Gross domestic product
Output measure of GDP
The output measure of GDP is obtained by combining value added (value of production less cost of inputs) by all businesses: agriculture, mining, manufacturing and services. Output data are usually presented in index form (that is, with a base year such as 1990 equal to 100).
Sectors
In general countries have larger agricultural sectors in the early stages of economic development (for example, sub-Saharan Africa, see figure). The manufacturing sector's share of output increases as the economy develops (Asia) and services take the largest share of output in mature economies (the USA).
Highly detailed data are often available. The production of tens or hundreds of goods and services industries may be recorded separately. For example, there will probably be an appropriate index in the GDP output breakdown to allow you to compare the performance of, say, a furniture manufacturing company with that of the industry as a whole. The industrialised countries generally publish more detailed (and more up-to-date) statistics than less developed countries.
Classifications
Economic information has to be categorised, but the
correct classification is not always self-evident. For example, should the production
of man-made fibres from petroleum be recorded under textiles (as they generally
used to be) or chemicals (as they are now)?
Standards have been introduced to deal with these problems and provide consistency. Industrial production, retail trade, imports and exports are classified according to standard themes. Many countries now follow the United Nations' international standard industrial classification (ISIC), while European countries tend to use the similar EU Nomenclature générale des activités dans les Communautés Européennes (NACE). These are fairly detailed and they need revision from time to time.
For example, if the standard industrial classification (sic) introduced in the UK in 1948 had not been revised several times, computer manufacturing would be classified under office equipment, which is part of non-electrical engineering.
When making sectoral comparisons between two or more countries, try to find out if the sectors are made up of the same industries, otherwise there may be inconsistencies in the comparison.
Expenditure measure of GDP
The expenditure measure of GDP is obtained by adding up all spending:
Private consumption (spending on items such as food and clothing)
+ government consumption (spending on public sector salaries and so on)
+ investment (spending on houses, factories, and so on)
= final domestic demand
+ stockbuilding (increase in inventories)
= total domestic demand
+ exports of goods and services (foreigners' spending)
- imports of goods and services (spending abroad)
= GDP
Income measure of GDP
The income measure of GDP is based on total incomes from production. It is essentially the total of:
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Wages and salaries of employees |
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Income from self-employment |
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Trading profits of companies |
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Trading surpluses of government corporations and enterprises |
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Income from rents |
These are known as factor incomes. GDP does not include transfer payments such as interest and dividends, pensions, or other social security benefits. The breakdown of incomes sheds additional light on economic behaviour because it is the counterpart to expenditure in what economists call the circular flow of money. It also provides a useful basis for forecasting inflation.
Incomes data are collected from figures which are based on common accounting conventions, rather than the principles of national accounting. One result is that reported company profits include any increase or decrease in the value of inventories. A value (as opposed to a volume) change does not represent any real economic activity, so this stock appreciation is deducted from total domestic income to arrive at GDP.
Discrepancies between output,
expenditure and income measures of GDP
In a perfect world, the output, expenditure and income measures would be identical. In practice there are discrepancies owing to inevitable shortcomings in data collection, differences in the reported timing of transactions and the black economy. The discrepancy between any pair of measures is typically up to 1 - 2% of GDP. It can be much larger than this, as it was in many countries in the mid-1970s when data collection was complicated by sharp oil price increases and rapid inflation.
Since output, expenditure and income data are, by and large, collected independently, the safest approach is to take the average of the three as indicative of overall economic trends. Not many governments, however, publish such averages and it may not be practical to calculate them. Consequently it is usually necessary to focus on one.
The output measure is usually the most reliable indicator of short-term developments (that is, up to one year) as the survey data are fairly concrete. For longer periods the expenditure measure is probably better, mainly because the weights used to aggregate the output indicators are updated at infrequent intervals and they become out of date. The income measure is usually the last available and least reliable.
Market prices and factor cost
Many transactions are subject to taxes and subsidies. Sales tax or value-added tax (VAT) and subsidised housing are obvious examples. The expenditure measure of GDP records market prices, which includes these taxes and subsidies. The income and output measures are generally reported at factor cost (that is, they exclude taxes and subsidies). The relationship is simple:
GDP at market prices
- indirect taxes + subsidies } factor cost adjustment
= GDP at factor cost
The factor cost adjustment
The factor cost adjustment (the net total of taxes and subsidies) enables the income, expenditure and output measures to be converted freely between factor cost and market prices. This allows consistent comparisons and highlights the effect of government intervention.
National conventions
Americans tend to measure economic activity at market prices right through to the net national product stage. They then adjust for taxes and subsidies to reach national income at factor cost. Thus a reference to US GDP probably means GDP at market prices. At the other end of the spectrum, the British publish many figures at both factor cost and market prices all the way through. Loose reference to British GDP usually means the expenditure measure at market prices. GDP on an income or output basis is probably at factor cost while the expenditure measures are usually at market prices, but the only way to be sure is to check the basis of the figures in question.
GDP at current and constant prices
GDP figures are reported in current and constant prices.
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Output data are generally collected in both current and constant prices. The constant price figures for each industry are obtained by valuing current output in the prices applicable in a given base year; say, 1990 or 1995. |
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Expenditure data are mostly collected in current prices. They are converted into constant prices by the same adjustment process used with output data, or – slightly differently – by deflating each component by an estimated price indicator. Once the current and constant price versions of the expenditure measure are available, they are used to calculate an overall deflator (that is, the price index) which is used with the income measure. |
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Income data are collected in current prices and converted into constant prices using deflators derived from the expenditure measure. |
The distinction between current and constant price measures of GDP is very important. Current price GDP could grow rapidly simply because prices are rising. But GDP measured at constant prices shows how the quantity of output is changing. Every component of GDP (consumption, investment, exports, imports) is measured at both constant and current prices to allow economists to see how real output is changing, or how demand is changing for each type of expenditure, or how incomes are changing after adjusting for inflation.
On WorldData we supply GDP measured by type of expenditure in both current local currency and dollars, and constant local currency. We also give real (constant price) growth rates of GDP split by type of output.
The GDP deflator
The GDP deflator calculated from expenditure data at factor cost is also known as the implicit price deflator. This is a handy measure of economy-wide inflation trends, but it is affected by changes in the composition of GDP.
Adjusting for inflation is less reliable at times when prices are changing rapidly. Small errors in the measurements of current values and prices can combine to create large errors in the constant price series. Make it a rule to question the accuracy of price deflators. For example, 12% nominal GDP growth with inflation of 10% results in approximately 2% real growth in GDP. If inflation is actually slightly higher, at 11%, real GDP growth is halved to a mere 1%. This is sometimes referred to as the price/volume split. At times of rapidly changing prices - such as when a country devalues its currency - commentators often question the price/volume split, implying that a mismeasurement of prices is leading to incorrect growth figures being published.
Related topics:
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Measuring economic activity |
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Private consumption |
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Government |
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Investment |
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Domestic demand |