The Gross Domestic Product is a supposed to be a measurement of the value of all the goods and services produced and provided in a nation, which is used to attempt to make a measurement of standard of living. But it's piss-poor - there's no way to subtract. Every traffic fatality, emphesima death, and chemical or oil spill increases the GDP. So start spilling! Conversely, things that don't involve money are excluded from the GDP, like *not* polluting.

In part, the GDP is the government's way of computing the unemployment rate of the United States. To compute the rate of unemployment, you must first calculate the actual GDP and subtract it from the potential GDP.

Actual GDP, also called productivity, is simply the amount of output per man hour worked in the economy during a particular period.

Potential GDP is the Output per man hour times total man hours available to be worked during a particular period.

As long as Actual GDP is less than Potential GDP, unemployment occurs. However, full employment does not mean that employment is at a full 100%.

see: full employment
The Gross Domestic Product measures economic activity by summing up all the monetary transactions that occur in a nation. It is often used as an indicator of economic progress and the prosperity of an economy. Unfortunately, the GDP as an indicator is given more credence than its approximations warrant. An increase in GDP can actually reflect one (or a combination) of three things:

1. True increase in productivity and the amount of goods and services available to (and used by) the population.
2. Additional economic activity required because of natural or man-made disasters - for example, the replacement of windows required after an earthquake or protest.
3. The transformation of the relationships within a society from informal activity to business dealings. One example is the growing use of hired child-care providers to replace the caring of children by relatives.

Ironically, hiring a prostitute in Nevada increases GDP (and the illusion of prosperity) while sleeping with your wife does not (unless you pay her and report that fact). Unfortunately, the GDP is still being used to measure economic progress by the both the uninformed and those who should know better.

The Gross Domestic Product, or GDP, of a nation measures all activity in the formal economy. This is all declared, paid. However, this is certainly not all the work that goes on in the economy.

My mom pays me a few pounds a week to mow the lawn. I don't declare this to the Inland Revenue, and thus they have no record of it. Work happened, but it's not in the GDP. This is part of the informal economy.

It's really difficult to work out how much unpaid and undeclared paid work is carried out. Estimates abound, such as, of total work been done:

  • Formal paid work: 46%.
  • Undeclared paid work: 3%.
  • Domestic unpaid work: 51%.
Many people consider these figures to be conservative.

Anyway, the GDP is usually used to measure the rate of economic growth in an economy. Sometimes index numbers are used because of the massive figures we would otherwise have to deal with. GDP per capita is calculated by doing

GDP / population

and is a fair indication of the standard of living, although as the figure doesn't specify who the money belongs to, it could mean there are just a rich elite in the country with a lot of money, and the rest of the population are poor.

If countries were corporations, GDP would be their added value, or "profit before expenses" (which is spent by citizens on stuff, so the profit doesn't make it to the end of fiscal year balance sheet). GDP/capita therefore represents the average purchasing power of a citizen. This is an important point: anti-globalization protestors like to say that General Electric (for example) is more economically powerful than many countries, but they compare GE's turnover or sales to the equivalent of a country's profit. If you compare apples with apples, suddenly corporations don't look so big relative to Malaysia.

Reference: "Countries Still Rule the World", an article by Martin Wolf in the FT, 5th February, 2002

GDP can be calculated at home with the following equation:

y = c + i + g + n


C = consumption: the sum of all goods and services purchased, related to GDP (people will spend no matter what, but they will spend more if they have more)

I = investment: the sum of all private investment in the country, including construction and surplus inventory, proportional to GDP (it only happens when people have extra resources)

G = government spending: the sum of all government contracts, exogenous to GDP (the government will spend no matter what)

N = net exports: the sum of all exports minus the sum of all imports, inversely related to GDP (as GDP goes up, the country brings in more and sends out less)

A related figure is aggregate expenditures, which is almost the same as GDP, but doesn't count surplus inventory. Another related figure is natural GDP, the highest GDP attainable before inflation starts to increase.

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