Process of using materials to produce something

Production is the process of combining various material inputs and immaterial inputs (plans, knowledge) in order to make something for consumption (output). It is the act of creating an output, a good or service which has value and contributes to the utility of individuals.^[1] The area of economics that focuses on production is referred to as production theory, which is intertwined with the consumption (or consumer) theory of economics.^[2]

Four Factors of Production (Jiang, )

The production process and output directly result from productively utilising the original inputs (or factors of production). Known as primary producer goods or services, land, labour, and capital are deemed the three fundamental production factors. These primary inputs are not significantly altered in the output process, nor do they become a whole component in the product. Under classical economics, materials and energy are categorised as secondary factors as they are bi-products of land, labour and capital.^[3] Delving further, primary factors encompass all of the resourcing involved, such as land, which includes the natural resources above and below the soil. However, there is a difference in human capital and labour.^[4] In addition to the common factors of production, in different economic schools of thought, entrepreneurship and technology are sometimes considered evolved factors in production.^[5][6] It is common practice that several forms of controllable inputs are used to achieve the output of a product. The production function assesses the relationship between the inputs and the quantity of output.^[7]

Economic well-being is created in a production process, meaning all economic activities that aim directly or indirectly to satisfy human wants and needs. The degree to which the needs are satisfied is often accepted as a measure of economic well-being. In production there are two features which explain increasing economic well-being. They are improving quality-price-ratio of goods and services and increasing incomes from growing and more efficient market production or total production which help in increasing GDP. The most important forms of production are:

In order to understand the origin of economic well-being, we must understand these three production processes. All of them produce commodities which have value and contribute to the well-being of individuals.

The satisfaction of needs originates from the use of the commodities which are produced. The need satisfaction increases when the quality-price-ratio of the commodities improves and more satisfaction is achieved at less cost. Improving the quality-price-ratio of commodities is to a producer an essential way to improve the competitiveness of products but this kind of gains distributed to customers cannot be measured with production data. Improving the competitiveness of products means often to the producer lower product prices and therefore losses in incomes which are to be compensated with the growth of sales volume.

Economic well-being also increases due to the growth of incomes that are gained from the growing and more efficient market production. Market production is the only production form that creates and distributes incomes to stakeholders. Public production and household production are financed by the incomes generated in market production. Thus market production has a double role in creating well-being, i.e. the role of producing goods and services and the role of creating income. Because of this double role, market production is the “primus motor” of economic well-being and therefore here under review.^{[citation needed]}

Elements of Production Economics[edit]

The underlying assumption of production is that maximisation of profit is the key objective of the producer. The difference in the value of the production values (the output value) and costs (associated with the factors of production) is the calculated profit. Efficiency, technological, pricing, behavioural, consumption and productivity changes are a few of the critical elements that significantly influence production economics.

Efficiency[edit]

Main article: Efficiency

Within production, efficiency plays a tremendous role in achieving and maintaining full capacity, rather than producing an inefficient (not optimal) level. Changes in efficiency relate to the positive shift in current inputs, such as technological advancements, relative to the producer's position.^[8] Efficiency is calculated by the maximum potential output divided by the actual input. An example of the efficiency calculation is that if the applied inputs have the potential to produce units but are producing 60 units, the efficiency of the output is , or 60%. Furthermore, economies of scale identify the point at which production efficiency (returns) can be increased, decrease or remain constant. &#;

Technological changes[edit]

Main article: Technical progress (economics)

This element sees the ongoing adaption of technology at the frontier of the production function. Technological change is a significant determinant in advancing economic production results, as noted throughout economic histories, such as the industrial revolution. Therefore, it is critical to continue to monitor its effects on production and promote the development of new technologies.^[9]

Behaviour, consumption and productivity[edit]

There is a strong correlation between the producer's behaviour and the underlying assumption of production – both assume profit maximising behaviour. Production can be either increased, decreased or remain constant as a result of consumption, amongst various other factors. The relationship between production and consumption is mirror against the economic theory of supply and demand. Accordingly, when production decreases more than factor consumption, this results in reduced productivity. Contrarily, a production increase over consumption is seen as increased productivity.

Pricing[edit]

In an economic market, production input and output prices are assumed to be set from external factors as the producer is the price taker. Hence, pricing is an important element in the real-world application of production economics. Should the pricing be too high, the production of the product is simply unviable. There is also a strong link between pricing and consumption, with this influencing the overall production scale.^[10][11]

As a source of economic well-being[edit]

In principle there are two main activities in an economy, production and consumption. Similarly, there are two kinds of actors, producers and consumers. Well-being is made possible by efficient production and by the interaction between producers and consumers. In the interaction, consumers can be identified in two roles both of which generate well-being. Consumers can be both customers of the producers and suppliers to the producers. The customers' well-being arises from the commodities they are buying and the suppliers' well-being is related to the income they receive as compensation for the production inputs they have delivered to the producers.

Stakeholders of production[edit]

Stakeholders of production are persons, groups or organizations with an interest in a producing company. Economic well-being originates in efficient production and it is distributed through the interaction between the company's stakeholders. The stakeholders of companies are economic actors which have an economic interest in a company. Based on the similarities of their interests, stakeholders can be classified into three groups in order to differentiate their interests and mutual relations. The three groups are as follows:

Interactive contributions of a company’s stakeholders (Saari, ,4)

Customers

The customers of a company are typically consumers, other market producers or producers in the public sector. Each of them has their individual production functions. Due to competition, the price-quality-ratios of commodities tend to improve and this brings the benefits of better productivity to customers. Customers get more for less. In households and the public sector this means that more need satisfaction is achieved at less cost. For this reason, the productivity of customers can increase over time even though their incomes remain unchanged.

Suppliers

The suppliers of companies are typically producers of materials, energy, capital, and services. They all have their individual production functions. The changes in prices or qualities of supplied commodities have an effect on both actors' (company and suppliers) production functions. We come to the conclusion that the production functions of the company and its suppliers are in a state of continuous change.

Producers

Those participating in production, i.e., the labour force, society and owners, are collectively referred to as the producer community or producers. The producer community generates income from developing and growing production.

The well-being gained through commodities stems from the price-quality relations of the commodities. Due to competition and development in the market, the price-quality relations of commodities tend to improve over time. Typically the quality of a commodity goes up and the price goes down over time. This development favourably affects the production functions of customers. Customers get more for less. Consumer customers get more satisfaction at less cost. This type of well-being generation can only partially be calculated from the production data. The situation is presented in this study. The producer community (labour force, society, and owners) earns income as compensation for the inputs they have delivered to the production. When the production grows and becomes more efficient, the income tends to increase. In production this brings about an increased ability to pay salaries, taxes and profits. The growth of production and improved productivity generate additional income for the producing community. Similarly, the high income level achieved in the community is a result of the high volume of production and its good performance. This type of well-being generation – as mentioned earlier - can be reliably calculated from the production data.

Main processes of a producing company[edit]

A producing company can be divided into sub-processes in different ways; yet, the following five are identified as main processes, each with a logic, objectives, theory and key figures of its own. It is important to examine each of them individually, yet, as a part of the whole, in order to be able to measure and understand them. The main processes of a company are as follows:

Main processes of a producing company (Saari ,3)

• real process.
• income distribution process
• production process.
• monetary process.
• market value process.

Production output is created in the real process, gains of production are distributed in the income distribution process and these two processes constitute the production process. The production process and its sub-processes, the real process and income distribution process occur simultaneously, and only the production process is identifiable and measurable by the traditional accounting practices. The real process and income distribution process can be identified and measured by extra calculation, and this is why they need to be analyzed separately in order to understand the logic of production and its performance.

