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Gross domestic product - Wikipedia, the free encyclopedia

Gross domestic product


From Wikipedia, the free encyclopedia

(Redirected from Gdp)


Gross domestic product (GDP) is
defined by OECD as "an aggregate
measure of production equal to the sum of
the gross values added of all resident
institutional units engaged in production
(plus any taxes, and minus any subsidies,
on products not included in the value of
their outputs)."[2]
GDP estimates are commonly used to
A map of world economies by size of GDP (nominal) in $US,
measure the economic performance of a
CIA World Factbook, 2012.[1]
whole country or region, but can also
measure the relative contribution of an
industry sector. This is possible because GDP is a measure of 'value added' rather than sales; it adds each
firm's value added (the value of its output minus the value of goods that are used up in producing it). For
example, a firm buys steel and adds value to it by producing a car; double counting would occur if GDP
added together the value of the steel and the value of the car.[3] Because it is based on value added, GDP
also increases when an enterprise reduces its use of materials or other resources ('intermediate
consumption') to produce the same output.
The more familiar use of GDP estimates is to calculate the growth of the economy from year to year
(and recently from quarter to quarter). The pattern of GDP growth is held to indicate the success or
failure of economic policy and to determine whether an economy is 'in recession'.

Contents
1 History
2 Determining GDP
2.1 Production approach
2.2 Income approach
2.3 Expenditure approach
2.3.1 Components of GDP by expenditure
2.3.2 Examples of GDP component variables
3 GDP vs GNI
3.1 International standards
3.2 National measurement
3.3 Interest rates
4 Nominal GDP and adjustments to GDP
5 Cross-border comparison and PPP
6 Per unit GDP
7 Standard of living and GDP

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7 Standard of living and GDP


8 Externalities
9 Limitations and criticisms
10 Lists of countries by their GDP
11 List of newer approaches to the measurement of (economic) progress
12 See also
13 Notes and references
14 Further reading
15 External links
15.1 Global
15.2 Data
15.3 Articles and books

History
The concept of GDP was first developed by Simon Kuznets for a US Congress report in 1934.[4] In this
report, Kuznets warned against its use as a measure of welfare (see below under limitations and
criticisms). After the Bretton Woods conference in 1944, GDP became the main tool for measuring a
country's economy.[5] At that time Gross National Product (GNP) was the preferred estimate, which
differed from GDP in that it measured production by a country's citizens at home and abroad rather than
its 'resident institutional units' (see OECD definition above). The switch to GDP came in the 1990s.
The history of the concept of GDP should be distinguished from the history of changes in ways of
estimating it. The value added by firms is relatively easy to calculate from their accounts, but the value
added by the public sector, by financial industries, and by intangible asset creation is more complex.
These activities are increasingly important in developed economies, and the international conventions
governing their estimation and their inclusion or exclusion in GDP regularly change in an attempt to
keep up with industrial advances. In the words of one academic economist "The actual number for GDP
is therefore the product of a vast patchwork of statistics and a complicated set of processes carried out on
the raw data to fit them to the conceptual framework."[6]
Angus Maddison calculated historical GDP figures going back to 1830 and before.

Determining GDP
GDP can be determined in three ways, all of which should, in principle, give the same result. They are
the production (or output or value added) approach, the income approach, or the expenditure approach.
The most direct of the three is the production approach, which sums the outputs of every class of
enterprise to arrive at the total. The expenditure approach works on the principle that all of the product
must be bought by somebody, therefore the value of the total product must be equal to people's total
expenditures in buying things. The income approach works on the principle that the incomes of the
productive factors ("producers," colloquially) must be equal to the value of their product, and determines
GDP by finding the sum of all producers' incomes.[7]
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Production approach
This approach mirrors the OECD definition given above.
1. Estimate the gross value of domestic output out of the many various economic activities;
2. Determine the intermediate consumption, i.e., the cost of material, supplies and services used to
produce final goods or services.
3. Deduct intermediate consumption from gross value to obtain the gross value added.
Gross value added = gross value of output value of
intermediate consumption.
Value of output = value of the total sales of goods and
services plus value of changes in the inventories.
The sum of the gross value added in the various economic
activities is known as "GDP at factor cost".
GDP at factor cost plus indirect taxes less subsidies on
products = "GDP at producer price".
For measuring output of domestic product, economic
activities (i.e. industries) are classified into various sectors.
After classifying economic activities, the output of each
sector is calculated by any of the following two methods:

Gross Value Added Structure [1]


(http://www.bluenomics.com/#!data/national
_accounts_gdp/gdp_production_approach/str 1. By multiplying the output of each sector by their
ucture_of_gross_value_added_by_sectors_g
respective market price and adding them together
va_/structure_of_gross_value_added_by_sec
tors_gva_annual_of_gdp%7Cchart/line$coun 2. By collecting data on gross sales and inventories from the
tries=usa&sorting=list//title)
records of companies and adding them together

The gross value of all sectors is then added to get the gross value added (GVA) at factor cost.
Subtracting each sector's intermediate consumption from gross output gives the GDP at factor cost.
Adding indirect tax minus subsidies in GDP at factor cost gives the "GDP at producer prices".

Income approach
The second way of estimating GDP is to use "the sum of primary incomes distributed by resident
producer units".[2]
If GDP is calculated this way it is sometimes called gross domestic income (GDI), or GDP (I). GDI
should provide the same amount as the expenditure method described later. (By definition, GDI = GDP.
In practice, however, measurement errors will make the two figures slightly off when reported by
national statistical agencies.)
This method measures GDP by adding incomes that firms pay households for factors of production they
hire - wages for labour, interest for capital, rent for land and profits for entrepreneurship.
The US "National Income and Expenditure Accounts" divide incomes into five categories:
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1. Wages, salaries, and supplementary labour


income
2. Corporate profits
3. Interest and miscellaneous investment income
4. Farmers' incomes
5. Income from non-farm unincorporated
businesses

Countries by 2012 GDP (nominal) per capita.[8]

These five income components sum to net domestic


income at factor cost.
Two adjustments must be made to get GDP:
1. Indirect taxes minus subsidies are added to get

over $102,400

$1,6003,200

$51,200102,400

$8001,600

$25,60051,200

$400800

$12,80025,600

below $400

$6,40012,800

unavailable

$3,2006,400

from factor cost to market prices.


