmental quality;
• health outcomes;
• subjective well-being.

A simplified distinction is:

$\text{GDP}\ne \text{Complete Measure of Economic Welfare}$

GDP is therefore generally used together with other economic and social indicators when assessing living standards and welfare.

GDP and business cycles

Changes in real GDP are commonly used to identify movements in aggregate economic activity.

A simplified relationship is:

$\text{Real GDP Growth}\to \text{Change in Aggregate Economic Activity}\to \text{Business-Cycle Conditions}$

Periods of sustained declines in economic activity may be associated with economic recessions, although the definition of a recession can vary between institutions and jurisdictions.

GDP and inflation

Nominal and real GDP differ in their treatment of price changes.

A simplified relationship is:

$\text{Nominal GDP}\approx \text{Real GDP}\times \text{Price Effect}$

The ratio between nominal and real GDP can be used to derive the GDP deflator, which measures changes in the prices of domestically produced final goods and services.

A simplified formula is:

$\text{GDP Deflator}=\frac{\text{Nominal GDP}}{\text{Real GDP}}\times 100$

Limitations

GDP has several limitations as an economic indicator.

It does not by itself indicate how income is distributed among households, whether production improves individual welfare, or whether economic activity is environmentally sustainable.

GDP estimates can also be revised as additional information becomes available and statistical methodologies are updated.

A simplified distinction is:

$\text{GDP}\to \text{Measure of Economic Production}\ne \text{Complete Measure of Economic Conditions}$

GDP is therefore most informative when considered alongside employment, inflation, productivity, household income, investment, trade, and other economic indicators.

See also

• Gross national income
• Gross value added
• National accounts
• Real gross domestic product
• GDP deflator
• Economic growth
• Economic indicator
• Business cycle
• Nominal GDP
• GDP per capita