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Encyclopedia > Real GDP

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. It is one of the measures of national income and output.

Contents

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.


Calculation

United States

The GDP is calculated by the Bureau of Economic Analysis (BEA).


Interest rates

Net interest expense is a transfer payment in all sectors except the financial sector. Net interest expenses in the financial sector is seen as production and value added and is added to GDP.


Cross-border comparison

GDPs of different countries may be compared by converting their value in national currency according to either

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.


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. For cross-border comparisons 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 bartering, volunteer work, or informal creation of wealth, such as unpaid childcare provided by non-working parents, 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 growth, 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 externalities. 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 window.
  • 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.


United States GDP

To give an example of the components and their size. ([1] (http://www.bea.gov/bea/dn/nipaweb/TableView.asp?SelectedTable=5&FirstYear=2002&LastYear=2004&Freq=Qtr))

Gross Domestic Product (Billions of dollars)
Period Ending 2003
Gross domestic product 11,004.0
Personal consumption expenditures 7,760.9
Durable goods 950.7
Nondurable goods 2,200.1
Services 4,610.1
Gross private domestic investment 1,665.8
Fixed investment 1,667.0
      Nonresidential 1,094.7
            Structures 261.6
            Equipment and software 833.1
      Residential 572.3
Change in private inventories -1.2
Net exports of goods and services -498.1
Exports 1,046.2
      Goods 726.4
      Services 319.8
Imports 1,544.3
      Goods 1,282.0
      Services 262.3
Government consumption expenditures and gross investment 2,075.5
Federal 752.2
      National defense 496.4
      Nondefense 255.7
State and local 1,323.3

Lists of countries by their GDP

See also

Calculation

  • Classification of Products by Activity (CPA)
  • Financial Intermediation Services Indirectly Measured (FISIM)

External links

  • GDP-indexed bonds (http://perso.wanadoo.fr/pgreenfinch/eoblpib.htm)

Data

  • Complete listing of countries by GDP: Purchasing Power Parity Method (http://aol.countrywatch.com/includes/grank/globrank.asp?TBLS=PPP+Method+Tables&vCOUNTRY=17&TYPE=GRANK) and Current Exchange Rate Method  (http://aol.countrywatch.com/includes/grank/gdpnumericcer.asp?TYPE=GRANK&TBL=NUMERICCER&vCOUNTRY=17)

Articles


  Results from FactBites:
 
What Was the GDP Then? | EH.Net (372 words)
Real GDP is the dollar value of production using a given base year prices.
GDP per capita is calculated by dividing either nominal or real GDP for a given year by the population in that year.
The nominal GDP per capita in 1870 was $195, while in 2006 was $44,070; the real GDP per capita for those same years was $2,509 and $37,807.
BEA: News Release: Gross Domestic Product (7606 words)
The slight acceleration in real GDP growth in the third quarter primarily reflected accelerations in PCE and in exports that were partly offset by an upturn in imports, a larger decrease in residential fixed investment, and a deceleration in nonresidential structures.
Real federal government consumption expenditures and gross investment increased 6.8 percent in the third quarter, compared with an increase of 6.0 percent in the second.
Measures of real GDP and its major components are also presented in dollar-denominated form, designated "chained (2000) dollar estimates." For most series, these estimates, which are presented in table 3, are computed by multiplying the current-dollar value in 2000 by a corresponding quantity index number and then dividing by 100.
  More results at FactBites »

 
 

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