What is... | August 31, 2010

What is GDP?

Many economists barely go through a day without uttering the three letter acronym GDP, such is its importance. GDP – or gross domestic product – is arguably the most important indicator of how countries are faring economically.

If the GDP of a country is positive, the economy is growing. If it is negative, the economy is contracting. GDP also acts as a measure of standard of living – but its suitability for this is a topic of robust debate, one in which French president Nicholas Sarkozy is a main proponent. eZonomics looks behind the headline numbers to see how GDP is calculated and its role in day-to-day life.

GDP aims to measure an economy in a single figure
Many economists will barely go through a day without uttering the three letter acronym GDP, such is its importance. GDP allows activity in an economy to be measured and compared over time. A basic definition of a recession, for example, is two quarters of negative GDP growth – while a recovery technically begins when GDP turns positive. GDP per capita (or per person) is also widely used as an indicator when comparing across countries.

It measures the value of goods and services being produced
GDP is typically calculated by government statisticians using real (or inflation adjusted) terms. The United Kingdom’s Office for National Statistics describes how it produces a single GDP estimate using three theoretical approaches. The approaches relate to the value of goods and services created, total expenditure on the finished goods and services and the income generated by the production of the goods and services. Likewise, Eurostat, the statistical office of the European communities, details how it works out the value of all goods and services produced less the value of any goods or services used when it calculates its real GDP growth rate for countries in Europe.

Can GDP gauge standard of living?
GDP has been used as an indication of communities’ well-being and living standards but there is widespread debate about its suitability for this. A report by Nobel Prize winner Joseph Stiglitz, commissioned by French President Nicholas Sarkozy, said measures of well being should be broadened from the focus on production. Likewise, a week-long debate on The Economist online decided GDP growth is not a good measure of living standards, with happiness academic Andrew Oswald saying “GDP is a gravely dated pursuit”.


eZonomics team
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