Nominal GDP and adjustments to GDP
The raw GDP figure as given by the equations above is called the nominal, historical, or current, GDP. When one compares GDP figures from one year to another, it is desirable to compensate for changes in the value of money – i.e., for the effects of inflation or deflation. To make it more meaningful for year-to-year comparisons, it may be multiplied by the ratio between the value of money in the year the GDP was measured and the value of money in a base year.
For example, suppose a country's GDP in 1990 was $100 million and its GDP in 2000 was $300 million. Suppose also that inflation had halved the value of its currency over that period. To meaningfully compare its GDP in 2000 to its GDP in 1990, we could multiply the GDP in 2000 by one-half, to make it relative to 1990 as a base year. The result would be that the GDP in 2000 equals $300 million × one-half = $150 million, in 1990 monetary terms. We would see that the country's GDP had realistically increased 50 "percent over that period, not 200 percent, as it might appear from the raw GDP data. The GDP adjusted for changes in money value in this way is called the "real, or constant, GDP.
The factor used to convert GDP from current to constant values in this way is called the "GDP deflator. Unlike "consumer price index, which measures inflation or deflation in the price of household consumer goods, the GDP deflator measures changes in the prices of all domestically produced goods and services in an economy including investment goods and government services, as well as household consumption goods.
Constant-GDP figures allow us to calculate a GDP growth rate, which indicates how much a country's production has increased (or decreased, if the growth rate is negative) compared to the previous year.
- Real GDP growth rate for year n = [(Real GDP in year n) − (Real GDP in year n − 1)] / (Real GDP in year n − 1)
Another thing that it may be desirable to account for is population growth. If a country's GDP doubled over a certain period, but its population tripled, the increase in GDP may not mean that the standard of living increased for the country's residents; the average person in the country is producing less than they were before. Per-capita GDP is a measure to account for population growth.
Cross-border comparison and purchasing power parity
The level of GDP in different countries may be compared by converting their value in national currency according to either the current currency exchange rate, or the purchasing power parity exchange rate.
- Current currency exchange rate is the "exchange rate in the international "foreign exchange market.
- Purchasing power parity exchange rate is the exchange rate based on the "purchasing power parity (PPP) of a currency relative to a selected standard (usually the "United States dollar). This is a comparative (and theoretical) exchange rate, the only way to directly realize this rate is to sell an entire "CPI basket in one country, convert the cash at the currency market rate & then rebuy that same basket of goods in the other country (with the converted cash). Going from country to country, the distribution of prices within the basket will vary; typically, non-tradable purchases will consume a greater proportion of the basket's total cost in the higher GDP country, per the "Balassa-Samuelson effect.
The ranking of countries may differ significantly based on which method is used.
- The current exchange rate method converts the value of goods and services using global currency "exchange rates. The method can offer better indications of a country's international purchasing power. For instance, if 10% of GDP is being spent on buying hi-tech foreign "arms, the number of weapons purchased is entirely governed by current exchange rates, since arms are a traded product bought on the international market. There is no meaningful 'local' price distinct from the international price for high technology goods. The PPP method of GDP conversion is more relevant to non-traded goods and services. In the above example if hi-tech weapons are to be produced internally their amount will be governed by GDP(PPP) rather than nominal GDP.
There is a clear pattern of the purchasing power parity method decreasing the disparity in GDP between high and low income (GDP) countries, as compared to the current exchange rate method. This finding is called the "Penn effect.
For more information, see "Measures of national income and output.
Standard of living and GDP: Wealth distribution and externalities
GDP per capita is often used as an indicator of living standards.
The major advantage of GDP per capita as an indicator of standard of living is that it is measured frequently, widely, and consistently. It is measured frequently in that most countries provide information on GDP on a quarterly basis, allowing trends to be seen quickly. It is measured widely in that some measure of GDP is available for almost every country in the world, allowing inter-country comparisons. It is measured consistently in that the technical definition of GDP is relatively consistent among countries.
GDP does not include several factors that influence the standard of living. In particular, it fails to account for:
- "Externalities – Economic growth may entail an increase in negative externalities that are not directly measured in GDP. Increased industrial output might grow GDP, but any pollution is not counted.
