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Gross domestic product (GDP) is the standard measure of the value added created through the production of goods and services in a country during a certain period. As such, it also measures the income earned from that production, or the total amount spent on final goods and services (less imports). While GDP is the single most important indicator to capture economic activity, it falls short of providing a suitable measure of people's material well-being for which alternative indicators may be more appropriate. This indicator is based on nominal GDP (also called GDP at current prices or GDP in value) and is available in different measures: US dollars and US dollars per capita (current PPPs). All OECD countries compile their data according to the 2008 System of National Accounts (SNA). This indicator is less suited for comparisons over time, as developments are not only caused by real growth, but also by changes in prices and PPPs.
The largest part of GDP is the value of all final goods and services which are produced to be sold (final means excluding intermediate consumption - see above). No distinction is made whether the goods or services that are produced have a positive or negative impact from a social or environmental perspective. For example if there is an oil spill in the ocean, the transport of the oil as well as the cleaning work related to this is included in GDP. GDP also includes the value of goods and services produced to be used as investments by the producers themselves.
Furthermore, GDP also includes all goods which are produced by households for own use.
There are a few types of work that are not included in GDP and they mainly concern some types of services, such as housework, everyday domestic services and personal care.
Example When Alessandro is at home and cleans the house, cooks dinner, washes and irons clothes or babysits for his younger brothers or sisters, none of that contributes to GDP. However, if he was paid to do any of those services for someone else, for example cleaning, cooking, ironing or babysitting in a hotel, this would contribute to GDP. In fact all volunteer services — as opposed to the volunteer production of goods — are excluded, regardless of who benefits from the work, whether it is you and your family or an organisation, like a charitable or sports/youth organisation.
Unreported transactions, such as simply working illegally (not registered for tax and social security), are included in GDP through estimates. An example would be cash payments to a cleaner whose work is not declared to the authorities. Estimates should also be made for illegal activities which involve monetary payment, such as buying counterfeit goods, smuggled cigarettes, prostitution and prohibited drugs. Making these estimates for unreported transactions and illegal activities is not easy: more information can be found in a separate article.
When considering how big an economy is, or how it compares over time or with other economies, it should be remembered that there is no ‘right’ amount of GDP or of GDP growth. GDP growth does not necessarily go hand in hand with positive social or environmental development in an economy. This brings us to the next point … what GDP does not reflect. It does not measure the social or environmental situation of an economy.
GDP has a lesser known relative, called gross national income (GNI). GDP measures the production of resident entities regardless of nationality within the economy, while GNI includes the income earned outside the economy by national entities and excludes the income earned by foreign nationals in the domestic economy.
Example
In an economy (called the host economy) there is a subsidiary of a foreign owned multinational enterprise. If that subsidiary transfers (repatriates) profits back to the home economy of the multinational enterprise, the repatriated profits will be included in the host economy’s GDP, but not in its GNI; on the other hand, the profits will be added to the home economy’s GNI, but not to its GDP. Another example is that of Christophe, who lives in Belgium and drives to Luxembourg for work every weekday. The value of the work he produces contributes to Luxembourg’s GDP, but then, when calculating Luxembourg’s GNI from its GDP, the income he earns is deducted.
As well as being useful for analysis in its own right, GDP can also be used as a reference for many other types of statistics. For research and development A common indicator when looking at the competitiveness of different economies is research and development (R&D) intensity, which is calculated as expenditure on R&D divided by GDP, expressed in percentage. R&D expenditure and GDP are both measured in euros, and so the resulting ratio is easy to compare across time and between countries. The EU’s R&D intensity in 2015 was 2.03 %, meaning that expenditure on R&D was equivalent to 2.03 % of GDP. For government finance statistics Another example is when considering how much money governments borrow or lend during a year and how much public debt (money the government owes) they have built up over time; these are often presented relative to GDP. In 2016, the government deficit (when government's expenditure is greater than its income) in the EU was 1.7 % of GDP, while the level of all outstanding debt was 83.5 % of GDP. These are just two examples where GDP is used as a reference: there are many more cases.
National, regional and local governments/administrations, European institutions, central banks as well as other economic and social bodies in the public and private sectors need a set of comparable and reliable statistics about the economy in order to be able to develop different policies that are based on facts. The change of GDP over time is the most important indicator of economic growth. The GDP is also used, for example, for deciding on the amount of money the EU regions receive from the EU’s structural funds, while the GNI of each EU Member State is used to determine how much each country pays to the EU’s budget. More information on the various uses of national accounts in general and GDP in particular is provided in a separate article.
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