Gross Domestic product

GDP was first developed by Simon Kuznets for a US Congress report in 1934. In this report, Kuznets warned against its use as a measure of welfare. After the Bretton Woods conference in 1944, GDP became the main tool for measuring a country's economy.

One way of measuring GDP is to measure total income. If GDP is calculated this way it is sometimes called gross domestic income (GDI), or GDP(I)

The income method approach 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.

According to income method approach
GDP = compensation of employees + gross operating surplus + gross mixed income + taxes less subsidies on production and imports.

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.

According to expenditure approach
GDP (Y) is the sum of consumption (C), investment (I), government spending (G) and net exports (X – M).

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.

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 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.

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 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.

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.

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.

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.

GDP is a neutral measure which merely shows an economy's general ability to pay for externalities such as social and environmental concerns. GDP does not account for variances in incomes of various demographic groups.