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Gross Domestic Product (GDP)

  The calculation of gross domestic product is the best measure of economic activity in a country. Normally abbreviated to GDP, it is arrived at by adding the total value of a country\'s annual output of goods and services. GDP equals private consumption + investment + government expenditure + the change in stockbuilding + (exports minus imports). It is normally valued at market prices; by subtracting indirect taxes and adding subsidies, however, it can be calculated at factor cost. This measure more accurately reveals the incomes paid to factors of production. To avoid double counting of goods and services produced for intermediate use, only final production for consumption and investment is aggregated. To eliminate the effect of inflation, GDP growth is normally expressed in constant prices. However, one school of economists believes that the nominal GDP expressed in current prices is the best guide for macroeconomic policy, because it reminds governments that both inflation and real economic growth matter.

GDP can be measured in three ways: by adding incomes of residents, both individuals and firms, derived directly from the production of goods and services; by adding the output contributed by different sectors; by adding expenditure on the goods and services produced by residents, before allowing for depreciation or capital consumption.

Since one person\'s output is another person\'s income, which in turn becomes expenditure, these three measures ought to be identical. Because of statistical imperfections, they rarely are. In addition, tax dodgers and the black economy escape the output and income measures but should, if the earnings are spent, turn up in the expenditure measure.

Although GDP is flawed, it is the best available measure of economic activity. Activities that are not paid for and so cannot be priced, such as housework or voluntary work, are excluded as well as the black economy. TF

See also gross national product.



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