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gross domestic product (GDP)

Contributor(s): Matthew Haughn

Gross domestic product (GDP) is the total amount of dollars made within a given location in the selling of all goods and services before deductions.

GDP can encompass a town, county, state or country. The period of time over which GDP is measured is variable but is commonly in fiscal quarters or years. Often, GDP is expressed as a percentage representing the increase or decrease over the previous year.

Commonly used by governments and economists to measure a region’s economic performance, GDP is a key measurement of welfare economics. If a country’s GDP is said to have grown by 4% in a year, that means the country’s economy has grown by 4%.

The measurement of GDP can be performed three different ways, but should all return approximately the same result. The three methods used to calculate a GDP include:

  • Production approach - Calculated by totaling output of enterprises.
  • Expenditure approach - Calculated by totaling the combination of goods consumed, government spending, investments and net total exports.
  • Income approach - Calculated by totaling employee compensation, corporate and non-incorporated firms’ gross profits and taxes, minus subsidies.

GDP was created as a measurement of economies by William Petty. The measurement was used to make certain landlords were not unduly taxed during the war between the English and Dutch (1652 to 1674). GDP was modernized by Simon Kuznets, who used it in a report to Congress in 1934. However, Kuznets explicitly warned against its use to measure the welfare (well-being) of citizens.

Criticisms of the GDP center around the idea that a healthy economy does not necessarily equate to the well-being of citizens. Critics argue that a better measure of how well a country is doing should include other metrics such as work-life balance, leisure time, health, poverty, crime, equality and the environment.

This was last updated in September 2017

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