Real process generates the production output from input, and it can be described by means of the production function. It refers to a series of events in production in which production inputs of different quality and quantity are combined into products of different quality and quantity. Products can be physical goods, immaterial services and most often combinations of both. The characteristics created into the product by the producer imply surplus value to the consumer, and on the basis of the market price this value is shared by the consumer and the producer in the marketplace. This is the mechanism through which surplus value originates to the consumer and the producer likewise. Surplus values to customers cannot be measured from any production data. Instead the surplus value to a producer can be measured. It can be expressed both in terms of nominal and real values. The real surplus value to the producer is an outcome of the real process, real income, and measured proportionally it means productivity.

The concept “real process” in the meaning quantitative structure of production process was introduced in Finnish management accounting in the s. Since then it has been a cornerstone in the Finnish management accounting theory. (Riistama et al. )

Income distribution process of the production refers to a series of events in which the unit prices of constant-quality products and inputs alter causing a change in income distribution among those participating in the exchange. The magnitude of the change in income distribution is directly proportionate to the change in prices of the output and inputs and to their quantities. Productivity gains are distributed, for example, to customers as lower product sales prices or to staff as higher income pay.

The production process consists of the real process and the income distribution process. A result and a criterion of success of the owner is profitability. The profitability of production is the share of the real process result the owner has been able to keep to himself in the income distribution process. Factors describing the production process are the components of profitability, i.e., returns and costs. They differ from the factors of the real process in that the components of profitability are given at nominal prices whereas in the real process the factors are at periodically fixed prices.

Monetary process refers to events related to financing the business. Market value process refers to a series of events in which investors determine the market value of the company in the investment markets.

Production growth and performance[edit]

Main article: Economic growth

Economic growth is often defined as a production increase of an output of a production process. It is usually expressed as a growth percentage depicting growth of the real production output. The real output is the real value of products produced in a production process and when we subtract the real input from the real output we get the real income. The real output and the real income are generated by the real process of production from the real inputs.

The real process can be described by means of the production function. The production function is a graphical or mathematical expression showing the relationship between the inputs used in production and the output achieved. Both graphical and mathematical expressions are presented and demonstrated. The production function is a simple description of the mechanism of income generation in production process. It consists of two components. These components are a change in production input and a change in productivity.^[12]

Components of economic growth (Saari ,2)

The figure illustrates an income generation process (exaggerated for clarity). The Value T2 (value at time 2) represents the growth in output from Value T1 (value at time 1). Each time of measurement has its own graph of the production function for that time (the straight lines). The output measured at time 2 is greater than the output measured at time one for both of the components of growth: an increase of inputs and an increase of productivity. The portion of growth caused by the increase in inputs is shown on line 1 and does not change the relation between inputs and outputs. The portion of growth caused by an increase in productivity is shown on line 2 with a steeper slope. So increased productivity represents greater output per unit of input.

The growth of production output does not reveal anything about the performance of the production process. The performance of production measures production's ability to generate income. Because the income from production is generated in the real process, we call it the real income. Similarly, as the production function is an expression of the real process, we could also call it “income generated by the production function”.

The real income generation follows the logic of the production function. Two components can also be distinguished in the income change: the income growth caused by an increase in production input (production volume) and the income growth caused by an increase in productivity. The income growth caused by increased production volume is determined by moving along the production function graph. The income growth corresponding to a shift of the production function is generated by the increase in productivity. The change of real income so signifies a move from the point 1 to the point 2 on the production function (above). When we want to maximize the production performance we have to maximize the income generated by the production function.

The sources of productivity growth and production volume growth are explained as follows. Productivity growth is seen as the key economic indicator of innovation. The successful introduction of new products and new or altered processes, organization structures, systems, and business models generates growth of output that exceeds the growth of inputs. This results in growth in productivity or output per unit of input. Income growth can also take place without innovation through replication of established technologies. With only replication and without innovation, output will increase in proportion to inputs. (Jorgenson et al. ,2) This is the case of income growth through production volume growth.

Jorgenson et al. (,2) give an empiric example. They show that the great preponderance of economic growth in the US since involves the replication of existing technologies through investment in equipment, structures, and software and expansion of the labor force. Further, they show that innovation accounts for only about twenty percent of US economic growth.

In the case of a single production process (described above) the output is defined as an economic value of products and services produced in the process. When we want to examine an entity of many production processes we have to sum up the value-added created in the single processes. This is done in order to avoid the double accounting of intermediate inputs. Value-added is obtained by subtracting the intermediate inputs from the outputs. The most well-known and used measure of value-added is the GDP (Gross Domestic Product). It is widely used as a measure of the economic growth of nations and industries.

Absolute (total) and average income[edit]

The production performance can be measured as an average or an absolute income. Expressing performance both in average (avg.) and absolute (abs.) quantities is helpful for understanding the welfare effects of production. For measurement of the average production performance, we use the known productivity ratio

• Real output / Real input.

The absolute income of performance is obtained by subtracting the real input from the real output as follows:

• Real income (abs.) = Real output&#;– Real input

The growth of the real income is the increase of the economic value that can be distributed between the production stakeholders. With the aid of the production model we can perform the average and absolute accounting in one calculation. Maximizing production performance requires using the absolute measure, i.e. the real income and its derivatives as a criterion of production performance.

Maximizing productivity also leads to the phenomenon called "jobless growth" This refers to economic growth as a result of productivity growth but without creation of new jobs and new incomes from them. A practical example illustrates the case. When a jobless person obtains a job in market production we may assume it is a low productivity job. As a result, average productivity decreases but the real income per capita increases. Furthermore, the well-being of the society also grows. This example reveals the difficulty to interpret the total productivity change correctly. The combination of volume increase and total productivity decrease leads in this case to the improved performance because we are on the “diminishing returns” area of the production function. If we are on the part of “increasing returns” on the production function, the combination of production volume increase and total productivity increase leads to improved production performance. Unfortunately, we do not know in practice on which part of the production function we are. Therefore, a correct interpretation of a performance change is obtained only by measuring the real income change.

Production Function[edit]

In the short run, the production function assumes there is at least one fixed factor input. The production function relates the quantity of factor inputs used by a business to the amount of output that result. There are three measure of production and productivity. The first one is total output(total product). It is straightforward to measure how much output is being produced in the manufacturing industries like motor vehicles. In the tertiary industry such as service or knowledge industries, it is harder to measure the outputs since they are less tangible.

The second way of measuring production and efficiency is average output. It measures output per-worker-employed or output-per-unit of capital. The third measures of production and efficiency is the marginal product. It is the change in output from increasing the number of workers used by one person, or by adding one more machine to the production process in the short run.

The law of diminishing marginal returns points out that as more units of a variable input are added to fixed amounts of land and capital, the change in total output would rise firstly and then fall^[13]

The length of time required for all the factor of production to be flexible varies from industry to industry. For example, in the nuclear power industry, it takes many years to commission new nuclear power plant and capacity.

Real-life examples of the firm's short - term production equations may not be quite the same as the smooth production theory of the department. In order to improve efficiency and promote the structural transformation of economic growth, it is most important to establish the industrial development model related to it. At the same time, a shift should be made to models that contain typical characteristics of the industry, such as specific technological changes and significant differences in the likelihood of substitution before and after investment ^[14]

Production models[edit]

A production model is a numerical description of the production process and is based on the prices and the quantities of inputs and outputs. There are two main approaches to operationalize the concept of production function. We can use mathematical formulae, which are typically used in macroeconomics (in growth accounting) or arithmetical models, which are typically used in microeconomics and management accounting. We do not present the former approach here but refer to the survey “Growth accounting” by Hulten Also see an extensive discussion of various production models and their estimations in Sickles and Zelenyuk (, Chapter ).

We use here arithmetical models because they are like the models of management accounting, illustrative and easily understood and applied in practice. Furthermore, they are integrated to management accounting, which is a practical advantage. A major advantage of the arithmetical model is its capability to depict production function as a part of production process. Consequently, production function can be understood, measured, and examined as a part of production process.

There are different production models according to different interests. Here we use a production income model and a production analysis model in order to demonstrate production function as a phenomenon and a measureable quantity.

