Gross Domestic Product

Read this section, which explains Gross Domestic Product. The GDP is the dollar value of goods and services produced in a given country in a year. What is the significance of GDP as an economic indicator?

Example: the Income Approach

Another way of measuring GDP is to measure total income. If GDP is calculated this way, it is sometimes called Gross Domestic Income (GDI). GDI should provide the same amount as the expenditure method. However, in practice, measurement errors will make the two figures slightly off when reported by national statistical agencies.

This method measures GDP by adding the incomes that firms pay households for factors of production -- i.e., wages for labor, interest for capital, rent for land, and profits for entrepreneurship. The U.S. "National Income and Expenditure Accounts" divide incomes into five categories:

  • Wages, salaries, and supplementary labor income
  • Corporate profits
  • Interest and miscellaneous investment income
  • Farmers' income
  • Income from non-farm unincorporated businesses

These five income components sum to net domestic income at factor cost. Two adjustments must then be made to get GDP:

  1. Indirect taxes minus subsidies are added to get from factor cost to market prices.
  2. Depreciation (or capital consumption allowance) is added to get from net domestic product to gross domestic product.

GDP per capita 2011 for the world economy; with the darkest reds being the highest and the lighter yellows to white being the lowest.