- Non-market transactions– GDP excludes activities that are not provided through the market, such as household production, bartering of goods and services, and volunteer or unpaid services.
- Non-monetary economy– GDP omits economies where no money comes into play at all, resulting in inaccurate or abnormally low GDP figures. For example, in countries with major business transactions occurring informally, portions of local economy are not easily registered. "Bartering may be more prominent than the use of money, even extending to services.
- Quality improvements and inclusion of new products– by not fully adjusting for quality improvements and new products, GDP understates true "economic growth. For instance, although computers today are less expensive and more powerful than computers from the past, GDP treats them as the same products by only accounting for the monetary value. The introduction of new products is also difficult to measure accurately and is not reflected in GDP despite the fact that it may increase the standard of living. For example, even the richest person in 1900 could not purchase standard products, such as antibiotics and cell phones, that an average consumer can buy today, since such modern conveniences did not exist then.
- Sustainability of growth– GDP is a measurement of economic historic activity and is not necessarily a projection.
- "Wealth distribution – GDP does not account for variances in incomes of various demographic groups. See "income inequality metrics for discussion of a variety of inequality-based economic measures.
It can be argued that GDP per capita as an indicator standard of living is correlated with these factors, capturing them indirectly. As a result, GDP per capita as a standard of living is a continued usage because most people have a fairly accurate idea of what it is and know it is tough to come up with quantitative measures for such constructs as happiness, quality of life, and well-being.
Limitations and criticisms
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Limitations at introduction
"Simon Kuznets, the economist who developed the first comprehensive set of measures of national income, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses of National Income Measurements":
The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. [...]
All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.
In 1962, Kuznets stated:
Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.
Ever since the development of GDP, multiple observers have pointed out limitations of using GDP as the overarching measure of economic and social progress.
Many "environmentalists argue that GDP is a poor measure of social progress because it does not take into account harm to the "environment.
Although a high or rising level of GDP is often associated with increased economic and social progress within a country, a number of scholars have pointed out that this does not necessarily play out in many instances. For example, "Jean Drèze and "Amartya Sen have pointed out that an increase in GDP or in GDP growth does not necessarily lead to a higher standard of living, particularly in areas such as healthcare and education. Another important area that does not necessarily improve along with GDP is political liberty, which is most notable in China, where GDP growth is strong yet political liberties are heavily restricted.
GDP does not account for the distribution of income among the residents of a country, because GDP is merely an aggregate measure. An economy may be highly developed or growing rapidly, but also contain a wide gap between the rich and the poor in a society. These inequalities often occur on the lines of race, ethnicity, gender, religion, or other minority status within countries. This can lead to misleading characterizations of economic well-being if the income distribution is heavily skewed toward the high end, as the poorer residents will not directly benefit from the overall level of wealth and income generated in their country. Even GDP per capita measures may have the same downside if inequality is high. For example, South Africa during apartheid ranked high in terms of GDP per capita, but the benefits of this immense wealth and income were not shared equally among the country.["citation needed]
GDP does not take into account the value of household and other "unpaid work. Some, including "Martha Nussbaum, argue that this value should be included in measuring GDP, as household labor is largely a substitute for goods and services that would otherwise be purchased for value. Even under conservative estimates, the value of unpaid labor in Australia has been calculated to be over 50% of the country's GDP. A later study analyzed this value in other countries, with results ranging from a low of about 15% in Canada (using conservative estimates) to high of nearly 70% in the United Kingdom (using more liberal estimates). For the United States, the value was estimated to be between about 20% on the low end to nearly 50% on the high end, depending on the methodology being used. Because many public policies are shaped by GDP calculations and by the related field of "national accounts, the non-inclusion of unpaid work in calculating GDP can create distortions in public policy, and some economists have advocated for changes in the way public policies are formed and implemented.
The UK's "Natural Capital Committee highlighted the shortcomings of GDP in its advice to the UK Government in 2013, pointing out that GDP "focuses on flows, not stocks. As a result, an economy can run down its assets yet, at the same time, record high levels of GDP growth, until a point is reached where the depleted assets act as a check on future growth". They then went on to say that "it is apparent that the recorded GDP growth rate overstates the sustainable growth rate. Broader measures of wellbeing and wealth are needed for this and there is a danger that short-term decisions based solely on what is currently measured by national accounts may prove to be costly in the long-term".
