Gross domestic product
Sir William Petty began calculating tax burdens during the war between England and the Dutch Republic from 1652 to 1674. He sought to prove that landlords were being taxed unfairly by the state. Charles Davenant expanded on this method in 1695. The modern concept of GDP emerged when Simon Kuznets created a system for the U.S. Congress in 1934. Congress commissioned Kuznets to measure national productivity to help tackle the Great Depression. His report titled National Income, 1929, 1932 warned against using these figures as a direct measure of welfare. After World War II, the Bretton Woods Conference in 1944 made GDP the primary tool for measuring economies. The United States Department of Commerce under Milton Gilbert embedded Kuznets ideas into government institutions. In 1991, the United States officially switched from gross national product to GDP as its main production metric. China adopted GDP as its economic indicator in 1993 after relying on a Marxist-inspired accounting system.
Statisticians determine gross domestic product through three distinct approaches that should theoretically yield identical results. The production approach sums the outputs of every class of enterprise to arrive at a total figure. This method calculates value added at each stage of production by deducting intermediate consumption from gross output. The income approach works on the principle that producer incomes must equal the value of their products. It measures GDP by adding wages paid to laborers, interest on capital, rent for land, and profits for entrepreneurs. The expenditure approach calculates the sum of final uses of goods and services measured in purchasers prices. This method relies on the fact that all products must be bought by someone. If a good is produced but remains unsold, standard accounting convention treats it as if the producer bought it themselves. The U.S. Bureau of Economic Analysis notes that source data for expenditure components are generally more reliable than those for income components.
The international standard for measuring GDP resides within the System of National Accounts published in 2008. Representatives from the International Monetary Fund, European Union, Organisation for Economic Co-operation and Development, United Nations, and World Bank prepared this document. Previous editions included SNA93 released in 1993 and SNA68 from 1968. These standards provide flexible rules allowing for differences in local statistical needs. Within each country, national government statistical agencies normally measure GDP because private sector organizations lack access to required information. The OECD maintains its own definitions alongside other major economic bodies. Cross-country comparisons often adjust figures using purchasing power parity to account for cost-of-living differences. Nominal GDP allows for comparing national economies on the international market using current exchange rates. Real GDP adjusts these raw figures to compensate for changes in money value over time.
Raw GDP figures represent nominal or historical values measured at current prices. Comparing these numbers across years requires compensating for inflation or deflation effects. A nominal GDP figure can be multiplied by a ratio between the value of money in the measurement year versus a base year. For instance, if currency value halved between 1990 and 2000, the 2000 figure would be adjusted downward to reflect 1990 monetary terms. This adjustment reveals realistic growth rather than inflated appearances caused by price increases alone. The factor used to convert current values into constant values is called the GDP deflator. Unlike consumer price index which tracks household goods, the GDP deflator measures price changes for all domestically produced items including investment goods and government services. These adjustments make year-to-year comparisons meaningful for understanding actual production increases.
Many environmentalists argue that gross domestic product fails to account for harm done to nature. GDP rewards behaviors detrimental to the environment while ignoring resource depletion and pollution. Traffic jams increase consumption of gasoline yet raise GDP despite worsening air quality. A 2020 study found poor regions grew faster by attracting polluting production after connecting to China's expressway system. Scientists warned that worldwide affluence measured by GDP metrics has increased resource use and pollutant emissions. Approximately 10 billion trees are net lost annually according to estimates. Global average deforested land reached 10 million hectares during the 2015, 2020 period. Agriculture accounted for 24% of Brazil's GDP where significant tropical forest loss occurred. Steve Cohen noted that all consumption behaviors do not create equal impacts on sustainability. Johan Rockström questioned if current models could coexist with rapid emission cuts required under the Paris Agreement.
Simon Kuznets warned in his 1937 report that national income measurements often misleadingly suggest precision and simplicity. American politician Robert F. Kennedy criticized GDP for counting bad things like crime-fighting while excluding good things like unpaid work. The value of unpaid labor in Australia exceeds 50% of its GDP according to conservative estimates. In 1990, Mahbub ul Haq introduced the Human Development Index at the United Nations. This composite index combines life expectancy, adult literacy rates, and standard living measures adjusted for purchasing power parity. Professors Joseph Stiglitz, Amartya Sen, and Jean-Paul Fitoussi formed a commission in 2009 to expand focus beyond economics to well-being. The Centre for Bhutan Studies began publishing the Gross National Happiness Index in 2008. The OECD Better Life Index appeared in 2013 covering dimensions from health to civic engagement. Since 2012, John Helliwell edited an annual World Happiness Report derived from single survey questions on life satisfaction. China launched the Gross Ecosystem Product in 2020 to measure ecosystem contributions including climate regulation.
Common questions
Who created the modern concept of gross domestic product and when?
Simon Kuznets created the system for the U.S. Congress in 1934 to measure national productivity during the Great Depression.
When did China adopt GDP as its economic indicator after relying on a Marxist-inspired accounting system?
China adopted GDP as its economic indicator in 1993 following years of using a Marxist-inspired accounting system.
What are the three approaches statisticians use to determine gross domestic product values?
Statisticians determine gross domestic product through the production approach, income approach, and expenditure approach which should theoretically yield identical results.
Which international organization published the System of National Accounts standard in 2008?
Representatives from the International Monetary Fund, European Union, Organisation for Economic Co-operation and Development, United Nations, and World Bank prepared the System of National Accounts published in 2008.
Why do environmentalists argue that gross domestic product fails to account for harm done to nature?
Environmentalists argue that gross domestic product rewards behaviors detrimental to the environment while ignoring resource depletion and pollution such as the loss of approximately 10 billion trees annually.