Gross domestic product

A map of world economies by size of GDP (nominal) in USD, World Bank, 2014[1]

Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period, often annually.[2][3] GDP (nominal) per capita does not, however, reflect differences in the cost of living and the inflation rates of the countries; therefore using a basis of GDP per capita at purchasing power parity (PPP) is arguably more useful when comparing living standards between nations, while Nominal GDP is more useful comparing national economies on the international market.[4]

The OECD defines GDP as "an aggregate measure of production equal to the sum of the gross values added of all resident and institutional units engaged in production and services (plus any taxes, and minus any subsidies, on products not included in the value of their outputs)."[5] An IMF publication states that, "GDP measures the monetary value of final goods and services—that are bought by the final user—produced in a country in a given period of time (say a quarter or a year)."[6]

Total GDP can also be broken down into the contribution of each industry or sector of the economy.[7] The ratio of GDP to the total population of the region is the per capita GDP and the same is called Mean Standard of Living. GDP is considered the "world's most powerful statistical indicator of national development and progress".[8]

History

William Petty came up with a basic concept of GDP to attack landlords against unfair taxation during warfare between the Dutch and the English between 1654 and 1676.[9] Charles Davenant developed the method further in 1695.[10] The modern concept of GDP was first developed by Simon Kuznets for a US Congress report in 1934.[11] In this report, Kuznets warned against its use as a measure of welfare[1] (see below under limitations and criticisms). After the Bretton Woods conference in 1944, GDP became the main tool for measuring a country's economy.[12] At that time gross national product (GNP) was the preferred estimate, which differed from GDP in that it measured production by a country's citizens at home and abroad rather than its 'resident institutional units' (see OECD definition above). The switch from GNP to GDP in the US was in 1991, trailing behind most other nations. The role that measurements of GDP played in World War II was crucial to the subsequent political acceptance of GDP values as indicators of national development and progress.[13] A crucial role was played here by the US Department of Commerce under Milton Gilbert where ideas from Kuznets were embedded into governmental institutions.

The history of the concept of GDP should be distinguished from the history of changes in ways of estimating it. The value added by firms is relatively easy to calculate from their accounts, but the value added by the public sector, by financial industries, and by intangible asset creation is more complex. These activities are increasingly important in developed economies, and the international conventions governing their estimation and their inclusion or exclusion in GDP regularly change in an attempt to keep up with industrial advances. In the words of one academic economist "The actual number for GDP is therefore the product of a vast patchwork of statistics and a complicated set of processes carried out on the raw data to fit them to the conceptual framework."[14]