Proposals to overcome GDP limitations
In response to these and other limitations of using GDP, alternative approaches have emerged.
- In the 1980s, "Amartya Sen and "Martha Nussbaum developed the "capability approach, which focuses on the functional capabilities enjoyed by people within a country, rather than the aggregate wealth held within a country. These capabilities consist of the functions that a person is able to achieve.
- In 1990 "Mahbub ul Haq, a Pakistani Economist at the United Nations, introduced the "Human Development Index (HDI). The HDI is a composite index of life expectancy at birth, adult literacy rate and standard of living measured as a logarithmic function of GDP, adjusted to purchasing power parity.
- In 1989, "John B. Cobb and "Herman Daly introduced "Index of Sustainable Economic Welfare (ISEW) by taking into account various other factors such as consumption of nonrenewable resources and degradation of the environment. The new formula deducted from GDP (personal consumption + public non-defensive expenditures - private defensive expenditures + capital formation + services from domestic labour - costs of environmental degradation - depreciation of natural capital)
- In 2005, "Med Jones, an American Economist, at the International Institute of Management, introduced the first secular Gross National Happiness Index a.k.a "Gross National Well-being framework and Index to complement GDP economics with additional seven dimensions, including environment, education, and government, work, social and health (mental and physical) indicators. The proposal was inspired by the King of Bhutan's "GNH philosophy.
- In 2009 the European Union released a communication titled GDP and beyond: Measuring progress in a changing world that identified five actions to improve the indicators of progress in ways that make it more responsive to the concerns of its citizens: Introduced a proposal to complementing GDP with environmental and social indicators
- In 2009 Professors "Joseph Stiglitz, "Amartya Sen, and "Jean-Paul Fitoussi at the "Commission on the Measurement of Economic Performance and Social Progress (CMEPSP), formed by French President, "Nicolas Sarkozy published a proposal to overcome the limitation of GDP economics to expand the focus to well-being economics with wellbeing framework consisting of health, environment, work, physical safety, economic safety, political freedom.
- In 2012, the Karma Ura of the Center for Bhutan Studies published Bhutan Local GNH Index contributors to happiness—physical, mental and spiritual health; time-balance; social and community vitality; cultural vitality; education; living standards; good governance; and ecological vitality. The "Bhutan GNH Index.
- In 2013 "OECD Better Life Index was published by the OECD. The dimensions of the index included health, economic, workplace, income, jobs, housing, civic engagement, life satisfaction
- In 2013 professors John Helliwell, "Richard Layard and "Jeffrey Sachs published "World Happiness Report and proposed to measure other wellbeing indicators in addition to GDP. the evaluation framework included GDP per capita, Gini (income inequality), life satisfaction, health, freedom of life choices, trust and absence of corruption.
Lists of countries by their GDP
- "Lists of countries by GDP
- "List of countries by GDP (nominal), ("per capita)
- "List of continents by GDP (nominal)
- "List of countries by GDP (PPP), ("per capita), ("per hour)
- "List of countries by GDP (real) growth rate, ("per capita)
- "List of countries by GDP sector composition
- "List of IMF ranked countries by past and projected GDP (PPP), ("per capita), ("nominal)
- "Annual average GDP growth
- "Capability approach
- "Chained volume series
- "Circular flow of income
- "Economic growth
- "GDP density
- "Gross output
- "Gross regional domestic product
- "Gross state product
- "Gross value added
- "Gross world product
- "Intermediate consumption
- "Inventory investment
- "List of countries by average wage
- "List of countries by household income
- "List of countries by GDP (nominal)
- "List of countries by GDP (nominal) per capita
- "List of countries by GDP (PPP)
- "List of countries by GDP (PPP) per capita
- "List of economic reports by U.S. government agencies
- "Misery index (economics)
- "National average salary
- "Potential output
- "Production (economics)
- "Real gross domestic product
Notes and references
- "GDP (Official Exchange Rate)" (PDF). "World Bank. Retrieved August 24, 2015.
- "OECD". Retrieved 14 August 2014.
