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You are here:   areppim >  Glossary of Terms >   Gross Domestic Product


GDP - Gross Domestic Product
GDP or gross domestic product is the total value of all goods and services produced within a country each year. It is therefore equivalent to the value added to the country's economy. GDP equals GNP (gross national product) after subtracting income from abroad.
The relationship between key economic aggregates may be represented by the GDP equation:

[ GDP = C + G + I + X - M ]

  • C = private consumption
  • G = government consumption
  • I = gross domestic investment
  • X = exports
  • M = imports
Alternatively, GDP can be measured in terms of the various uses to which income may be allocated:

[ GDP = C + S + T ]

  • C = private consumption
  • S = private sector saving
  • T = tax payments
GDP is generally valuated at actual market prices, i.e. the amount of money that willing buyer and seller agree upon to settle a transaction. Furthermore, GDP can be evaluated either in the prices relating to the period being measured (current prices), or in the average prices of a selected year, known as the base year (constant prices).
Constant price series show how the quantity or volume of the GDP -- the "real" GDP -- has changed, by eliminating the growth factor due to price increases. The ratio of the current and constant price series provides a measure of price inflation and forms the basis for the GDP deflator.
GDP is used as the prime indicator of economic muscle. However, GDP shortcomings as an economic indicator are well known:
  • GDP only tracks duly reported commercial transactions. Other activities such as unpaid work (e.g. household or voluntary work), parallel business, production for auto-consumption or unreported employment are ignored.
  • GDP does not take into account externalised or delayed costs such as the pollution of air, water or soil, the undue depletion of limited natural resources, the long-term costs of road accidents (loss of the lifetime production value of the victims) or of throwaway objects (waste of resources and cost of refuse treatment).
  • It only allows for meaningful comparisons between countries having similar production levels and similar social structures. A given volume of production predominantly for self-consumption in country A, or for trade in country B, will produce totally different GDPs.
"World GDP" or GWP (gross world product) is commonly used to measure the value of the economic output at the world level.
  Convert nominal US dollars to real dollars with areppim's GDP Deflator.