Production income model[edit]

Profitability of production measured by surplus value (Saari ,3)

The scale of success run by a going concern is manifold, and there are no criteria that might be universally applicable to success. Nevertheless, there is one criterion by which we can generalise the rate of success in production. This criterion is the ability to produce surplus value. As a criterion of profitability, surplus value refers to the difference between returns and costs, taking into consideration the costs of equity in addition to the costs included in the profit and loss statement as usual. Surplus value indicates that the output has more value than the sacrifice made for it, in other words, the output value is higher than the value (production costs) of the used inputs. If the surplus value is positive, the owner’s profit expectation has been surpassed.

The table presents a surplus value calculation. We call this set of production data a basic example and we use the data through the article in illustrative production models. The basic example is a simplified profitability calculation used for illustration and modelling. Even as reduced, it comprises all phenomena of a real measuring situation and most importantly the change in the output-input mix between two periods. Hence, the basic example works as an illustrative “scale model” of production without any features of a real measuring situation being lost. In practice, there may be hundreds of products and inputs but the logic of measuring does not differ from that presented in the basic example.

In this context, we define the quality requirements for the production data used in productivity accounting. The most important criterion of good measurement is the homogenous quality of the measurement object. If the object is not homogenous, then the measurement result may include changes in both quantity and quality but their respective shares will remain unclear. In productivity accounting this criterion requires that every item of output and input must appear in accounting as being homogenous. In other words, the inputs and the outputs are not allowed to be aggregated in measuring and accounting. If they are aggregated, they are no longer homogenous and hence the measurement results may be biased.

Both the absolute and relative surplus value have been calculated in the example. Absolute value is the difference of the output and input values and the relative value is their relation, respectively. The surplus value calculation in the example is at a nominal price, calculated at the market price of each period.

Production analysis model[edit]

A model ^[15] used here is a typical production analysis model by help of which it is possible to calculate the outcome of the real process, income distribution process and production process. The starting point is a profitability calculation using surplus value as a criterion of profitability. The surplus value calculation is the only valid measure for understanding the connection between profitability and productivity or understanding the connection between real process and production process. A valid measurement of total productivity necessitates considering all production inputs, and the surplus value calculation is the only calculation to conform to the requirement. If we omit an input in productivity or income accounting, this means that the omitted input can be used unlimitedly in production without any cost impact on accounting results.

Accounting and interpreting[edit]

The process of calculating is best understood by applying the term ceteris paribus, i.e. "all other things being the same," stating that at a time only the impact of one changing factor be introduced to the phenomenon being examined. Therefore, the calculation can be presented as a process advancing step by step. First, the impacts of the income distribution process are calculated, and then, the impacts of the real process on the profitability of the production.

The first step of the calculation is to separate the impacts of the real process and the income distribution process, respectively, from the change in profitability (&#;– = ). This takes place by simply creating one auxiliary column (4) in which a surplus value calculation is compiled using the quantities of Period 1 and the prices of Period 2. In the resulting profitability calculation, Columns 3 and 4 depict the impact of a change in income distribution process on the profitability and in Columns 4 and 7 the impact of a change in real process on the profitability.

The accounting results are easily interpreted and understood. We see that the real income has increased by units from which units come from the increase of productivity growth and the rest units come from the production volume growth. The total increase of real income () is distributed to the stakeholders of production, in this case, units to the customers and to the suppliers of inputs and the rest units to the owners.

Here we can make an important conclusion. Income formation of production is always a balance between income generation and income distribution. The income change created in a real process (i.e. by production function) is always distributed to the stakeholders as economic values within the review period. Accordingly, the changes in real income and income distribution are always equal in terms of economic value.

Based on the accounted changes of productivity and production volume values we can explicitly conclude on which part of the production function the production is. The rules of interpretations are the following:

The production is on the part of “increasing returns” on the production function, when

• productivity and production volume increase or
• productivity and production volume decrease

The production is on the part of “diminishing returns” on the production function, when

• productivity decreases and volume increases or
• productivity increases and volume decreases.

In the basic example, the combination of volume growth (+) and productivity growth (+) reports explicitly that the production is on the part of “increasing returns” on the production function (Saari a, –).

Another production model (Production Model Saari ) also gives details of the income distribution (Saari ,14). Because the accounting techniques of the two models are different, they give differing, although complementary, analytical information. The accounting results are, however, identical. We do not present the model here in detail but we only use its detailed data on income distribution, when the objective functions are formulated in the next section.

Objective functions[edit]

An efficient way to improve the understanding of production performance is to formulate different objective functions according to the objectives of the different interest groups. Formulating the objective function necessitates defining the variable to be maximized (or minimized). After that other variables are considered as constraints or free variables. The most familiar objective function is profit maximization which is also included in this case. Profit maximization is an objective function that stems from the owner's interest and all other variables are constraints in relation to maximizing of profits in the organization.

Summary of objective function formulations (Saari ,17)

The procedure for formulating objective functions[edit]

The procedure for formulating different objective functions, in terms of the production model, is introduced next. In the income formation from production the following objective functions can be identified:

• Maximizing the real income
• Maximizing the producer income
• Maximizing the owner income.

These cases are illustrated using the numbers from the basic example. The following symbols are used in the presentation: The equal sign (=) signifies the starting point of the computation or the result of computing and the plus or minus sign (+ / -) signifies a variable that is to be added or subtracted from the function. A producer means here the producer community, i.e. labour force, society and owners.

Objective function formulations can be expressed in a single calculation which concisely illustrates the logic of the income generation, the income distribution and the variables to be maximized.

The calculation resembles an income statement starting with the income generation and ending with the income distribution. The income generation and the distribution are always in balance so that their amounts are equal. In this case, it is units. The income which has been generated in the real process is distributed to the stakeholders during the same period. There are three variables that can be maximized. They are the real income, the producer income and the owner income. Producer income and owner income are practical quantities because they are addable quantities and they can be computed quite easily. Real income is normally not an addable quantity and in many cases it is difficult to calculate.

The dual approach for the formulation[edit]

Here we have to add that the change of real income can also be computed from the changes in income distribution. We have to identify the unit price changes of outputs and inputs and calculate their profit impacts (i.e. unit price change x quantity). The change of real income is the sum of these profit impacts and the change of owner income. This approach is called the dual approach because the framework is seen in terms of prices instead of quantities (ONS 3, 23).

The dual approach has been recognized in growth accounting for long but its interpretation has remained unclear. The following question has remained unanswered: “Quantity based estimates of the residual are interpreted as a shift in the production function, but what is the interpretation of the price-based growth estimates?” (Hulten , 18). We have demonstrated above that the real income change is achieved by quantitative changes in production and the income distribution change to the stakeholders is its dual. In this case, the duality means that the same accounting result is obtained by accounting the change of the total income generation (real income) and by accounting the change of the total income distribution.

See also[edit]

[edit]

References[edit]

Further references and external links[edit]

• Moroney, J. R. () Cobb-Douglass production functions and returns to scale in US manufacturing industry, Western Economic Journal, vol 6, no 1, December , pp 39–
• Pearl, D. and Enos, J. () Engineering production functions and technological progress, The Journal of Industrial Economics, vol 24, September , pp 55–
• Robinson, J. () The production function and the theory of capital, Review of Economic Studies, vol XXI, , pp.&#;81–
• Anwar Shaikh, "Laws of Production and Laws of Algebra: The Humbug Production Function", in The Review of Economics and Statistics, Volume 56(1), February , p.&#; www.oldyorkcellars.com://www.oldyorkcellars.com~AShaikh/www.oldyorkcellars.com
• Anwar Shaikh, "Laws of Production and Laws of Algebra—Humbug II", in Growth, Profits and Property ed. by Edward J. Nell. Cambridge, Cambridge University Press, www.oldyorkcellars.com://www.oldyorkcellars.com~AShaikh/www.oldyorkcellars.com
• Anwar Shaikh, "Nonlinear Dynamics and Pseudo-Production Functions", published?, www.oldyorkcellars.com://www.oldyorkcellars.com~AShaikh/Nonlinear%20Dynamics%20and%20Pseudo-Production%www.oldyorkcellars.com
• Shephard, R () Theory of cost and production functions, Princeton University Press, Princeton NJ.
• Sickles, R., and Zelenyuk, V. (). Measurement of Productivity and Efficiency: Theory and Practice. Cambridge: Cambridge University Press. doi/ www.oldyorkcellars.com
• Thompson, A. () Economics of the firm, Theory and practice, 3rd edition, Prentice Hall, Englewood Cliffs. ISBN&#;
• Elmer G. Wiens: Production Functions - Models of the Cobb-Douglas, C.E.S., Trans-Log, and Diewert Production Functions.