2. Depreciation (or capital consumption
allowance) is added to get from net domestic
product to gross domestic product.
Total income can be subdivided according to various
schemes, leading to various formulae for GDP measured
by the income approach. A common one is:
GDP =

GDP (PPP) per capita (World bank, 2012).

compensation of employees + gross operating surplus +


gross mixed income + taxes less subsidies on production
and imports
GDP = COE + GOS + GMI + TP & M SP & M
Compensation of employees (COE) measures the total
remuneration to employees for work done. It includes
Nominal GDP Income Approach [2]
(http://www.bluenomics.com/#!data/national
_accounts_gdp/gdp_income_approach/struct
ure_of_gdp_income_approach/structure_of_
gdp_income_approach_annual_of_total%7C
chart/line$countries=united_kingdom&sortin
g=list//title&min=631152000000)

wages and salaries, as well as employer contributions to


social security and other such programs.
Gross operating surplus (GOS) is the surplus due to
owners of incorporated businesses. Often called profits,
although only a subset of total costs are subtracted from
gross output to calculate GOS.
Gross mixed income (GMI) is the same measure as GOS,

but for unincorporated businesses. This often includes most small businesses.

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The sum of COE, GOS and GMI is called total factor income; it is the income of all of the factors of
production in society. It measures the value of GDP at factor (basic) prices. The difference between
basic prices and final prices (those used in the expenditure calculation) is the total taxes and subsidies
that the government has levied or paid on that production. So adding taxes less subsidies on production
and imports converts GDP at factor cost to GDP(I).
Total factor income is also sometimes expressed as:
Total factor income = employee compensation + corporate profits + proprietor's income + rental
income + net interest[9]
Yet another formula for GDP by the income method is:

where R : rents
I : interests
P : profits
SA : statistical adjustments (corporate income taxes, dividends, undistributed corporate profits)
W : wages.

Expenditure approach
The third way to estimate GDP is to calculate the sum of the final uses of goods and services (all uses
except intermediate consumption) measured in purchasers' prices.[2]
In economics, most things produced are produced for sale and then sold. Therefore, measuring the total
expenditure of money used to buy things is a way of measuring production. This is known as the
expenditure method of calculating GDP. Note that if you knit yourself a sweater, it is production but
does not get counted as GDP because it is never sold. Sweater-knitting is a small part of the economy,
but if one counts some major activities such as child-rearing (generally unpaid) as production, GDP
ceases to be an accurate indicator of production. Similarly, if there is a long term shift from non-market
provision of services (for example cooking, cleaning, child rearing, do-it yourself repairs) to market
provision of services, then this trend toward increased market provision of services may mask a dramatic
decrease in actual domestic production, resulting in overly optimistic and inflated reported GDP. This is
particularly a problem for economies which have shifted from production economies to service
economies.
Components of GDP by expenditure
GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports
(X M).
Y = C + I + G + (X M)
Here is a description of each GDP component:
C (consumption) is normally the largest GDP component in the economy, consisting of private
(household final consumption expenditure) in the economy. These personal expenditures fall
under one of the following categories: durable goods, non-durable goods, and services. Examples
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include food, rent, jewelry, gasoline, and medical


expenses but does not include the purchase of new
housing.
I (investment) includes, for instance, business
investment in equipment, but does not include exchanges
of existing assets. Examples include construction of a
new mine, purchase of software, or purchase of
machinery and equipment for a factory. Spending by

Components of U.S. GDP

households (not government) on new houses is also


included in investment. In contrast to its colloquial
meaning, "investment" in GDP does not mean
purchases of financial products. Buying financial
products is classed as 'saving', as opposed to
investment. This avoids double-counting: if one
buys shares in a company, and the company uses the
money received to buy plant, equipment, etc., the
amount will be counted toward GDP when the
company spends the money on those things; to also
count it when one gives it to the company would be
to count two times an amount that only corresponds
to one group of products. Buying bonds or stocks is
a swapping of deeds, a transfer of claims on future
production, not directly an expenditure on products.
G (government spending) is the sum of

Nominal GDP Expenditure Approach [3]


(http://www.bluenomics.com/#!data/national
_accounts_gdp/gdp_expenditure_approach/st
ructure_of_gdp_expenditure_approach/struct
ure_of_gdp_expenditure_approach_annual_n
ominal_of_gdp%7Cchart/line$countries=usa
&sorting=list//title)

government expenditures on final goods and


services. It includes salaries of public servants, purchases of weapons for the military and any
investment expenditure by a government. It does not include any transfer payments, such as social
security or unemployment benefits.
X (exports) represents gross exports. GDP captures the amount a country produces, including
goods and services produced for other nations' consumption, therefore exports are added.
M (imports) represents gross imports. Imports are subtracted since imported goods will be
included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as
domestic.
A fully equivalent definition is that GDP (Y) is the sum of final consumption expenditure (FCE),
gross capital formation (GCF), and net exports (X M).

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Y = FCE + GCF+ (X M)
FCE can then be further broken down by three sectors (households, governments and non-profit
institutions serving households) and GCF by five sectors (non-financial corporations, financial
corporations, households, governments and non-profit institutions serving households
(http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Glossary:Nonprofit_institutions_serving_households_(NPISH))). The advantage of this second definition is that
expenditure is systematically broken down, firstly, by type of final use (final consumption or capital
formation) and, secondly, by sectors making the expenditure, whereas the first definition partly follows a
mixed delimitation concept by type of final use and sector.
Note that C, G, and I are expenditures on final goods and services; expenditures on intermediate goods
and services do not count. (Intermediate goods and services are those used by businesses to produce
other goods and services within the accounting year.[10] )
According to the U.S. Bureau of Economic Analysis, which is responsible for calculating the national
accounts in the United States, "In general, the source data for the expenditures components are
considered more reliable than those for the income components [see income method, below]."[11]
Examples of GDP component variables
C, I, G, and NX(net exports): If a person spends money to renovate a hotel to increase occupancy rates,
the spending represents private investment, but if he buys shares in a consortium to execute the
renovation, it is saving. The former is included when measuring GDP (in I), the latter is not. However,
when the consortium conducted its own expenditure on renovation, that expenditure would be included
in GDP.
If a hotel is a private home, spending for renovation would be measured as consumption, but if a
government agency converts the hotel into an office for civil servants, the spending would be included in
the public sector spending, or G.
If the renovation involves the purchase of a chandelier from abroad, that spending would be counted as
C, G, or I (depending on whether a private individual, the government, or a business is doing the
renovation), but then counted again as an import and subtracted from the GDP so that GDP counts only
goods produced within the country.
If a domestic producer is paid to make the chandelier for a foreign hotel, the payment would not be
counted as C, G, or I, but would be counted as an export.
A "production boundary" delimits what will be
counted as GDP.
"One of the fundamental questions that must be
addressed in preparing the national economic
accounts is how to define the production
boundarythat is, what parts of the myriad human
activities are to be included in or excluded from
the measure of the economic production."[12]

