What is Gross Domestic Product?

• Author: Tim Callen
• Position: Division Chief in the IMF's Middle East and Central Asia Department
• Pages: 48-49

Page 48

Many professions commonly use acronyms. To doctors, accountants, and baseball players, the letters MRI (magnetic resonance imaging), GAAP (generally accepted accounting principles), and ERA (earned run average), respectively, need no explanation.

To someone unfamiliar with these fields, however, without an explanation these acronyms are a stumbling block to a better understanding of the subject at hand. Economics is no different. Economists use many acronyms.

One of the most common is GDP, which stands for gross domestic product. It is often cited in newspapers, on the television news, and in reports by governments, central banks, and the business community. It has become widely used as a reference point for the health of national and global economies. When GDP is growing, especially if inflation is not a problem, workers and businesses are generally better off than when it is not.

Measuring GDP

GDP measures the monetary value of final goods and services-that is, those that are bought by the final user-produced in a country in a given period of time (say a quarter or a year). It counts all the output generated within the borders of a country. GDP is composed of goods and services produced for sale in the market and also includes some nonmarket production, such as defense or education services provided by the government. An alternative concept, gross national product, or GNP, counts all the output of the residents of a country. So if a German-owned company has a factory in the United States, the output of this factory would be included in U.S. GDP, but in German GNP.

Not all productive activity is included in GDP. For example, unpaid work (such as that performed in the home or by volunteers) and black-market activities are not included because they are difficult to measure and value accurately. That means, for example, that a baker who produces a loaf of bread for a customer would contribute to GDP, but would not contribute to GDP if he baked the same loaf for his family.

Moreover, "gross" domestic product takes no account of the wear and tear on the machinery, buildings, and so on (the so-called capital stock) that are used in producing the output. If this depletion of the capital stock, called depreciation, is subtracted from GDP, we get net domestic product.

Theoretically, GDP can be viewed in three different ways.

* The...