Market value of goods and services produced within a country

"GDP" redirects here. For other uses, see GDP (disambiguation).

Gross domestic product (GDP) is a monetarymeasure of the market value of all the final goods and services produced in a specific time period by countries.^[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) may be more useful when comparing living standards between nations, while nominal GDP is more useful comparing national economies on the international market.^[4] Total GDP can also be broken down into the contribution of each industry or sector of the economy.^[5] 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 definitions are maintained by a number of national and international economic organizations. The Organisation for Economic Co-operation and Development (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)".^[6] 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)."^[7]

GDP is often used as a metric for international comparisons as well as a broad measure of economic progress. It is often considered to be the "world's most powerful statistical indicator of national development and progress".^[8] However, critics of the growth imperative often argue that GDP measures were never intended to measure progress, and leave out key other externalities, such as resource extraction, environmental impact and unpaid domestic work.^[9] Critics frequently propose alternative economic models such as doughnut economics which use other measures of success or alternative indicators such as the OECD's Better Life Index as better approaches to measuring the effect of the economy on human development and well being.

History[edit]

Quarterly gross domestic product

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 and ^[10]Charles Davenant developed the method further in ^[11] The modern concept of GDP was first developed by Simon Kuznets for a US Congress report, where he warned against its use as a measure of welfare (see below under limitations and criticisms).^[12] After the Bretton Woods conference in , GDP became the main tool for measuring a country's economy.^[13] 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 , 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.^[14] A crucial role was played here by the US Department of Commerce under Milton Gilbert where ideas from Kuznets were embedded into institutions.

The history of the concept of GDP should be distinguished from the history of changes in many 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."^[15]

GDP became truly global in when China officially adopted it as its indicator of economic performance. Previously, China had relied on a Marxist-inspired national accounting system.^[16]

Determining gross domestic product (GDP)[edit]

An infographic explaining how GDP is calculated in the UK

GDP can be determined in three ways, all of which should, theoretically, give the same result. They are the production (or output or value added) approach, the income approach, or the speculated expenditure approach. It is representative of the total output and income within an economy

The most direct of the three is the production approach, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people's total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors ("producers", colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes.^[17]

Production approach[edit]

Also known as the Value Added Approach, it calculates how much value is contributed at each stage of production.

This approach mirrors the OECD(Organisation for Economic Co-operation and Development) definition given above.

1. Estimate the gross value of domestic output out of the many various economic activities;
2. Determine the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services.
3. Deduct intermediate consumption from gross value to obtain the gross value added.

Gross value added = gross value of output – value of intermediate consumption.

Value of output = value of the total sales of goods and services plus value of changes in the inventory.

The sum of the gross value added in the various economic activities is known as "GDP at factor cost".

GDP at factor cost plus indirect taxes less subsidies on products = "GDP at producer price".

For measuring output of domestic product, economic activities (i.e. industries) are classified into various sectors. After classifying economic activities, the output of each sector is calculated by any of the following two methods:

1. By multiplying the output of each sector by their respective market price and adding them together
2. By collecting data on gross sales and inventories from the records of companies and adding them together

The value of output of all sectors is then added to get the gross value of output at factor cost. Subtracting each sector's intermediate consumption from gross output value gives the GVA (=GDP) at factor cost. Adding indirect tax minus subsidies to GVA (GDP) at factor cost gives the "GVA (GDP) at producer prices".

Income approach[edit]

The second way of estimating GDP is to use "the sum of primary incomes distributed by resident producer units".^[6]

If GDP is calculated this way it is sometimes called gross domestic income (GDI), or GDP (I). GDI should provide the same amount as the expenditure method described later. By definition, GDI is equal to GDP. In practice, however, measurement errors will make the two figures slightly off when reported by national statistical agencies.

This method measures GDP by adding incomes that firms pay households for factors of production they hire - wages for labour, interest for capital, rent for land and profits for entrepreneurship.

The US "National Income and Expenditure Accounts" divide incomes into five categories:

1. Wages, salaries, and supplementary labour income
2. Corporate profits
3. Interest and miscellaneous investment income
4. Farmers' incomes
5. Income from non-farm unincorporated businesses

These five income components sum to net domestic income at factor cost.

Two adjustments must be made to get GDP:

1. Indirect taxes minus subsidies are added to get from factor cost to market prices.
2. Depreciation (or capital consumption allowance) is added to get from net domestic product to gross domestic product.

Total income can be subdivided according to various schemes, leading to various formulae for GDP measured by the income approach. A common one is:

GDP = Compensation of employeesCOE + gross operating surplusGOS + gross mixed incomeGMI + taxes less subsidies on production and importsT_{P & M} – S_{P & M}

• Compensation of employees (COE) measures the total remuneration to employees for work done. It includes wages and salaries, as well as employer contributions to social security and other such programs.
• Gross operating surplus (GOS) is the surplus due to owners of incorporated businesses. Often called profits, although only a subset of total costs are subtracted from gross output to calculate GOS.
• Gross mixed income (GMI) is the same measure as GOS, but for unincorporated businesses. This often includes most small businesses.

The sum of COE, GOS and GMI is called total factor income; it is the income of all of the factors of production in society. It measures the value of GDP at factor (basic) prices. The difference between basic prices and final prices (those used in the expenditure calculation) is the total taxes and subsidies that the government has levied or paid on that production. So adding taxes less subsidies on production and imports converts GDP(I) at factor cost to GDP(I) at final prices.

Total factor income is also sometimes expressed as:

Total factor income = employee compensation + corporate profits + proprietor's income + rental income + net interest^[18]

Expenditure approach[edit]

The third way to estimate GDP is to calculate the sum of the final uses of goods and services (all uses except intermediate consumption) measured in purchasers' prices.^[6]

Market goods that are produced are purchased by someone. In the case where a good is produced and unsold, the standard accounting convention is that the producer has bought the good from themselves. Therefore, measuring the total expenditure used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP.

Components of GDP by expenditure[edit]

U.S. GDP computed on the expenditure basis.

GDP (Y) is the sum of consumption (C), investment (I), government Expenditures (G) and net exports (X – M).

Y = C + I + G + (X − M)

Here is a description of each GDP component:

• C (consumption) is normally the largest GDP component in the economy, consisting of private expenditures in the economy (household final consumption expenditure). These personal expenditures fall under one of the following categories: durable goods, nondurable goods, and services. Examples include food, rent, jewelry, gasoline, and medical expenses, but not the purchase of new housing.
• I (investment) includes, for instance, business investment in equipment, but does not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in investment. In contrast to its colloquial meaning, "investment" in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products; buying an existing building will involve a positive investment by the buyer and a negative investment by the seller, netting to zero overall investment.
• G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchases of weapons for the military and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits. Analyses outside the USA will often treat government investment as part of investment rather than government spending.
• X (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.
• M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.

Note that C, I, and G are expenditures on final goods and services; expenditures on intermediate goods and services do not count. (Intermediate goods and services are those used by businesses to produce other goods and services within the accounting year.^[19]) So for example if a car manufacturer buys auto parts, assembles the car and sells it, only the final car sold is counted towards the GDP. Meanwhile, if a person buys replacement auto parts to install them on their car, those are counted towards the GDP.