- Callen, Tim. "Gross Domestic Product: An Economy's All". IMF. Retrieved 3 June 2016.
- Dawson, Graham (2006). Economics and Economic Chenge. FT / Prentice Hall. p. 205. "ISBN "9780273693512.
- "Petty impressive". The Economist. Retrieved August 1, 2015.
- Coyle, Diane. "Warfare and the Invention of GDP". The Globalist. Retrieved August 1, 2015.
- Congress commissioned Kuznets to create a system that would measure the nation's productivity in order to better understand how to tackle the "Great Depression.Simon Kuznets, 1934. "National Income, 1929–1932". 73rd US Congress, 2d session, Senate document no. 124, page 5-7 Simon Kuznets, 1934. "National Income, 1929–1932". 73rd US Congress, 2d session, Senate document no. 124, page 5-7 Simon Kuznets, 1934. "National Income, 1929–1932". 73rd US Congress, 2d session, Senate document no. 124, page 5-7. https://fraser.stlouisfed.org/scribd/?title_id=971&filepath=/docs/publications/natincome_1934/19340104_nationalinc.pdf
- Dickinson, Elizabeth. "GDP: a brief history". ForeignPolicy.com. Retrieved 25 April 2012.
- Coyle, Diane (2014). GDP: A Brief but Affectionate History. Princeton University Press. p. 6. "ISBN "9780691156798.
- World Bank, Statistical Manual >> National Accounts >> GDP–final output, retrieved October 2009.
"User's guide: Background information on GDP and GDP deflator". HM Treasury.
"Measuring the Economy: A Primer on GDP and the National Income and Product Accounts" (PDF). Bureau of Economic Analysis.
- Based on the IMF data. If no data was available for a country from IMF, I used WorldBank data.
- United States Bureau of Economic Analysis, "A guide to the National Income and Product Accounts of the United States" (PDF)., page 5; retrieved November 2009. Another term, "business current transfer payments", may be added. Also, the document indicates that the capital consumption adjustment (CCAdj) and the inventory valuation adjustment (IVA) are applied to the proprietor's income and corporate profits terms; and CCAdj is applied to rental income.
- Thayer Watkins, San José State University Department of Economics, "Gross Domestic Product from the Transactions Table for an Economy", commentary to first table, " Transactions Table for an Economy". (Page retrieved November 2009.)
- Concepts and Methods of the United States National Income and Product Accounts, chap. 2.
- Lequiller, François; Derek Blades (2006). Understanding National Accounts. OECD. p. 18. "ISBN "978-92-64-02566-0.
To convert GDP into GNI, it is necessary to add the income received by resident units from abroad and deduct the income created by production in the country but transferred to units residing abroad.
- United States, Bureau of Economic Analysis, Glossary, "GDP". Retrieved November 2009.
- "U.S. Department of Commerce. Bureau of Economic Analysis". Bea.gov. 2009-10-21. Retrieved 2010-07-31.
- "National Accounts". Central Bureau of Statistics. Retrieved 2011-06-29.
- HM Treasury, Background information on GDP and GDP deflator
Some of the complications involved in comparing national accounts from different years are explained in this World Bank document.
- "How Do We Measure Standard of Living?" (PDF). The Federal Reserve Bank of Boston.
- Mankiw, N.G.; Taylor, M.P. (2011). Economics (2nd ed., revised ed.). Andover: Cengage Learning.
- "Macroeconomics - GDP and Welfare". Retrieved 2015-02-21.
- "How Real GDP per Capita Affects the Standard of Living". Study.com.
- Simon Kuznets. "How To Judge Quality". The New Republic, October 20, 1962
- The Virtues of Ignoring GDP http://www.thebrokeronline.eu/Articles/The-virtues-of-ignoring-GDP
- The Rise and Fall of G.D.P. http://www.nytimes.com/2010/05/16/magazine/16GDP-t.html?pagewanted=all
- Drèze, Jean; Sen, Amartya (2013). An uncertain glory India and its contradictions. Princeton: Princeton University Press. "ISBN "9781400848775.
- "China Country Report Freedom in the World 2012". freedomhouse.org.
- Nussbaum, Martha C. (2013). Creating capabilities : the human development approach. Cambridge, Mass.: Belknap Press of Harvard University Press. "ISBN "0674072359.