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GDP real growth rates for 2010.

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All output for market is at least in theory included within the boundary. Market output is defined as that
which is sold for "economically significant" prices; economically significant prices are "prices which
have a significant influence on the amounts producers are willing to supply and purchasers wish to
buy."[13] An exception is that illegal goods and services are often excluded even if they are sold at
economically significant prices (Australia and the United States exclude them).
This leaves non-market output. It is partly excluded and partly included. First, "natural processes without
human involvement or direction" are excluded.[14] Also, there must be a person or institution that owns
or is entitled to compensation for the product. An example of what is included and excluded by these
criteria is given by the United States' national accounts agency: "the growth of trees in an uncultivated
forest is not included in production, but the harvesting of the trees from that forest is included."[15]
Within the limits so far described, the boundary is further constricted by "functional considerations."[16]
The Australian Bureau for Statistics explains this: "The national accounts are primarily constructed to
assist governments and others to make market-based macroeconomic policy decisions, including
analysis of markets and factors affecting market performance, such as inflation and unemployment."
Consequently, production that is, according to them, "relatively independent and isolated from markets,"
or "difficult to value in an economically meaningful way" [i.e., difficult to put a price on] is
excluded.[17] Thus excluded are services provided by people to members of their own families free of
charge, such as child rearing, meal preparation, cleaning, transportation, entertainment of family
members, emotional support, care of the elderly.[18] Most other production for own (or one's family's)
use is also excluded, with two notable exceptions which are given in the list later in this section.
Non-market outputs that are included within the boundary are listed below. Since, by definition, they do
not have a market price, the compilers of GDP must impute a value to them, usually either the cost of the
goods and services used to produce them, or the value of a similar item that is sold on the market.
Goods and services provided by governments and non-profit organizations free of charge or for
economically insignificant prices are included. The value of these goods and services is estimated
as equal to their cost of production. This ignores the consumer surplus generated by an efficient
and effective government supplied infrastructure. For example, government-provided clean water
confers substantial benefits above its cost. Ironically, lack of such infrastructure which would
result in higher water prices (and probably higher hospital and medication expenditures) would be
reflected as a higher GDP. This may also cause a bias that mistakenly favors inefficient
privatizations since some of the consumer surplus from privatized entities' sale of goods and
services are indeed reflected in GDP.[19]
Goods and services produced for own-use by businesses are attempted to be included. An example
of this kind of production would be a machine constructed by an engineering firm for use in its
own plant.
Renovations and upkeep by an individual to a home that she owns and occupies are included. The
value of the upkeep is estimated as the rent that she could charge for the home if she did not
occupy it herself. This is the largest item of production for own use by an individual (as opposed
to a business) that the compilers include in GDP.[19] If the measure uses historical or book prices
for real estate, this will grossly underestimate the value of the rent in real estate markets which
have experienced significant price increases (or economies with general inflation). Furthermore,
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depreciation schedules for houses often accelerate the accounted depreciation relative to actual
depreciation (a well-built house can be lived in for several hundred years a very long time after
it has been fully depreciated). In summary, this is likely to grossly underestimate the value of
existing housing stock on consumers' actual consumption or income.
Agricultural production for consumption by oneself or one's household is included.
Services (such as chequeing-account maintenance and services to borrowers) provided by banks
and other financial institutions without charge or for a fee that does not reflect their full value have
a value imputed to them by the compilers and are included. The financial institutions provide these
services by giving the customer a less advantageous interest rate than they would if the services
were absent; the value imputed to these services by the compilers is the difference between the
interest rate of the account with the services and the interest rate of a similar account that does not
have the services. According to the United States Bureau for Economic Analysis, this is one of the
largest imputed items in the GDP.[20]

GDP vs GNI
GDP can be contrasted with gross national product (GNP) or, as it is now known, gross national income
(GNI). The difference is that GDP defines its scope according to location, while GNI defines its scope
according to ownership. In a global context, world GDP and world GNI are, therefore, equivalent terms.
GDP is product produced within a country's borders; GNI is product produced by enterprises owned by a
country's citizens. The two would be the same if all of the productive enterprises in a country were
owned by its own citizens, and those citizens did not own productive enterprises in any other countries.
In practice, however, foreign ownership makes GDP and GNI non-identical. Production within a
country's borders, but by an enterprise owned by somebody outside the country, counts as part of its
GDP but not its GNI; on the other hand, production by an enterprise located outside the country, but
owned by one of its citizens, counts as part of its GNI but not its GDP.
For example, the GNI of the USA is the value of output produced by American-owned firms, regardless
of where the firms are located. Similarly, if a country becomes increasingly in debt, and spends large
amounts of income servicing this debt this will be reflected in a decreased GNI but not a decreased
GDP. Similarly, if a country sells off its resources to entities outside their country this will also be
reflected over time in decreased GNI, but not decreased GDP. This would make the use of GDP more
attractive for politicians in countries with increasing national debt and decreasing assets.
Gross national income (GNI) equals GDP plus income receipts from the rest of the world minus income
payments to the rest of the world.[21]
In 1991, the United States switched from using GNP to using GDP as its primary measure of
production.[22] The relationship between United States GDP and GNP is shown in table 1.7.5 of the
National Income and Product Accounts.[23]

International standards

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The international standard for measuring GDP is contained in the book System of National Accounts
(1993), which was prepared by representatives of the International Monetary Fund, European Union,
Organization for Economic Co-operation and Development, United Nations and World Bank. The
publication is normally referred to as SNA93 to distinguish it from the previous edition published in
1968 (called SNA68) [24]
SNA93 provides a set of rules and procedures for the measurement of national accounts. The standards
are designed to be flexible, to allow for differences in local statistical needs and conditions.

