Beginners:GDP - What is gross domestic product (GDP)?

Highlights

Watch the video explaining what is included in GDP

This article is part of Statistics 4 beginners, a section in Statistics Explained where statistical indicators and concepts are explained in a simple way to make the world of statistics a bit easier for pupils and students as well as for everyone else with an interest in statistics.

Gross domestic product (GDP) is the most common measure for the size of an economy, and it measures the value of total final output of goods and services produced by that economy in a certain period of time. The aim is to quantify the additional value coming from goods and services newly produced, the so-called value added, not taking into consideration the value of goods and services used to produce them (intermediate consumption).

This indicator can be compiled for a country, a region (such as Tuscany in Italy or Burgundy in France), or for groups of countries, as in the case of the European Union (EU). Why is this information important? GDP is an indicator which is used by a lot of different governmental and non-governmental organisations and institutions to make key economic policies and investments.

Full article

What’s covered by GDP?

Watch the video explaining what is included in GDP

The value of all final goods and services, therefore excluding intermediate consumption, represents the largest part of GDP. Nonetheless, it also includes the value of goods and services that are going to be used by the producers themselves as investments. In the case of GDP, no distinction is made whether the goods or services produced have a positive or negative impact from a social or environmental perspective. For example, if there is an oil spill in the ocean, the transport of the oil as well as the cleaning work related to this are included in GDP.

Example: If an engineering company produces some special machines for its own use, a building company builds new offices for itself, or a business develops software for in-house use, these goods and services are included in GDP, even though they are not actually sold.

The same applies if Josefina makes a major change to her house by herself. Just as any construction work done by (unpaid) volunteers, it would be counted as part of GDP.

Furthermore, GDP also includes all goods which are produced by households for own use.

Example: If Kamila grows some crops at home, brews some beer or makes clothes or furniture — all for her own personal use — all this work contributes to GDP in her country. In practice, this type of work tends to be very small in scale in developed economies, and only some major categories will be surveyed or estimated for inclusion in GDP.

However, there are a few types of work that are not included in GDP and they mainly concern services such as housework, everyday domestic services and personal care.

Example: When Alessandro is at home and cleans the house, cooks dinner, washes and irons clothes or babysits for his younger brothers or sisters, none of that contributes to GDP.
However, if he was paid to do any of those services for someone else, for example cleaning, cooking, ironing or babysitting in a hotel, this would contribute to GDP.

In fact all volunteer services — as opposed to the volunteer production of goods — are excluded, regardless of who benefits from the work, whether it is you and your family or an organisation, like a charitable or sports/youth organisation.

What about the black/grey or informal economy?

GDP includes estimates of all those unreported transactions happening beyond the formal economy, for example untracked cash payments to a worker whose work is not declared to the authorities (and therefore not registered for taxes and not eligible for social security). Other activities considered illegal in most countries are estimated as well to calculate GDP, such as buying counterfeit goods, smuggled cigarettes and drugs, and prostitution.

Making these estimates for unreported transactions and illegal activities is not easy: more information can be found in a separate article.

So, what work does GDP not reflect?

When considering how big an economy is through its GDP, or its change over time or how it compares with other economies, the truth is that there is no ‘right’ amount of GDP or of GDP growth. GDP growth does not necessarily imply positive social or environmental development in an economy: this brings us to the next point… what GDP does not reflect.

It does not measure the social or environmental situation of an economy.
Because of this, statisticians have worked for many years on developing frameworks other than national accounts to look at these issues, for example surveys on income and living conditions and environmental accounts. These efforts have been supported by various organisations, whose statisticians, economists and other social scientists have been trying to produce indicators with broader measures than GDP, focusing on topics such as happiness or well-being. Within Eurostat this work has been known as 'GDP and beyond’. Elsewhere two of the best known examples are the United Nations´ human development index and the OECD’s better life index.

Does GDP have a family?

GDP has a lesser known relative, called gross national income (GNI). While GDP measures the production of resident entities within the economy regardless of nationality, GNI includes the income earned outside the economy by national entities and excludes the income earned by foreign nationals in the domestic economy.

Example: In an economy (called the host economy) there is a subsidiary of a foreign owned multinational enterprise. If that subsidiary transfers (repatriates) profits back to the home economy of the multinational enterprise, the repatriated profits will be included in the host economy’s GDP, but not in its GNI; on the other hand, the profits will be added to the home economy’s GNI, but not to its GDP.

Another example is that of Christophe, who lives in Belgium and drives to Luxembourg for work every weekday. The value of the work he produces contributes to Luxembourg’s GDP, but then, when calculating Luxembourg’s GNI from its GDP, the income he earns is deducted.
While Christophe's work does not contribute to Belgium's GDP, the pay he receives is included in Belgium's GNI.

The difference between GDP and GNI can be very large in some economies hosting many multinational enterprises, for example Ireland or Luxembourg. In addition, in Luxembourg there is a a large number of people crossing the border every day to work from neighbouring countries.

How can GDP be used as a benchmark?

As well as being useful for analysis in its own right, GDP can also be used as a reference for many other types of statistics and indicators.

For research and development

Research and development (R&D) intensity is a common indicator when looking at the competitiveness of different economies, which is calculated by comparing expenditure on R&D to GDP. R&D expenditure and GDP are both measured in euros, so that the resulting ratio is easy to compare across time and between countries. The EU’s R&D intensity in 2021 was 2.27 %, meaning that expenditure on R&D was equivalent to 2.27 % of GDP.

For government finance statistics

Another use of GDP involves government finance statistics. As governments can borrow or lend money, at the same time they can also owe money to other entities and increase public debt. When government expenditure is greater than its income, the government’s deficit (when government's expenditure is greater than its income) is recorded as well. Both measures are often compared to GDP. In 2022, the government deficit in the EU was 3.4 % of GDP, while the level of all outstanding debt was 84.0 % of GDP.

These are just two examples of where GDP is used as a reference: there are many more cases.

Who is interested in GDP and why?

National, regional and local governments/administrations, European institutions, central banks as well as other economic and social bodies in the public and private sectors need a set of comparable and reliable statistics about the economy in order to be able to develop different policies that are based on facts. The change of GDP over time is at present the most important indicator of economic growth.

GDP is also used, for example, to allocate EU’s structural funds to regions of the EU, whereas the GNI of each EU Member State is used to determine the contribution of each country to the EU’s budget.

More information on the various uses of national accounts in general and GDP in particular is provided in a separate article.

Back to Statistics 4 beginners — Introduction