According to the U.S. Bureau of Economic Analysis, which is responsible for calculating the national accounts in the United States, "In general, the source data for the expenditures components are considered more reliable than those for the income components [see income method, above]."^[20]

GDP and GNI[edit]

GDP can be contrasted with gross national product (GNP) or, as it is now known, gross national income (GNI). The difference is that GDP defines its scope according to location, while GNI defines its scope according to ownership. In a global context, world GDP and world GNI are, therefore, equivalent terms.

GDP is product produced within a country's borders; GNI is product produced by enterprises owned by a country's citizens. The two would be the same if all of the productive enterprises in a country were owned by its own citizens, and those citizens did not own productive enterprises in any other countries. In practice, however, foreign ownership makes GDP and GNI non-identical. Production within a country's borders, but by an enterprise owned by somebody outside the country, counts as part of its GDP but not its GNI; on the other hand, production by an enterprise located outside the country, but owned by one of its citizens, counts as part of its GNI but not its GDP.

For example, the GNI of the USA is the value of output produced by American-owned firms, regardless of where the firms are located. Similarly, if a country becomes increasingly in debt, and spends large amounts of income servicing this debt this will be reflected in a decreased GNI but not a decreased GDP. Similarly, if a country sells off its resources to entities outside their country this will also be reflected over time in decreased GNI, but not decreased GDP. This would make the use of GDP more attractive for politicians in countries with increasing national debt and decreasing assets.

Gross national income (GNI) equals GDP plus income receipts from the rest of the world minus income payments to the rest of the world.^[21]

In , the United States switched from using GNP to using GDP as its primary measure of production.^[22] The relationship between United States GDP and GNP is shown in table of the National Income and Product Accounts.^[23]

International standards[edit]

The international standard for measuring GDP is contained in the book System of National Accounts (), which was prepared by representatives of the International Monetary Fund, European Union, Organisation for Economic Co-operation and Development, United Nations and World Bank. The publication is normally referred to as SNA to distinguish it from the previous edition published in (SNA93) or (called SNA68) ^[24]

SNA provides a set of rules and procedures for the measurement of national accounts. The standards are designed to be flexible, to allow for differences in local statistical needs and conditions.

National measurement[edit]

Main article: National agencies responsible for GDP measurement

Countries by GDP (PPP) per capita (Int$) in according to the IMF

&#;&#; > $50, &#;&#; $35, - $50, &#;&#; $20, - $35, &#;&#; $10, - $20,

&#;&#; $5, - $10, &#;&#; $2, - $5, &#;&#; < $2, &#;&#; No data

Countries by GDP (nominal) per capita^{[note 1]}

&#;&#; > $60, &#;&#; $50, - $60, &#;&#; $40, - $50, &#;&#; $30, - $40,

&#;&#; $20, - $30, &#;&#; $10, - $20, &#;&#; $5, - $10, &#;&#; $2, - $5,

&#;&#; $1, - $2, &#;&#; $ - $1, &#;&#; < $ &#;&#; No data

U.S GDP computed on the income basis

Within each country GDP is normally measured by a national government statistical agency, as private sector organizations normally do not have access to the information required (especially information on expenditure and production by governments).

Nominal GDP and adjustments to GDP[edit]

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 – 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 was $&#;million and its GDP in was $&#;million. Suppose also that inflation had halved the value of its currency over that period. To meaningfully compare its GDP in to its GDP in , we could multiply the GDP in by one-half, to make it relative to as a base year. The result would be that the GDP in equals $&#;million × one-half = $&#;million, in monetary terms. We would see that the country's GDP had realistically increased 50 percent over that period, not 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.^[25]

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[edit]

The level of GDP in 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.

Main article: Measures of national income and output

Standard of living and GDP: wealth distribution and externalities[edit]

GDP per capita is often used as an indicator of living standards.^[26]

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.^[27][28] Increased industrial output might grow GDP, but any pollution is not counted.^[29]
• 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.^[28]
• 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 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.^[28]

It can be argued that GDP per capita as an indicator standard of living is correlated with these factors, capturing them indirectly.^[26][30] 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.^[26]

Limitations and criticisms[edit]

Limitations at introduction[edit]

Simon Kuznets, the economist who developed the first comprehensive set of measures of national income, stated in his second report to the US Congress in , in a section titled "Uses and Abuses of National Income Measurements":^[12]

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 , Kuznets stated:^[31]

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.

Further criticisms[edit]

Ever since the development of GDP, multiple observers have pointed out limitations of using GDP as the overarching measure of economic and social progress. For example, many environmentalists argue that GDP is a poor measure of social progress because it does not take into account harm to the environment.^[32][33] Furthermore, the GDP does not consider human health nor the educational aspect of a population.^[34] American politician Robert F. Kennedy criticized the GDP as a measure of “everything except that which makes life worthwhile”. He continued to argue that it "does not allow for the health of our children, the quality of their education or the joy of their play.”^[35]

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.^[36] 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.^[37]

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.^{[citation needed]} 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]} An inequality which the United Nations Sustainable Development Goal 10 amongst other global initiatives aims to address.^[38]

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.^[39] Even under conservative estimates, the value of unpaid labor in Australia has been calculated to be over 50% of the country's GDP.^[40] 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.^[41] Because many public policies are shaped by GDP calculations and by the related field of national accounts,^[42] 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.^[43]

The UK's Natural Capital Committee highlighted the shortcomings of GDP in its advice to the UK Government in , 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".

It has been suggested that countries that have authoritarian governments, such as the People's Republic of China, and Russia, inflate their GDP figures.^[44]

Research and development about the relation between GDP and use of GDP and reality[edit]

See also: Decision-making, Problem-solving, Impact evaluation, Economic data, and Resource

Shown is how the global material footprint and global CO₂ emissionsfrom fossil-fuel combustion and industrial processes changed compared with global GDP.^[45]

Instances of GDP measures have been considered numbers that are artificial constructs.^[46] In scientists, as part of a World Scientists' Warning to Humanity-associated series, warned that worldwide growth in affluence in terms of GDP-metrics has increased resource use and pollutant emissions with affluent citizens of the world – in terms of e.g. resource-intensive consumption – being responsible for most negative environmental impacts and central to a transition to safer, sustainable conditions. They summarised evidence, presented solution approaches and stated that far-reaching lifestylechanges need to complement technological advancements and that existing societies, economies and cultures inciteconsumption expansion and that the structural imperative for growth in competitivemarket economies inhibits societal change.^[47][48][45] Sarah Arnold, Senior Economist at the New Economics Foundation (NEF) stated that "GDP includes activities that are detrimental to our economy and society in the long term, such as deforestation, strip mining, overfishing and so on".^[49] The number of trees that are net lost annually is estimated to be approximately 10&#;billion.^[50][51] The global average annual deforested land in the – demi-decade was 10&#;million hectares and the average annual net forest area loss in the – decade &#;million hectares, according to the Global Forest Resources Assessment ^[52] According to one study, depending on the level of wealth inequality, higher GDP-growth can be associated with more deforestation.^[53] In "agriculture and agribusiness" accounted for 24&#;% of the GDP of Brazil, where a large share of annual net tropical forest loss occurred and is associated with sizable portions of this economic activity domain.^[54] The number of obese adults was approximately &#;million (12%) in ^[55] In scientists reported that large improvements in health only lead to modest long-term increases in GDP per capita.^[56] After developing an abstract metric similar to GDP, the Center for Partnership Studies highlighted that GDP "and other metrics that reflect and perpetuate them" may not be useful for facilitating the production of products and provision of services that are useful – or comparatively more useful – to society, and instead may "actually encourage, rather than discourage, destructive activities".^[57][58]Steve Cohen of the Earth Institute elucidated that while GDP does not distinguish between different activities (or lifestyles), "all consumption behaviors are not created equal and do not have the same impact on environmental sustainability".^[59]Johan Rockström, director of the Potsdam Institute for Climate Impact Research, noted that "it's difficult to see if the current G.D.P.-based model of economic growth can go hand-in-hand with rapid cutting of emissions", which nations have agreed to attempt under the Paris Agreement in order to mitigate real-world impacts of climate change.^[60] Some have pointed out that GDP did not adapt to sociotechnical changes to give a more accurate picture of the modern economy and does not encapsulate the value of new activities such as delivering price-free information and entertainment on social media.^[61] In Diane Coyle explained that GDP excludes much unpaid work, writing that "many people contribute free digital work such as writing open-source software that can substitute for marketed equivalents, and it clearly has great economic value despite a price of zero", which constitutes a common criticism "of the reliance on GDP as the measure of economic success" especially after the emergence of the digital economy.^[62] Similarly GDP does not value or distinguish for environmental protection. A study found that "poor regions' GDP grows faster by attracting more pollutingproduction after connection to China's expressway system.^[63] GDP may not be a tool capable of recognizing how much natural capital agents of the economy are building or protecting.^{[64][additional citation(s) needed]}