National measurement
Within each country GDP is normally measured by a
national government statistical agency, as private sector
organizations normally do not have access to the
information required (especially information on
expenditure and production by governments).

Interest rates
Net interest expense is a transfer payment in all sectors
except the financial sector. Net interest expenses in the
financial sector are seen as production and value added
and are added to GDP.

Nominal GDP and adjustments to


GDP

Structure of Nominal GNI [4]


(http://www.bluenomics.com/#!data/national
_accounts_gdp/other_basic_concepts/structu
re_of_gross_national_income_gni_/structure
_of_gross_national_income_gni_annual_usd
_nominal%7Cchart/line$countries=usa&sorti
ng=list//title)

The raw GDP figure as given by the equations above is


called the nominal, historical, or current, GDP. When one
compares GDP figures from one year to another, it is
desirable to compensate for changes in the value of money i.e., for the effects of inflation or deflation.
To make it more meaningful for year-to-year comparisons, it may be multiplied by the ratio between the
value of money in the year the GDP was measured and the value of money in a base year.
For example, suppose a country's GDP in 1990 was $100 million and its GDP in 2000 was $300 million.
Suppose also that inflation had halved the value of its currency over that period. To meaningfully
compare its GDP in 2000 to its GDP in 1990, we could multiply the GDP in 2000 by one-half, to make it
relative to 1990 as a base year. The result would be that the GDP in 2000 equals $300 million one-half
= $150 million, in 1990 monetary terms. We would see that the country's GDP had realistically
increased 50 percent over that period, not 200 percent, as it might appear from the raw GDP data. The
GDP adjusted for changes in money value in this way is called the real, or constant, GDP.
The factor used to convert GDP from current to constant values in this way is called the GDP deflator.
Unlike consumer price index, which measures inflation or deflation in the price of household consumer
goods, the GDP deflator measures changes in the prices of all domestically produced goods and services
in an economy including investment goods and government services, as well as household consumption
goods.[25]
Constant-GDP figures allow us to calculate a GDP growth rate, which indicates how much a country's
production has increased (or decreased, if the growth rate is negative) compared to the previous year.
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Real GDP growth rate for year n = [(Real GDP in year n) (Real GDP in year n 1)] / (Real
GDP in year n 1)
Another thing that it may be desirable to account for is population growth. If a country's GDP doubled
over a certain period, but its population tripled, the increase in GDP may not mean that the standard of
living increased for the country's residents; the average person in the country is producing less than they
were before. Per-capita GDP is a measure to account for population growth.

Cross-border comparison and PPP


The level of GDP in different countries may be compared by converting their value in national currency
according to either the current currency exchange rate, or the purchasing power parity exchange rate.
Current currency exchange rate is the exchange rate in the international foreign exchange
market.
Purchasing power parity exchange rate is the exchange rate based on the purchasing power
parity (PPP) of a currency relative to a selected standard (usually the United States dollar). This is
a comparative (and theoretical) exchange rate, the only way to directly realize this rate is to sell an
entire CPI basket in one country, convert the cash at the currency market rate & then rebuy that
same basket of goods in the other country (with the converted cash). Going from country to
country, the distribution of prices within the basket will vary; typically, non-tradable purchases
will consume a greater proportion of the basket's total cost in the higher GDP country, per the
Balassa-Samuelson effect.
The ranking of countries may differ significantly based on which method is used.
The current exchange rate method converts the value of goods and services using global currency
exchange rates. The method can offer better indications of a country's international purchasing
power. For instance, if 10% of GDP is being spent on buying hi-tech foreign arms, the number of
weapons purchased is entirely governed by current exchange rates, since arms are a traded
product bought on the international market. There is no meaningful 'local' price distinct from the
international price for high technology goods.
The purchasing power parity method accounts for the relative effective domestic purchasing
power of the average producer or consumer within an economy. The method can provide a better
indicator of the living standards especially of less developed countries, because it compensates for
the weakness of local currencies in the international markets. It also offers better indication of
total national wealth. For example, India ranks 10th by nominal GDP, but 3rd by PPP. The PPP
method of GDP conversion is more relevant to non-traded goods and services. In the above
example if hi-tech weapons are to be produced internally their amount will be governed by
GDP(PPP) rather than nominal GDP.

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There is a clear pattern of the purchasing power parity method decreasing the disparity in GDP between
high and low income (GDP) countries, as compared to the current exchange rate method. This finding is
called the Penn effect.
For more information, see Measures of national income and output.

Per unit GDP


GDP is an aggregate figure which does not consider differing sizes of nations. Therefore, GDP can be
stated as GDP per capita (per person) in which total GDP is divided by the resident population on a
given date, GDP per citizen where total GDP is divided by the numbers of citizens residing in the
country on a given date, and less commonly GDP per unit of a resource input, such as GDP per GJ of
energy or Gross domestic product per barrel. GDP per citizen in the above case is pretty similar to GDP
per capita in most nations, however, in nations with very high proportions of temporary foreign workers
like in Persian Gulf nations, the two figures can be vastly different.
GDP per capita (current USD)
2008 2009 2010

2011

2012

United States of America 46,760 45,305 46,612 48,112 49,641


United Kingdom

43,147 35,331 36,238 38,974 39,090

Source:Helgi Library,[26] World Bank

Standard of living and GDP


GDP per capita is not a measurement of the standard of living in an economy; however, it is often used
as such an indicator, on the rationale that all citizens would benefit from their country's increased
economic production. Similarly, GDP per capita is not a measure of personal income. GDP may increase
while real incomes for the majority decline. The major advantage of GDP per capita as an indicator of
standard of living is that it is measured frequently, widely, and consistently. It is measured frequently in
that most countries provide information on GDP on a quarterly basis, allowing trends to be seen quickly.
It is measured widely in that some measure of GDP is available for almost every country in the world,
allowing inter-country comparisons. It is measured consistently in that the technical definition of GDP is
relatively consistent among countries.
The major disadvantage is that it is not a measure of standard of living. GDP is intended to be a measure
of total national economic activitya separate concept.
The argument for using GDP as a standard-of-living proxy is not that it is a good indicator of the
absolute level of standard of living, but that living standards tend to move with per-capita GDP, so that
changes in living standards are readily detected through changes in GDP.

