General knowledge · Economics & society

GDP

Devised by Simon Kuznets for the US Congress, 1934

Economics — national accounting and the measurement of output

The total market value of the goods and services produced inside a country's borders in a given period, and the number by which economies are compared, recessions declared and governments judged. The modern measure grew out of a report Simon Kuznets prepared for the United States Senate in 1934, written in the depths of a depression that had exposed how little anyone knew about the size of the economy. Kuznets himself warned that national welfare "can scarcely be inferred" from it, and the measure's blind spots — unpaid household work, environmental damage, who gets the income — have kept a small industry of alternatives in business ever since.

How to spot them

▸Simon Kuznets's 1934 report to the US Senate, and his warning about inferring welfare from it
▸The expenditure identity: consumption plus investment plus government spending plus exports minus imports
▸Robert Kennedy in 1968: it measures everything except that which makes life worthwhile
▸Ireland's 26 per cent growth in 2015, which Paul Krugman called 'leprechaun economics'

Key facts

Simon Kuznets's report 'National Income, 1929–32', prepared for the United States Senate (1934)

The origin of the modern measure — and of Kuznets's own warning against using it as a measure of welfare

C plus I plus G plus exports minus imports

The expenditure approach; the income and output approaches should, in principle, give the same total

Robert F. Kennedy at the University of Kansas: it 'measures everything, in short, except that which makes life worthwhile' (1968)

18 March 1968; he was speaking of the gross national version of the figure

Ireland's 2015 figure was revised to 26 per cent growth, prompting Paul Krugman's jibe about leprechauns (2016)

Multinational balance-sheet relocations; Ireland now also publishes a modified national income measure, GNI*

The rule of thumb that two consecutive quarters of falling output make a recession

Widely used in Britain and Europe; the US dates recessions instead by a committee of the National Bureau of Economic Research

From 2014 UK statisticians began including illegal drugs and prostitution in the national accounts (2014)

Required by the European System of Accounts 2010, which covers all market transactions, legal or not

The 1990 alternative combining life expectancy, education and income, devised for the UN by Mahbub ul Haq with Amartya Sen (1990)

The Human Development Index, the best known of the rival measures

Key ideas

Gross domestic product counts output produced within a territory; gross national product or income counts output earned by a country's residents wherever it is produced. For countries with large foreign investments or many multinationals, the two can diverge sharply.
Nominal figures are at current prices; real figures are adjusted by a deflator so that growth is not just inflation.
Comparisons between countries use either market exchange rates or purchasing power parity, and the two rankings differ a great deal — PPP flatters poorer countries, where non-traded services are cheap.
Because only market transactions are counted, a country that moves childcare or cooking from the home into the market appears to grow even if nothing more is being done.

Quick-fire facts

•Simon Kuznets received the 1971 Nobel Memorial Prize in Economic Sciences, in part for this work
•Richard Stone, who built the double-entry system of national accounts adopted by the UN, received the prize in 1984
•The United States switched its headline measure from gross national to gross domestic product in 1991, to align with international practice
•The expenditure approach is the familiar identity: consumption, investment, government spending, plus net exports
•Ireland's 2015 growth was restated at 26.3 per cent after multinationals relocated intellectual property onto Irish balance sheets
•The UK began including illegal drugs and prostitution in the accounts in 2014 under the European System of Accounts 2010
•The Human Development Index was created for the UN Development Programme in 1990 by Mahbub ul Haq, working with Amartya Sen
•Bhutan is famous for its official commitment to Gross National Happiness instead
•The Economist's Big Mac index, launched in 1986, is a light-hearted test of purchasing power parity
•Nominal output is measured at current prices; real output is adjusted using a price deflator

Drill it — 8 cards

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Sources

Simon Kuznets, for the US Senate — National Income, 1929–32 Senate document 124, 73rd Congress, 1934. Cited without URL.
OECD — OECD National Accounts at a Glance Definitions of GDP, GNI and the three approaches to measurement; cited without URL.