Proposals to overcome GDP limitations[edit]

In response to these and other limitations of using GDP, alternative approaches have emerged.

• In the s, 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.^[65]
• In 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 , 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 , 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.^[66][67][68]
• In the European Union released a communication titled GDP and beyond: Measuring progress in a changing world^[69] that identified five actions to improve indicators of progress in ways that make them more responsive to the concerns of its citizens.
• In 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 a well-being framework consisting of health, environment, work, physical safety, economic safety, and political freedom.
• In , the Centre for Bhutan Studies began publishing the Bhutan Gross National Happiness (GNH) Index, whose contributors to happiness include physical, mental, and spiritual health; time balance; social and community vitality; cultural vitality; education; living standards; good governance; and ecological vitality.^[70]
• In , the OECD Better Life Index was published by the OECD. The dimensions of the index included health, economic, workplace, income, jobs, housing, civic engagement, and life satisfaction.
• Since , John Helliwell, Richard Layard and Jeffrey Sachs have edited an annual World Happiness Report which reports a national measure of subjective well-being, derived from a single survey question on satisfaction with life. GDP explains some of the cross-national variation in life satisfaction, but more of it is explained by other, social variables (See World Happiness Report).
• In , Serge Pierre Besanger published a "GDP " proposal which combines an expanded GNI formula which he calls GNIX, with a Palma ratio and a set of environmental metrics based on the Daly Rule.^[71]

Lists of countries by their GDP[edit]

See also[edit]

Notes[edit]

References[edit]

Further reading[edit]

External links[edit]

Global

Data

• Bureau of Economic Analysis: Official United States GDP data
• www.oldyorkcellars.com: Links to historical statistics on GDP for 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), –present, maintained by Samuel H. Williamson and Lawrence H. Officer, both professors of economics at the University of Illinois at Chicago.
• 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, income earning potential versus consumptive values, credible data estimating GDP for countries around the world. This includes data for some countries for over 2, years back to 1 CE and for essentially all countries since

Articles and books

• 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, income earning potential versus consumptive values, New York,
• What's wrong with the GDP?
• Whether output and CPI inflation are mismeasured, income earning potential versus consumptive values, by Nouriel Roubini and David Backus, in Lectures in Macroeconomics
• Rodney Edvinsson, Edvinsson, Rodney (). "Growth, Accumulation, Crisis: With New Macroeconomic Data for Sweden –". Diva.
• Clifford Cobb, Ted Halstead and Jonathan Rowe, income earning potential versus consumptive values. "If the GDP is up, why is America down?" The Atlantic Monthly, vol.no. 4, Octoberpages 59–78
• Jerorn C.J.M. van den Bergh, "Abolishing GDP"
• GDP and GNI in OECD Observer No, Dec Jan

Market value of goods and services produced within a country

"GDP" redirects here. For other uses, see GDP (disambiguation).

Gross domestic product (GDP) is a monetarymeasure of the market value of all the final goods and services produced in a specific time period by countries.^[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) may be more useful when comparing living standards between nations, while nominal GDP is more useful comparing national economies on the international market.^[4] Total GDP can also be broken down into the contribution of each industry or sector of the economy.^[5] 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 definitions are maintained by a number of national and international economic organizations. The Organisation for Economic Co-operation and Development (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)".^[6] 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 income earning potential versus consumptive values time (say a quarter or a year)."^[7]

GDP is often used as a metric for international comparisons as well as a broad measure of economic progress. It is often considered to be the "world's most powerful statistical indicator of national development and progress".^[8] However, critics of the growth imperative often argue that GDP measures were never intended to measure progress, and leave out key other externalities, such as income earning potential versus consumptive values extraction, environmental impact and unpaid domestic work.^[9] Critics frequently propose alternative economic models such as doughnut economics which use other measures of success or alternative indicators such as the OECD's Better Life Index as better approaches to measuring the effect of the economy on human development and well being.

History[edit]

Quarterly gross domestic product

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 and ^[10]Charles Davenant developed the method further in ^[11] The modern concept of GDP was first developed income earning potential versus consumptive values Simon Kuznets for a US Congress report, where he warned against its use as a measure of welfare (see bitcoin investor seriös under limitations and criticisms).^[12] After the Bretton Woods conference inGDP became the main tool for measuring a country's economy.^[13] 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 intrailing 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.^[14] A crucial role was played here by the US Department of Commerce under Milton Gilbert where ideas from Kuznets were embedded into institutions.

The history of the concept of GDP should be distinguished from the history of changes in many ways of estimating it. The value added by firms is relatively easy to calculate from their accounts, but the value added by the public income earning potential versus consumptive values, 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, income earning potential versus consumptive values, 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."^[15]

GDP became truly global in when China officially adopted it as its indicator of economic performance. Previously, China had relied on a Marxist-inspired national accounting system.^[16]

Determining gross domestic product (GDP)[edit]

An infographic explaining how GDP is calculated in the UK

GDP can be determined in three ways, all of which should, income earning potential versus consumptive values, theoretically, give the same result. They are the production (or output or value added) approach, the income approach, or the speculated expenditure approach. It is representative of the total output and income within an economy

The most direct of the three is the production approach, income earning potential versus consumptive values, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the income earning potential versus consumptive values product must be equal to people's total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors ("producers", colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes.^[17]

Production approach[edit]

Also known as the Value Added Income earning potential versus consumptive values, it calculates how much value is contributed at each stage of production.

This approach mirrors the OECD(Organisation for Economic Co-operation and Development) definition given above.

1. Estimate the gross value of domestic output out of the many various economic activities;
2. Determine the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services.
3. Deduct intermediate consumption from gross value to obtain the gross value added.

Gross value added = gross value of output – value of intermediate consumption.

Value of output = value of the total sales of goods and services plus value of changes in the inventory.

The sum of the gross value added in the various economic activities is known as "GDP at factor cost".

GDP at factor cost plus indirect taxes less subsidies on products = "GDP at producer price".

For measuring output of domestic product, economic activities (i.e. industries) are classified into various sectors. After classifying economic activities, the output of each sector is calculated by any of the following two methods:

1. By multiplying the output of each sector by their respective market price and adding them together
2. By collecting data on gross sales and inventories from the records of companies and adding them together

The value of output of all sectors is then added to get the gross value of output at factor cost. Subtracting each sector's intermediate consumption from gross output value gives the GVA (=GDP) at factor cost. Adding indirect tax minus subsidies to GVA (GDP) at factor cost gives the "GVA (GDP) at producer prices".

Income approach[edit]

The second way of estimating GDP is to use "the sum of primary incomes distributed by resident producer units".^[6]

If GDP is calculated this way it is sometimes called gross domestic income (GDI), or GDP (I). GDI should income earning potential versus consumptive values the same amount as the expenditure method described later. By definition, GDI is equal to GDP. In practice, however, measurement errors will make the two figures slightly off when reported by national statistical agencies.