Externalities
GDP is widely used by economists to gauge economic recession and recovery and an economy's general
monetary ability to address externalities. It is not meant to measure externalities. It serves as a general
metric for a nominal monetary standard of living and is not adjusted for costs of living within a region.
GDP is a neutral measure which merely shows an economy's general ability to pay for externalities such
as social and environmental concerns.[27] Examples of externalities include:
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Wealth distribution GDP does not account for variances in incomes of various demographic
groups. See income inequality metrics for discussion of a variety of inequality-based economic
measures.
Non-market transactionsGDP excludes activities that are not provided through the market, such
as household production and volunteer or unpaid services. As a result, GDP is understated. The
work of New Zealand economist Marilyn Waring has highlighted that if a concerted attempt to
factor in unpaid work were made, then it would in part undo the injustices of unpaid (and in some
cases, slave) labour, and also provide the political transparency and accountability necessary for
democracy.
Underground economy official GDP estimates may not take into account the underground
economy, in which transactions contributing to production, such as illegal trade and tax-avoiding
activities, are unreported, causing GDP to be underestimated.
Asset valueGDP does not take into account the value of all assets in an economy. This is akin to
ignoring a company's balance sheet, and judging it solely on the basis of its income statement.
Non-monetary economyGDP omits economies where no money comes into play at all, resulting
in inaccurate or abnormally low GDP figures. For example, in countries with major business
transactions occurring informally, portions of local economy are not easily registered. Bartering
may be more prominent than the use of money, even extending to services.
GDP also ignores subsistence production.
Quality improvements and inclusion of new products by not adjusting for quality
improvements and new products, GDP understates true economic growth. For instance, although
computers today are less expensive and more powerful than computers from the past, GDP treats
them as the same products by only accounting for the monetary value. The introduction of new
products is also difficult to measure accurately and is not reflected in GDP despite the fact that it
may increase the standard of living. For example, even the richest person in 1900 could not
purchase standard products, such as antibiotics and cell phones, that an average consumer can buy
today, since such modern conveniences did not exist then.
What is being producedGDP counts work that produces no net change or that results from
repairing harm. For example, rebuilding after a natural disaster or war may produce a considerable
amount of economic activity and thus boost GDP. The economic value of health care is another
classic exampleit may raise GDP if many people are sick and they are receiving expensive
treatment, but it is not a desirable situation. Alternative economic estimates, such as the standard
of living or discretionary income per capita try to measure the human utility of economic activity.
See uneconomic growth.
Sustainability of growth GDP is a measurement of economic historic activity and is not
necessarily a projection. A country may achieve a temporarily high GDP from use of natural
resources or by misallocating investment.
Nominal GDP does not measure variations in purchasing power or costs of living by area, so when
the GDP figure is deflated over time, GDP growth can vary greatly depending on the basket of
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goods used and the relative proportions used to deflate the GDP figure.
Cross-border comparisons of GDP can be inaccurate as they do not take into account local
differences in the quality of goods, even when adjusted for purchasing power parity. This type of
adjustment to an exchange rate is controversial because of the difficulties of finding comparable
baskets of goods to compare purchasing power across countries. For instance, people in country A
may consume the same number of locally produced apples as in country B, but apples in country
A are of a more tasty variety. This difference in material well being will not show up in GDP
statistics. This is especially true for goods that are not traded globally, such as houses.

Limitations and criticisms


Simon Kuznets, the economist who developed the first comprehensive set of measures of national
income, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses of
National Income Measurements":[4]
The valuable capacity of the human mind to simplify a complex situation in a compact
characterization becomes dangerous when not controlled in terms of definitely stated
criteria. With quantitative measurements especially, the definiteness of the result suggests,
often misleadingly, a precision and simplicity in the outlines of the object measured.
Measurements of national income are subject to this type of illusion and resulting abuse,
especially since they deal with matters that are the center of conflict of opposing social
groups where the effectiveness of an argument is often contingent upon oversimplification.
[...]

All these qualifications upon estimates of national income as an index of productivity are
just as important when income measurements are interpreted from the point of view of
economic welfare. But in the latter case additional difficulties will be suggested to anyone
who wants to penetrate below the surface of total figures and market values. Economic
welfare cannot be adequately measured unless the personal distribution of income is known.
And no income measurement undertakes to estimate the reverse side of income, that is, the
intensity and unpleasantness of effort going into the earning of income. The welfare of a
nation can, therefore, scarcely be inferred from a measurement of national income as
defined above.
In 1962, Kuznets stated:[28]
Distinctions must be kept in mind between quantity and quality of growth, between costs
and returns, and between the short and long run. Goals for more growth should specify more
growth of what and for what.
Austrian School economist Frank Shostak has argued that GDP is an empty abstraction devoid of any
link to the real world, and, therefore, has little or no value in economic analysis. Says Shostak:[29]
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The GDP framework cannot tell us whether final goods and services that were produced
during a particular period of time are a reflection of real wealth expansion, or a reflection of
capital consumption. For instance, if a government embarks on the building of a pyramid,
which adds absolutely nothing to the well-being of individuals, the GDP framework will
regard this as economic growth. In reality, however, the building of the pyramid will divert
real funding from wealth-generating activities, thereby stifling the production of wealth.

