The Definition of GDP

By Andrew Otis , last updated July 11, 2011

Gross Domestic Product, known in short as GDP, is widely used as an indicator of the economic health of a country. GDP is usually calculated in United States Dollar amounts. It represents the total dollar value of all goods and services produced and performed within one country over a one year period. GDP is usually expressed as a comparison against the last quarter or year. The gritty aspects of GDP can be quite difficult to accurately calculate, since there are so many variables and oftentimes very spotty data.

GDP can be calculate in two ways, one by summing up incomes in a country, or by summing up expenditures in a country. The more commonly seen method is of expenditures.

Expenditure Formula

GDP = C + G + I + (E-M)

In this formula, "C" is equal to all private consumption, or consumer spending, in a nation's economy. Consumption is all things related to personal expenditures on goods ranging anywhere from food to medical expenses. "G" is the sum of all government spending of the country, "I" is for investment. It is the sum of all the country's businesses spending on capital. This does not include financial products like bonds, since those are considered savings, not investments. "E-M" is the nation's total net exports, which is calculated as country's total exports minus total imports.

Income Formula

GDP =compensation of employees + gross operating surplus + gross mixed income + taxes less subsidies on production and imports.

Compensation of employees measures the total remuneration to employees for work done, including wages and salaries, as well as employer contributions to social security and other programs. Gross operating surplus is the surplus owed to owners of incorporated businesses. Gross mixed income is the same as for the gross operating surplus except for unincorporated businesses, which includes most small businesses.

GDP Per Capita

You can further calculate GDP per capita (GDPpc), which is a country's gross domestic product per person, by dividing GDP by the number of people within a country. GDPpc gives a sense of the wealth of a country divided. Often, as is the case with developing countries, GDP rises quickly along with population. However, GDPpc may not rise as quickly because a country's increased wealth has to be divided over more people.

Criticisms of GDP

Prior to 1990, GDP per capita was the most common statistic used to compare levels of social modernization across countries. Using GDP to measure country development bothered some researchers, most notably Pakistani economist Mahbub ul Haq and Indian economist Amartya Sen, who were convinced that the study of social modernization should not be restricted to economic progress, but also include advancements in human well-being.

The drive ‘‘to shift the focus of development economics from national income accounting to people centered policies’’ caused the United Nations’ Human Development Program to create the Human Development Index in 1990. Using the HDI, researchers could rank countries according to a single, simple index which incorporates the full complexity of human capabilities and societies.

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