This method measures GDP by adding incomes that firms pay households for factors of production they hire - wages for labour, interest for capital, rent for land and profits for entrepreneurship.

The US "National Income and Expenditure Accounts" divide incomes into five categories:

1. Wages, salaries, and supplementary labour income
2. Corporate profits
3. Interest and miscellaneous investment income
4. Farmers' incomes
5. Income from non-farm unincorporated businesses

These five income components sum to net domestic income at factor cost.

Two adjustments must be made to get GDP:

1. Indirect taxes minus subsidies are added to get from factor cost to market prices.
2. Depreciation (or capital consumption allowance) is added to get from net domestic product to gross domestic product.

Total income can be subdivided according to various schemes, leading to various formulae for GDP measured by the income approach. A common one is:

GDP = Compensation of employeesCOE + gross operating surplusGOS + gross mixed incomeGMI + taxes less subsidies on production and importsT_{P & M} – S_{P & M}

• Compensation of employees (COE) measures the total remuneration to employees for work done. It includes wages and salaries, as well as employer contributions to social security and other such programs.
• Gross operating surplus (GOS) is the surplus due to owners of incorporated businesses. Often called profits, although only a subset of total costs are subtracted from gross output to calculate GOS.
• Gross mixed income (GMI) is the same measure as GOS, but for unincorporated businesses. This often includes most small businesses.

The sum of COE, GOS and GMI is called total factor income; it is the income of all of the factors of production in society. It measures the value of GDP at factor (basic) prices. The difference between basic prices and final prices (those used in the expenditure calculation) is the total taxes and subsidies that the government has levied or paid on that production. So adding taxes less subsidies on production and imports converts GDP(I) at factor cost to GDP(I) at final prices.

Total factor income is also sometimes expressed as:

Total factor income = employee compensation + corporate profits + proprietor's income + rental income + net interest^[18]

Expenditure approach[edit]

The third way to estimate GDP is to calculate the sum of the final uses of goods and services (all uses except intermediate consumption) measured in purchasers' prices.^[6]

Market goods that are produced are purchased by someone. In the case where a good is produced and unsold, the standard accounting convention is that the producer has bought the good from themselves. Therefore, measuring the total income earning potential versus consumptive values used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP.

Components of GDP by expenditure[edit]

U.S. GDP computed on the expenditure basis.

GDP (Y) is the sum of consumption (C), investment (I), government Expenditures (G) and net exports (X – M).

Y = C + I + G + (X − M)

Here is a description of each GDP component:

• C (consumption) is normally the largest GDP component in the economy, consisting of private expenditures in the economy (household final consumption expenditure). These personal expenditures fall under one of the following categories: durable goods, nondurable goods, and services. Examples include food, rent, jewelry, gasoline, and medical expenses, but not the purchase of new housing.
• I (investment) includes, for instance, business investment in equipment, but does not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in investment. In contrast to its colloquial meaning, "investment" in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products; buying an existing building will involve a positive investment by the buyer income earning potential versus consumptive values a negative investment by the seller, netting to zero overall investment.
• G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, income earning potential versus consumptive values, purchases of weapons for the military and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits. Analyses outside the USA will often treat government investment as part of investment rather than government spending.
• X (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.
• M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.

Note that C, I, and G are expenditures on final goods and services; expenditures on intermediate goods and services do not count. (Intermediate goods and services are those used by businesses to produce other goods and services within the accounting year.^[19]) So for example if a car manufacturer buys auto parts, assembles the car and sells it, only the final car sold is counted towards the GDP. Meanwhile, if a person buys replacement auto parts to install them on their car, those are counted towards the GDP.

According to the U.S. Bureau of Economic Analysis, which is responsible for calculating the national accounts in the United States, "In general, the source data for the expenditures components are considered more reliable than those for the income components [see income method, above]."^[20]

GDP and GNI[edit]

GDP can be contrasted with gross national product (GNP) or, as it is now known, gross national income (GNI). The difference is that GDP defines its scope according to location, while GNI defines its scope according to ownership. In a global context, world GDP and world GNI are, therefore, equivalent terms.

GDP is product produced within a country's borders; GNI is product produced by enterprises owned by a country's income earning potential versus consumptive values. The two would be the same if all of the productive enterprises in a country were owned by its own citizens, and those citizens did not own productive enterprises in any other income earning potential versus consumptive values. In practice, however, foreign ownership makes GDP and GNI non-identical. Production within a country's borders, but by an enterprise owned by somebody outside the country, counts as part of its GDP but not its GNI; on the other hand, production by an enterprise located outside the country, but owned by one of its citizens, counts as part of its GNI but not its GDP.

For example, the GNI of the USA is the value of output produced by American-owned firms, regardless of where the firms are located, income earning potential versus consumptive values. Similarly, if a country becomes increasingly in debt, and spends large amounts of income servicing this debt this will be reflected in a decreased GNI but not a decreased GDP. Similarly, if a country sells off its resources to entities outside their country this will also be reflected over time in decreased GNI, but not decreased GDP. This would make the use of GDP more attractive for politicians in countries with increasing national debt and decreasing assets.

Gross national income (GNI) equals GDP plus income receipts from the rest of the world minus income payments to the rest of the world.^[21]

Inthe United States switched from using Income earning potential versus consumptive values to using GDP as its primary measure of production.^[22] The relationship between United States GDP and GNP is shown in table of the National Income and Product Accounts.^[23]

International standards[edit]

The international standard for measuring GDP is contained in the book System of National Accounts (), which was prepared by representatives of the International Monetary Fund, European Union, Organisation for Economic Co-operation and Development, United Nations and World Bank. The publication is normally referred to as SNA to distinguish it from the previous edition published in (SNA93) or (called SNA68) ^[24]

SNA provides a set of rules and procedures for the measurement of national accounts. The standards are designed to be flexible, to allow for differences in local statistical needs and conditions.

National measurement[edit]

Main article: National agencies responsible for GDP measurement

Countries by GDP (PPP) per capita (Int$) in according to the IMF

&#;&#; > $50, &#;&#; $35, - $50, &#;&#; $20, - $35, &#;&#; $10, - $20,

&#;&#; $5, - $10, &#;&#; $2, - $5, &#;&#; < $2, &#;&#; No data

Countries by GDP (nominal) per capita^{[note 1]}

&#;&#; > $60, &#;&#; $50, - $60, &#;&#; $40, - $50, &#;&#; $30, - $40,

&#;&#; $20, - $30, &#;&#; $10, - $20, &#;&#; $5, - $10, &#;&#; $2, - $5,

&#;&#; $1, - $2, &#;&#; $ - $1, &#;&#; < $ &#;&#; No data

U.S GDP computed on the income basis

Within each country GDP is normally measured by a national government statistical agency, as private sector organizations normally do not have access to the information required (especially information on expenditure and production by governments).

Nominal GDP and adjustments to GDP[edit]

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 – 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 was $&#;million and its GDP in was $&#;million. Suppose also that inflation had halved the value of its currency over that period. To meaningfully compare its GDP in to its GDP inwe could multiply the GDP in by one-half, to make it relative to as a base year. The result would be that the GDP in equals income earning potential versus consumptive values × one-half = $&#;million, in monetary terms. We would see that the country's GDP had realistically increased 50 percent over that period, not 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, income earning potential versus consumptive values, 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.^[25]

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[edit]

The level of GDP in countries may be compared by converting their income earning potential versus consumptive values in national currency according to income earning potential versus consumptive values 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 200 day moving average bitcoin 50 day 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 income earning potential versus consumptive values the international market. There income earning potential versus consumptive values 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 income earning potential versus consumptive values 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, income earning potential versus consumptive values.