- Blades, François Lequiller, Derek (2006). Understanding national accounts (Reprint. ed.). Paris: OECD. p. 112. "ISBN "978-92-64-02566-0.
- "Incorporating Estimates of Household Production of Non-Market Services into International Comparisons of Material Well-Being".
- "National Income Accounting and Public Policy" (PDF).
- "National Accounts: A Practical Introduction" (PDF).
- Shahani, Severine Deneulin ; Lila (2009). An Introduction to the Human Development and Capability : Approach (1. ed.). London: Earthscan Ltd. "ISBN "9781844078066.
- "Gross National Happiness (GNH) - A New Socioeconomic Development Policy Framework - A Policy White Paper - The American Pursuit of Unhappiness - Med Jones, IIM". Iim-edu.org. 10 January 2005.
- Happiness Ministry in Dubai http://www.thenational.ae/opinion/comment/the-happiness-portfolio-is-no-laughing-matter Happiness Ministry in Dubai Check
|url=value ("help). Missing or empty
- "Harvard Kennedy School Report to US Congressman 21st Century GDP: National Indicators for a New Era" (PDF).
- "GDP and beyond: Measuring progress in a changing world". European Union. 2009. Retrieved 2012-02-26.
- "Bhutan GNH Index"
- "Coyle, Diane (2014). GDP: A Brief but Affectionate History. Princeton, NJ: "Princeton University Press. "ISBN "978-0-691-15679-8.
- Australian Bureau for Statistics, Australian National Accounts: Concepts, Sources and Methods, 2000. Retrieved November 2009. In depth explanations of how GDP and other national accounts items are determined.
- United States Department of Commerce, Bureau of Economic Analysis, "Concepts and Methods of the United States National Income and Product Accounts" (PDF).. Retrieved November 2009. In depth explanations of how GDP and other national accounts items are determined.
|""||Wikimedia Commons has media related to Gross domestic product.|
|""||Wikiquote has quotations related to: Gross Domestic Product|
- Australian Bureau of Statistics Manual on GDP measurement
- GDP-indexed bonds
- OECD GDP chart
- UN Statistical Databases
- World Development Indicators (WDI) at Worldbank.org
- World GDP Chart (since 1960)
- Bureau of Economic Analysis: Official United States GDP data
- Historicalstatistics.org: Links to historical statistics on GDP for different countries and regions, maintained by the Department of Economic History at "Stockholm University.
- "Quandl - GDP by country - downloadable in CSV, Excel, JSON or XML
- Historical US GDP (yearly data), 1790–present, maintained by Samuel H. Williamson and Lawrence H. Officer, both professors of economics at the "University of Illinois at Chicago.
- Historical US GDP (quarterly data), 1947–present
- Google – public data: GDP and Personal Income of the U.S. (annual): Nominal Gross Domestic Product
- The Maddison Project of the Groningen Growth and Development Centre at the "University of Groningen, the Netherlands. This project continues and extends the work of "Angus Maddison in collating all the available, credible data estimating GDP for different countries around the world. This includes data for some countries for over 2,000 years back to 1 CE and for essentially all countries since 1950.
Articles and books
|"Library resources about
Gross domestic product
- Gross Domestic Product: An Economy’s All, "International Monetary Fund.
- Stiglitz JE, Sen A, Fitoussi J-P. Mismeasuring our Lives: Why GDP Doesn't Add Up, New Press, New York, 2010
- What's wrong with the GDP?
- Whether output and CPI inflation are mismeasured, by "Nouriel Roubini and "David Backus, in Lectures in Macroeconomics
- Rodney Edvinsson, "Growth, Accumulation, Crisis: With New Macroeconomic Data for Sweden 1800–2000".
- Clifford Cobb, Ted Halstead and Jonathan Rowe. "If the GDP is up, why is America down?" The Atlantic Monthly, vol. 276, no. 4, October 1995, pages 59–78
- Jerorn C.J.M. van den Bergh, "Abolishing GDP"
- GDP and GNI in OECD Observer No246-247, Dec 2004-Jan 2005
- Progress, what progress? in OECD Observer No272 March 2009