Gross domestic product

Gross domestic product (GDP) is a way to measure how much a country is making and spending. It adds up the total value of all the things a country makes and the services it provides in one year. This includes what people buy, what the government spends, what countries trade with each other, and how much money is invested in building and creating new things.

GDP helps us understand how well a country's economy is doing. It is often used to compare how different countries are doing or to see how a country’s economy is changing over time. By dividing the total GDP by the number of people in a country, we can get an idea of the average amount each person contributes, called GDP per capita.

Even though GDP is useful, it doesn’t tell the whole story. It doesn’t show how happy or healthy people are, or how fairly the money is shared among everyone. Some other ways to measure how well people are doing include looking at things like health, education, and how the environment is treated.

History

Sir William Petty first thought of an idea like GDP to help decide taxes and show that landlords were taxed too much during wars between the Dutch and the English from 1652 to 1674. Later, Charles Davenant made this method better in 1695.

The modern way of measuring GDP was created by Simon Kuznets for a report in 1934 for the U.S. Congress. After a big meeting in 1944 called the Bretton Woods Conference, GDP became the main way to measure how well a country’s economy was doing. Before that, people used something called GNP, which looked at what a country’s people made both at home and abroad. The United States switched to using GDP in 1991.

Different ways of calculating GDP have changed over time, especially for things like government work, financial industries, and creating things that you can’t see, like software. These parts are harder to measure but very important today.

China started using GDP in 1993 to measure its economy, instead of the system it used before.

Determining gross domestic product (GDP)

GDP can be found in three main ways, and each should give the same answer. These are the production method, the income method, and the spending method. They all show the total value of everything made and earned in a country.

The production method adds up everything made by businesses. The spending method looks at what people and the government buy. The income method adds up all the money earned by workers, businesses, and others.

Production approach

This method, also called the Value Added Approach, looks at how much value is added at each step of making a product.

It works like this:

1. Find the total value of everything made.
2. Subtract the cost of materials and services used to make it.
3. What’s left is the value added.

Income approach

This method adds up all the incomes earned by workers, business owners, and others.

It includes:

• Wages and salaries
• Business profits
• Interest and investment income
• Income from small businesses
• Net income from businesses

Expenditure approach

This method adds up everything people and the government spend money on.

The main parts are:

• C (consumption): What people buy, like food and clothes
• I (investment): What businesses spend on new equipment or buildings
• G (government spending): What the government spends on things like schools and roads
• X (exports): What the country sells to others
• M (imports): What the country buys from others, which is subtracted so we don’t count it twice

These parts together show the total GDP.

Lists of countries by GDP

Here are some lists that show how well different places are doing with their money:

• List of continents by GDP
• List of countries by GDP (nominal)
• List of countries by GDP (PPP)
• List of countries by GDP sector composition
• List of countries by largest historical GDP

Economic growth

Further information: Economic growth and Productivity-improving technologies

Real GDP helps us see how much a country’s production has changed from the year before. This change is shown as a percentage. If the number is positive, the country made more things and services than the last year. If it’s negative, it made less.

Relation to gross national income

GDP and gross national income (GNI) are two ways to measure a country's economic activity, but they look at things differently.

GDP measures the value of goods and services made inside a country's borders, no matter who owns the businesses there. GNI measures the value of goods and services made by a country's citizens, no matter where those businesses are located.

For example, if a factory in your country is owned by someone from another country, its products count toward your country's GDP but not its GNI. If a company from your country owns a factory in another country, its products count toward your country's GNI but not its GDP. This means GDP and GNI can be different depending on who owns businesses and where they are located.

Limitations and criticisms

Gross Domestic Product (GDP) is a way to measure how much a country is making, but it doesn't tell the whole story about how well people are living. GDP misses important things like pollution, unpaid work at home, and the value of free information online. It also doesn't show how money is shared among people. So, a country could have a high GDP but still have big gaps between rich and poor.

Some people think we need new ways to measure progress that include things like health, education, and the environment. For example, some places are trying out new ideas that look at happiness and well-being instead of just money. These new ways might give us a better picture of how well people are really doing.