Gross Domestic Product

A country’s gross domestic product is a useful guide to the level of activity in its economy, and its growth rate can have a significant effect upon inflation and unemployment. That makes it a matter of importance to the study of macroeconomics, but its usefulness in other respects is more limited.

Definitions

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

GDP can alternatively be defined as the total output of the economy’s producers, or the total expenditure of its investors and consumers, or the total of all payments of wages, interest and rent. It is normally stated as "GDP at market prices", which indicates that the prices used include the effects of indirect taxes and subsidies. In order to adjust the total so that it matches payments to the factors of production, indirect taxes (such as sales taxes) are deducted and subsidies (which are the equivalent of negative sales taxes) are added back - and that adjusted total is termed "GDP at factor cost". Published statistics normally include estimates of "GDP at constant prices", obtained by adjusting the observed values of GDP at current prices in an attempt to eliminate the effects of inflation. Time-series thus adjusted are referred to as showing "real", as distinct from "nominal", changes of of GDP.