So what are we to make out of the periodical pronouncements that the economy, as depicted
by real GDP, grew by a particular percentage? All we can say is that this percentage has
nothing to do with real economic growth and that it most likely mirrors the pace of
monetary pumping. We can thus conclude that the GDP framework is an empty abstraction
devoid of any link to the real world.
The UK's Natural Capital Committee (http://www.naturalcapitalcommittee.org/home.html) highlighted
the shortcomings of GDP in its advice to the UK Government in 2013, pointing out that GDP "focusses
on flows, not stocks. As a result an economy can run down its assets yet, at the same time, record high
levels of GDP growth, until a point is reached where the depleted assets act as a check on future
growth". They then went on to say that "it is apparent that the recorded GDP growth rate overstates the
sustainable growth rate. Broader measures of wellbeing and wealth are needed for this and there is a
danger that short-term decisions based solely on what is currently measured by national accounts may
prove to be costly in the long-term".
Many environmentalists argue that GDP is a poor measure of social progress because it does not take
into account harm to the environment.[30][31]
In 1989 Herman Daly and John B. Cobb developed the Index of Sustainable Economic Welfare (ISEW),
which they proposed as a more valid measure of socio-economic progress, by taking into account
various other factors such as consumption of non-renewable resources and degradation of the
environment.
India and China have the largest population in the world and hence has the greatest potential in
productivity due to the fact that the value of a product is measured as the value of service that can be
obtained by the holder in exchange for that product. ( Units per man hour)

Lists of countries by their GDP


Lists of countries by GDP
List of countries by GDP (nominal), (per capita)
List of continents by GDP (nominal)
List of countries by GDP (PPP), (per capita), (per hour)
List of countries by GDP (real) growth rate, (per capita)
List of countries by GDP sector composition
List of countries by future GDP estimates (PPP), (per capita), (nominal)

List of newer approaches to the measurement of (economic)


progress
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Human development index (HDI) up until 2009 report HDI used GDP as a part of its calculation
and then factors in indicators of life expectancy and education levels. In 2010 the GDP component
has been replaced with GNI.
Genuine progress indicator (GPI) or Index of Sustainable Economic Welfare (ISEW) The GPI
and the ISEW attempt to address many of the above criticisms by taking the same raw information
supplied for GDP and then adjust for income distribution, add for the value of household and
volunteer work, and subtract for crime and pollution.
European Quality of Life Survey The survey, first published in 2005, assessed quality of life
across European countries through a series of questions on overall subjective life satisfaction,
satisfaction with different aspects of life, and sets of questions used to calculate deficits of time,
loving, being and having.[32]
Gross national happiness The Centre for Bhutanese Studies in Bhutan is working on a complex
set of subjective and objective indicators to measure 'national happiness' in various domains
(living standards, health, education, eco-system diversity and resilience, cultural vitality and
diversity, time use and balance, good governance, community vitality and psychological wellbeing). This set of indicators would be used to assess progress towards gross national happiness,
which they have already identified as being the nation's priority, above GDP.
Happy Planet Index The happy planet index (HPI) is an index of human well-being and
environmental impact, introduced by the New Economics Foundation (NEF) in 2006. It measures
the environmental efficiency with which human well-being is achieved within a given country or
group. Human well-being is defined in terms of subjective life satisfaction and life expectancy
while environmental impact is defined by the Ecological Footprint.
OECD Better Life Index - The better lives compendium of indicators produced in 2011 reflects
some 10 years by the organisation to develop a wider of set of indicators more closely attuned to
the measurement of wellbeing or welfare outcomes. There is felt to be considerable convergence
(in 2011) in high income countries about the kinds of dimensions that should be included in such
multi-dimensional approaches to welfare measurement - see for instance the capabilities
measurement research project capabilities approach.
Composite Wealth Indicators Namely yearly material wealth (an amended version of GNI to
include depletion of natural resources and the costs of pollution), biological wealth (measured
through life expectancy) and thus expected material wealth (or physical wealth), a linear
combination of biological and yearly material wealth (the amount of material wealth expected to
be produced by an individual during his/her lifetime).[33]
Future Orientation Index - Tobias Preis et al. used Google Trends data to demonstrate that Internet
users from countries with a higher per capita gross domestic product (GDP) are more likely to
search for information about the future than information about the past. The findings, published in
the journal Scientific Reports, suggest there may be a link between online behaviour and realworld economic indicators.[34][35][36] The authors of the study examined Google search queries
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made by Internet users in 45 different countries in 2010 and calculated the ratio of the volume of
searches for the coming year ('2011') to the volume of searches for the previous year ('2009'),
which they call the 'future orientation index'.[37] They compared the future orientation index to the
per capita GDP of each country and found a strong tendency for countries in which Google users
enquire more about the future to exhibit a higher GDP. The results hint that there may potentially
be a relationship between the economic success of a country and the information-seeking
behaviour of its citizens online.
World Governance Index - Basing their work on the United Nations Millennium Declaration,
which was the subject of unprecedented U.N. consensus among the heads of state and government
who adopted it in 2000, a team of researchers of the Forum for a new World Governance (FnWG)
(http://www.world-governance.net) focused its research on the five main concepts defining the
application framework of world governance and constituting key goals to be reached by 2015:
Peace and Security; Democracy and Rule of Law; Human Rights and Participation; Sustainable
Development and Human Development
Social Progress Index - measures the extent to which countries provide for the social and
environmental needs of their citizens. Fifty-two indicators in the areas of basic human needs,
foundations of wellbeing, and opportunity show the relative performance of nations. The index
uses outcome measures when there is sufficient data available or the closest possible proxies.

See also
Annual average GDP

Inventory investment

List of economic reports by

growth

List of countries by average

U.S. government agencies

Chained volume series

wage

Misery index (economics)

Circular flow of income

List of countries by

National average salary

Gross output

household income

Potential output

Gross regional domestic

List of countries by GDP

Production (economics)

product

(nominal)

Real gross domestic product

Gross state product

List of countries by GDP

Gross value added

(nominal) per capita

Gross world product

List of countries by GDP

Intermediate consumption

(PPP)
List of countries by GDP
(PPP) per capita

Notes and references


1. ^ "GDP (Official Exchange Rate)" (https://www.cia.gov/library/publications/the-worldfactbook/fields/2195.html). CIA World Factbook. Retrieved June 2, 2012.

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factbook/fields/2195.html). CIA World Factbook. Retrieved June 2, 2012.

2. ^ a b c "OECD" (http://stats.oecd.org/glossary/detail.asp?ID=1163). Retrieved 14 August 2014.


