Introduction
The gross domestic product (GDP) is arguably the most important economic indicator, drawing a picture of total output and economy produces in a given year. The GDP can be approached in three ways:
- Production approach
- Income approach
- Expenditure approach
All three are equivalent but have different components. What is produced is equal to what is earned, and this is equal to what gets spent. I will address the components of each GDP definition, and briefly discuss how to practically deal with it.
Production approach
GDP is the gross value of domestic output of all economic activities (GDP at market prices. This is the value of the total sales of goods and services plus value of changes in the inventories. In the production approach it consists of gross value added (GDP at factor cost) and the value of intermediate consumption (i.e., the cost of material, supplies and services used to produce final goods or services).
Gross value added = gross value of output – value of intermediate consumption.
GDP at factor cost plus indirect taxes less subsidies on products is the "GDP at producer price".
Income approach
GDP = COE + GOS + GMI + [T_PM – S_PM]
compensation of employees (COE) + gross operating surplus (GOS) + gross mixed income (GMI) + taxes less subsidies on production and imports (T_PM – S_PM).
Expenditure approach
Y = C + I + G + (X − M)
consumption (C) + investment (I) + government spending (G) + net exports (X – M)
Often Y is used in this definition instead of GDP.
Gross value added
Gross value added (GVA) is the measure of the value of goods and services produced in an area, industry or sector of an economy, in economics. I.e. of output.
GVA = GDP - intermediate consumption (production approach)
GDP = GVA + taxes on products - subsidies on products
GVA = GDP + subsidies - (direct, sales) taxes
If taxes > subsidies, GDP > GVA, which is the case for Belgium.
Gross value added is used for measuring gross regional domestic product and other measures of the output of entities smaller than a whole economy (for which taxes-subsidies are aggregated).
Over-simplistically, GVA is the grand total of all revenues, from final sales and (net) subsidies, which are incomes into businesses. Those incomes are then used to cover expenses (wages & salaries, dividends), savings (profits, depreciation), and (indirect) taxes.
More on the difference in interpretation between GVA and GDP on
Quora.
GDP, GNP, GNI, and HDI
GDP can be contrasted with gross national product (GNP) or gross national income (GNI). The difference is that GDP defines its scope according to location, while GNP/GNI defines its scope according to ownership. In a global context, world GDP and world GNP/GNI are, therefore, equivalent terms. Most often, we care about GDP, but GNI might indicate that an economy is colonized or colonizing.
The
Human Development Index (HDI) was created by the United Nations to emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone. The HDI can also be used to question national policy choices, asking how two countries with the same level of GNI per capita can end up with different human development outcomes. These contrasts can stimulate debate about government policy priorities. The Human Development Index (HDI) is a summary measure (geometric mean) of average achievement in key dimensions of human development:
- Healtha long and healthy life (life expectancy)
- Education (years of schooling)
- Standard of living (log of the GNI per capita)
In practice, GDP and the HDI correlate very strongly, although there are notable differences that appear even sharper in other 'happiness' indicators. For instance: if two persons decide to stay at home to clean the house and care for the children, nothing is registered in the GDP. If each cleans the house of the other and pays him or her for the job the same wage, we have precisely the same utility, but two wages are added to GDP. I nevertheless favour the use of GDP as an objective measurement for economic development (in the example given, a market for cleaning opens up), but keeping in mind that we are more interested in utility than in the mere quantity of goods and services provided.
GDP figures from Eurostat
GDP figures can be downloaded from Eurostat (key: namq_10_gdp). Below are a few tips to select the correct indicators:
- The European System of Accounts (ESA) gives a guideline for the measurement of production in sectors. If you want to have a good laugh, look at what happened in Ireland in 2015: 30% GDP growth because of a change in the guidelines! Depending on the source you will find longer time series in one or the other system, but for recent years in Europe, you should take the most recent ESA.
- The broadest GDP in nominal terms is 'GDP at market prices'. Mostly you want it to be in EUR or USD, not in the national currency, unless exchange rates are what passionates you.
- GDP in real term is found in the 'chain linked volume' series. Basically, chain linking output means output is expressed in the prices of the previous year, but as it goes this boils down to using a base year.
Note that ESA/Eurostat use the code B for GDP components using the production approach, code D for components using the income approach, and code P for the expenditure approach (which are extensive).
Together with Sebastien Fontenay I have made the -eurostatuse- command in Stata to fetch data from Eurostat. To make indices, I have made the -reindex- command you find elsewhere on this blog or if you send me an email.