Main article: Measures of national income and output

Standard of living and GDP: wealth distribution and externalities[edit]

GDP per capita is often used as an indicator of living standards.^[26]

The major advantage of GDP per capita as an indicator of standard of living is that it is measured frequently, widely, income earning potential versus consumptive values, 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.^[27][28] Increased industrial output might grow GDP, but any pollution is not counted.^[29]
• 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, income earning potential versus consumptive values. Bartering may be more prominent than the use of money, even extending to services.^[28]
• 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 could not purchase standard products, such as antibiotics and cell phones, income earning potential versus consumptive values, 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 income earning potential versus consumptive values 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.^[28]

It can be argued that GDP per capita as an indicator standard of living is correlated with these factors, capturing them indirectly.^[26][30] 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.^[26]

Limitations and criticisms[edit]

Limitations at introduction[edit]

Simon Kuznets, the economist who developed the first comprehensive set of measures of national income, stated in his second report to the US Congress inin a section titled "Uses and Abuses of National Income Measurements":^[12]

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.

InKuznets stated:^[31]

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.

Further criticisms[edit]

Ever since the development of GDP, multiple observers have pointed out limitations of using GDP as the overarching measure of economic and social progress. For example, many environmentalists argue that GDP is a poor measure of social progress because it does not take into account harm to the environment.^[32][33] Furthermore, the GDP does not consider human health nor the educational aspect of a population.^[34] American politician Robert F. Kennedy criticized the GDP as a measure of “everything except that which makes life worthwhile”. He continued to argue that it "does not allow for the health of our children, the quality of their education or the joy of their play.”^[35]

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.^[36] 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.^[37]

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, income earning potential versus consumptive values, or other minority status within countries.^{[citation needed]} 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 income earning potential versus consumptive values and income were not shared equally among the country.^{[citation needed]} An inequality which the United Nations Sustainable Development Goal 10 amongst other global initiatives aims to address.^[38]

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.^[39] Even under conservative estimates, the value of unpaid labor in Australia has been calculated to be over 50% of the country's GDP.^[40] 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 income earning potential versus consumptive values 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.^[41] Because many public policies are shaped by GDP calculations and by the related field of national accounts,^[42] 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.^[43]

The UK's Natural Capital Committee highlighted the shortcomings of GDP in its advice to the UK Government inpointing 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".

It has been suggested that countries that have authoritarian governments, such as the People's Republic of China, and Russia, inflate their GDP figures.^[44]

Research and development about the relation between GDP and use of GDP and reality[edit]

See also: Decision-making, income earning potential versus consumptive values, Problem-solving, Impact evaluation, Economic data, and Resource

Shown is how the global material footprint and global CO₂ emissionsfrom fossil-fuel combustion and industrial processes changed compared with global GDP.^[45]

Instances of GDP measures have been considered numbers that are artificial constructs.^[46] In scientists, as part of a World Scientists' Warning to Humanity-associated series, warned that worldwide growth in affluence in terms of GDP-metrics has increased resource use and pollutant emissions with affluent citizens of the world – in terms of e.g. resource-intensive consumption – being responsible for most negative environmental impacts and central to a transition to safer, sustainable conditions. They summarised evidence, presented solution approaches and stated that far-reaching lifestylechanges need to complement technological advancements and that existing societies, economies and cultures inciteconsumption expansion and that the structural imperative for growth in competitivemarket economies inhibits societal change.^[47][48][45] Sarah Arnold, Senior Economist at the New Economics Foundation (NEF) stated that "GDP includes activities that are detrimental to our economy and society in the long term, such as deforestation, strip mining, overfishing and so on".^[49] The number of trees that are net lost annually is estimated to be approximately income earning potential versus consumptive values The income earning potential versus consumptive values average annual deforested land in the income earning potential versus consumptive values demi-decade was 10&#;million hectares and the average annual net forest area loss in the – decade &#;million hectares, according to the Global Forest Resources Assessment ^[52] According to one study, depending on the level of wealth inequality, higher GDP-growth can be associated with more deforestation.^[53] In "agriculture and agribusiness" accounted for 24&#;% of the GDP of Brazil, where a large share of annual net tropical forest loss occurred and is associated with sizable portions of this economic activity domain.^[54] The number of obese adults was approximately &#;million (12%) in ^[55] In scientists reported that large improvements in health only lead to modest long-term increases in GDP per capita.^[56] After developing an abstract metric similar to GDP, the Center for Partnership Studies highlighted that GDP "and other metrics that reflect and perpetuate them" may not be useful for facilitating the production of products and provision of services that are useful – or comparatively more useful – to society, and instead may "actually encourage, rather than discourage, destructive activities".^[57][58]Steve Cohen of the Earth Institute elucidated that while GDP does not distinguish between different activities (or lifestyles), "all consumption behaviors are not created equal and do not have the same impact on environmental sustainability".^[59]Johan Rockström, director of the Potsdam Institute for Climate Impact Research, noted that "it's difficult to see if the current G.D.P.-based model of economic growth can go hand-in-hand with rapid cutting of emissions", which nations have agreed to attempt under the Paris Agreement in order to mitigate real-world impacts of climate change.^[60] Some have pointed out that GDP did not adapt to sociotechnical changes to give a more accurate picture of the modern economy and does not encapsulate the value of new activities such as delivering price-free information and entertainment on social media.^[61] In Diane Coyle explained that GDP excludes much unpaid work, writing that income earning potential versus consumptive values people contribute free digital work such as writing open-source software that can substitute for marketed equivalents, income earning potential versus consumptive values, and it clearly has great economic value despite a price of zero", which constitutes a common criticism "of the reliance on GDP as the measure of economic success" especially after the emergence of the digital economy.^[62] Similarly GDP does not value or distinguish for environmental protection. A study found that "poor regions' GDP grows faster by attracting more pollutingproduction after connection to China's expressway system.^[63] GDP may not be a tool capable of recognizing how much natural capital agents of the economy are building or protecting.^{[64][additional citation(s) needed]}

Proposals to overcome GDP limitations[edit]

In response to these and other limitations of using GDP, alternative approaches have emerged.

• In the s, 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.^[65]
• In 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.
• InJohn 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, income earning potential versus consumptive values. The new formula deducted from GDP (personal consumption income earning potential versus consumptive values public non-defensive expenditures - private defensive expenditures + capital formation + services from domestic labour - costs of environmental degradation - depreciation of natural capital)
• InMed 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, income earning potential versus consumptive values, work, social and health (mental and physical) indicators. The proposal was inspired by the King of Bhutan's GNH philosophy.^[66][67][68]
• In the European Union released a communication titled GDP and beyond: Measuring progress in a changing world^[69] that identified five actions to improve indicators of progress in ways that make them more responsive to the concerns of its citizens.
• In Professors Joseph Stiglitz, Amartya Sen, income earning potential versus consumptive values, 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 a well-being framework consisting of health, environment, work, physical safety, economic safety, and political freedom.
• Inthe Centre for Bhutan Studies began publishing the Bhutan Gross National Happiness (GNH) Index, whose contributors to happiness include physical, mental, and spiritual health; time balance; social and community vitality; cultural vitality; education; living standards; good governance; and ecological vitality.^[70]
• Inthe OECD Better Life Index was published by the OECD. The dimensions of the index included health, economic, workplace, income earning potential versus consumptive values, jobs, housing, civic engagement, and life satisfaction.
• SinceJohn Helliwell, Richard Layard and Jeffrey Sachs have edited an annual World Happiness Report which reports a national measure of subjective well-being, derived from a single survey question on satisfaction with life. GDP explains some of the cross-national variation in life satisfaction, but more of it is explained by other, social variables (See World Happiness Report).
• InSerge Pierre Besanger published a "GDP " proposal which combines an expanded GNI formula which he calls GNIX, with a Palma ratio and a set of environmental metrics based on the Daly Rule.^[71]

Lists of countries by their GDP[edit]

See also[edit]

Notes[edit]

References[edit]