3. ^ Dawson, Graham (2006). Economics and Economic Chenge. FT / Prentice Hall. p. 205.
ISBN 9780273693512.
4. ^ a b Congress commissioned Kuznets to create a system that would measure the nation's productivity in
order to better understand how to tackle the Great Depression.Simon Kuznets, 1934. "National Income,
19291932". 73rd US Congress, 2d session, Senate document no. 124, page 5-7 Simon Kuznets, 1934.
"National Income, 19291932". 73rd US Congress, 2d session, Senate document no. 124, page 5-7 Simon
Kuznets, 1934. "National Income, 19291932". 73rd US Congress, 2d session, Senate document no. 124,
page 5-7. http://fraser.stlouisfed.org/docs/publications/nipab/19340104_nationalinc.pdf
5. ^ Dickinson, Elizabeth. "GDP: a brief history"
(http://www.foreignpolicy.com/articles/2011/01/02/gdp_a_brief_history). ForeignPolicy.com. Retrieved 25
April 2012.
6. ^ Coyle, Diane (2014). GDP: A Brief but Affectionate History. Princeton University Press. p. 6.
ISBN 9780691156798.
7. ^ World Bank, Statistical Manual >> National Accounts >> GDPfinal output
(http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/EXTDECSTAMAN/0,,contentMDK:
20882526~menuPK:2648252~pagePK:64168445~piPK:64168309~theSitePK:2077967~isCURL:Y,00.html),
retrieved October 2009.
"User's guide: Background information on GDP and GDP deflator" (http://www.hmtreasury.gov.uk/data_gdp_backgd.htm). HM Treasury.
"Measuring the Economy: A Primer on GDP and the National Income and Product Accounts"
(http://www.bea.gov/national/pdf/nipa_primer.pdf) (PDF). Bureau of Economic Analysis.
8. ^ Based on the IMF figures. If no number was available for a country from IMF, CIA figures were used.
9. ^ United States Bureau of Economic Analysis, A guide to the National Income and Product Accounts of the
United States (http://www.bea.gov/national/pdf/nipaguid.pdf) PDF, page 5; retrieved November 2009.
Another term, "business current transfer payments", may be added. Also, the document indicates that the
capital consumption adjustment (CCAdj) and the inventory valuation adjustment (IVA) are applied to the
proprietor's income and corporate profits terms; and CCAdj is applied to rental income.
10. ^ Thayer Watkins, San Jos State University Department of Economics, "Gross Domestic Product from the
Transactions Table for an Economy" (http://www.sjsu.edu/faculty/watkins/gdp.htm), commentary to first
table, " Transactions Table for an Economy". (Page retrieved November 2009.)
11. ^ Concepts and Methods of the United States National Income and Product Accounts, chap. 2.
12. ^ BEA, Concepts and Methods of the United States National Income and Product Accounts, p 12.
13. ^ Australian National Accounts: Concepts, Sources and Methods, 2000, sections 3.5 and 4.15.
14. ^ This and the following statement on entitlement to compensation are from Australian National Accounts:
Concepts, Sources and Methods, 2000, section 4.6.
15. ^ Concepts and Methods of the United States National Income and Product Accounts, page 2-2.
16. ^ Concepts and Methods of the United States National Income and Product Accounts, page 2-2.
17. ^ Australian National Accounts: Concepts, Sources and Methods, 2000, section 4.4.
18. ^ Concepts and Methods of the United States National Income and Product Accounts, page 2-2; and
Australian National Accounts: Concepts, Sources and Methods, 2000, section 4.4.
19. ^ a b Concepts and Methods of the United States National Income and Product Accounts, page 2-4.
20. ^ Concepts and Methods of the United States National Income and Product Accounts, page 2-5.
21. ^ Lequiller, Franois; Derek Blades (2006). Understanding National Accounts (http://books.google.com/?
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id=pXpJL6f8b3wC&printsec=frontcover&dq=%22Understanding+National+Accounts%22#v=onepage&q=
%22To%20convert%20GDP%20into%20GNI%22&f=false). OECD. p. 18. ISBN 978-92-64-02566-0. "To
convert GDP into GNI, it is necessary to add the income received by resident units from abroad and deduct
the income created by production in the country but transferred to units residing abroad."
22. ^ United States, Bureau of Economic Analysis, Glossary, "GDP"
(http://www.bea.gov/glossary/glossary.cfm). Retrieved November 2009.
23. ^ "U.S. Department of Commerce. Bureau of Economic Analysis"
(http://bea.gov/national/nipaweb/SelectTable.asp?Selected=Y). Bea.gov. 2009-10-21. Retrieved 2010-07-31.
24. ^ "National Accounts" (http://www.central-bureau-of-statistics.an/SNA/sna_intro.asp). Central Bureau of
Statistics. Retrieved 2011-06-29.
25. ^ HM Treasury, Background information on GDP and GDP deflator
Some of the complications involved in comparing national accounts from different years are explained in this
World Bank document
(http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/EXTDECSTAMAN/0,,contentMDK:
20908551~menuPK:2648276~pagePK:64168445~piPK:64168309~theSitePK:2077967~isCURL:Y,00.html).
26. ^ | http://helgilibrary.com/indicators/index/gdp-per-capita-current-usd GDP Per Capita (Current USD) |
2014-02-10
27. ^ "Eric Zencey-G.D.P. R.I.P." (http://www.nytimes.com/2009/08/10/opinion/10zencey.html?
_r=4&pagewanted=1&emc=eta1). Nytimes.com. August 2009. Retrieved 2011-01-31.
28. ^ Simon Kuznets. "How To Judge Quality". The New Republic, October 20, 1962
29. ^ Frank Shostak. "What is up with the GDP?" (https://mises.org/daily/770).
30. ^ The Virtues of Ignoring GDP http://www.thebrokeronline.eu/Articles/The-virtues-of-ignoring-GDP
31. ^ The Rise and Fall of G.D.P. http://www.nytimes.com/2010/05/16/magazine/16GDP-t.html?pagewanted=all
32. ^ "First European Quality of Life Survey"
(http://www.eurofound.europa.eu/publications/htmlfiles/ef0591.htm).
33. ^ See Emanuele Felice, Neither dashboard nor 'mashup' indices: an empirical wealth approach as a pathway
to a comprehensive measure of development, http://www.h-economica.uab.es/wps/2012_01.pdf
34. ^ Tobias Preis, Helen Susannah Moat, H. Eugene Stanley and Steven R. Bishop (2012). "Quantifying the
Advantage of Looking Forward" (https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3320057). Scientific
Reports 2: 350. doi:10.1038/srep00350 (http://dx.doi.org/10.1038%2Fsrep00350). PMC 3320057
(https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3320057). PMID 22482034
(https://www.ncbi.nlm.nih.gov/pubmed/22482034).
35. ^ Paul Marks (April 5, 2012). "Online searches for future linked to economic success"
(http://www.newscientist.com/article/dn21678-online-searches-for-future-linked-to-economic-success.html).
New Scientist. Retrieved April 9, 2012.
36. ^ Casey Johnston (April 6, 2012). "Google Trends reveals clues about the mentality of richer nations"
(http://arstechnica.com/gadgets/news/2012/04/google-trends-reveals-clues-about-the-mentality-of-richernations.ars). Ars Technica. Retrieved April 9, 2012.
37. ^ Tobias Preis (2012-05-24). "Supplementary Information: The Future Orientation Index is available for
download" (http://www.tobiaspreis.de/bigdata/future_orientation_index.pdf). Retrieved 2012-05-24.

