Gross Domestic Product

Gross national product (GDP) is a total of the outputs recorded in a country’s national accounts. It is the best-known of such totals, and estimates of its growth rate are widely used as indicators of the prospects of inflation or unemployment. Efforts are constantly being made to overcome its limitations for that and other purposes.

Definitions

Gross domestic product (GDP) can be defined as the total recorded value of the goods and services produced within an economy. The word "gross" indicates that no deduction is made for the loss of value due to the depreciation of assets, and the word "domestic" indicates that net income from abroad is not included. (If income from abroad is allowed for, gross domestic product becomes gross national product (GNP), and if depreciation is also allowed for, it becomes net national product or simply national income).

GDP can in fact be defined as either the total recorded output of the economy’s producers, or the total recorded expenditure of its investors and consumers, or the total of all recorded payments of wages, interest and rent - all of which totals are, in principle, equal. It is normally stated as "GDP at market prices", which indicates that the prices used include the effects of indirect taxes and subsidies. In an alternative version that matches payments to the factors of production, indirect taxes (such as sales taxes) are deducted, and subsidies (which are the equivalent of negative sales taxes) are added back - and the adjusted total is then termed "GDP at factor cost". Published statistics normally include estimates of "GDP at constant prices", which are obtained by applying approximate price index adjustments to the recorded values of its components. Time-series thus adjusted are commonly referred to as showing "real", as distinct from "nominal", changes of GDP.

The standard methods used for estimating GDP are described in a primer published by the United States Bureau of Economic Analysis

Limitations and adjustments

Household accounts

Among the economic activities that are not recorded in the national accounts is unpaid production within a country’s households. It has been estimated that for Britain such production amounts to over 40 per cent of GDP. That omission can in principle be corrected by constructing household accounts based upon "time use surveys" , and several countries are planning to publish "satellite accounts" for that purpose.

New technology

Another limitation of conventional measures of real GDP arises from the failure to make due allowance for the introduction of new technology. For example, the substitution of word-processors for typewriters produced what was really an output increase, but which may well have been treated as a price increase. The economist William Nordhaus has used a study of the changing methods of generating light to suggest that failure to allow for changes in technology had led to significant underestimates of real GDP growth as well as overestimates of inflation. , and it has been estimated that failure to take account of quality improvements had for long resulted in underestimates of real GDP growth in the United States of between 0.6 and 1.5 percentage points. . The effects of that failure can sometimes be mitigated by the use of "hedonic price indexes" (as described in the article on the price index) based upon studies of the different prices that people are willing to pay for available quality differences - as is becoming the practice in the United States for the treatment of some high-technology products .