Further reading
Coyle, Diane (2014). GDP: A Brief but Affectionate History. Princeton, NJ: Princeton University Press.
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ISBN 978-0-691-15679-8.
Australian Bureau for Statistics, Australian National Accounts: Concepts, Sources and Methods
(http://www.abs.gov.au/Ausstats/abs@.nsf/Latestproducts/3F880EE1D366198CCA2569A400061616?
opendocument), 2000. Retrieved November 2009. In depth explanations of how GDP and other national
accounts items are determined.
United States Department of Commerce, Bureau of Economic Analysis, Concepts and Methods of the United
States National Income and Product Accounts (http://www.bea.gov/national/pdf/NIPAhandbookch14.pdf) PDF. Retrieved November 2009. In depth explanations of how GDP and other national accounts items
are determined.

External links
Global
World GDP Chart (since 1960)

Wikimedia Commons has


media related to Gross
domestic product.

(http://www.google.com/publicdata/explore?ds=wb-

Wikiquote has quotations


related to: Gross Domestic
Product

wdi&met=ny_gdp_mktp_cd&idim=country:USA:CHN:FRA:DEU:JPN:GBR)
Australian Bureau of Statistics Manual on GDP measurement
(http://www.abs.gov.au/Ausstats/abs@.nsf/66f306f503e529a5ca25697e0017661f/3f880ee1d3661
98cca2569a400061616!OpenDocument)
GDP-indexed bonds (http://perso.wanadoo.fr/pgreenfinch/eoblpib.htm)
World Development Indicators (WDI) (http://databank.worldbank.org/data/home.aspx)
UN Statistical Databases (http://unstats.un.org/unsd/databases.htm)

Data
Bureau of Economic Analysis: Official United States GDP data
(http://www.bea.gov/national/index.htm#gdp)
Historicalstatistics.org: Links to historical statistics on GDP for different countries and regions
(http://www.historicalstatistics.org/), maintained by the Department of Economic History at
Stockholm University.
Quandl - GDP by county (https://www.quandl.com/c/economics/gdp-by-country) - downloadable
in CSV, Excel, JSON or XML
Historical US GDP (yearly data) (http://www.measuringworth.org/usgdp/), 1790present,
maintained by Samuel H. Williamson and Lawrence H. Officer, both professors of economics at
the University of Illinois at Chicago.
Historical US GDP (quarterly data) (http://finance-data.com/series/GDP), 1947present
OECD Statistics
Google public data (http://www.google.com/publicdata/explore?
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ds=a7jenngfc4um7_&ctype=l&strail=false&nselm=h&met_y=gross_domestic_product&hl=en&d
l=en): GDP and Personal Income of the U.S. (annual): Nominal Gross Domestic Product
The Maddison Project (http://www.ggdc.net/maddison/maddison-project/home.htm) of the
Groningen Growth and Development Centre at the University of Groningen, the Netherlands. This
project continues and extends the work of Angus Maddison in collating all the available, credible
data estimating GDP for different countries around the world. This includes data for some
countries for over 2,000 years back to 1 CE and for essentially all countries since 1950.

Articles and books


Gross Domestic Product: An Economys All
(http://www.imf.org/external/pubs/ft/fandd/basics/gdp.htm), International Monetary Fund.
Stiglitz JE, Sen A, Fitoussi J-P. Mismeasuring our Lives: Why GDP Doesn't Add Up, New Press,
New York, 2010 (http://www.wcfia.harvard.edu/node/6224)
What's wrong with the GDP? (http://dieoff.org/page11.htm)
Limitations of GDP Statistics (http://ingrimayne.saintjoe.edu/econ/Measuring/GNP2.html) by
Robert Schenk.
Whether output and CPI inflation are mismeasured
(http://pages.stern.nyu.edu/~nroubini/MEASURE.HTM), by Nouriel Roubini and David Backus,
in Lectures in Macroeconomics
Rodney Edvinsson, Growth, Accumulation, Crisis: With New Macroeconomic Data for Sweden
18002000 (http://urn.kb.se/resolve?urn=urn:nbn:se:su:diva-378) PDF
Clifford Cobb, Ted Halstead and Jonathan Rowe. "If the GDP is up, why is America down?" The
Atlantic Monthly, vol. 276, no. 4, October 1995, pages 5978
(http://www.theatlantic.com/past/politics/ecbig/gdp.htm)
Jerorn C.J.M. van den Bergh, "Abolishing GDP (http://papers.ssrn.com/sol3/papers.cfm?
abstract_id=962343)"
GDP and GNI in OECD Observer No246-247, Dec 2004-Jan 2005
(http://www.oecdobserver.org/news/fullstory.php/aid/1507/GDP_and_GNI.html)
Progress, what progress? in OECD Observer No272 March 2009
(http://www.oecdobserver.org/news/fullstory.php/aid/2793/Progress,_what_progress_.html)
Retrieved from "http://en.wikipedia.org/w/index.php?title=Gross_domestic_product&oldid=628998821"
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