Gross domestic product (GDP) is defined by OECD as "an
aggregate measure of production equal to the sum of the gross values added of
all resident institutional units engaged in production (plus any taxes, and
minus any subsidies, on products not included in the value of their outputs)
GDP = compensation
of employees + gross
operating surplus + gross mixed income + taxes less subsidies on production and imports
GDP = COE
+ GOS + GMI + TP & M – SP & M
- Compensation of employees (COE) measures the total remuneration to employees for
work done. It includes wages and salaries, as well as employer
contributions to social security
and other such programs.
- Gross operating surplus (GOS) is the surplus due to owners of incorporated
businesses. Often called profits, although only a subset of total costs are subtracted
from gross output to calculate GOS.
- Gross mixed income
(GMI) is the same measure as GOS, but for unincorporated businesses. This
often includes most small businesses.
Gross national product (GNP) is the market value of all the
products and services produced in one year by labour and property supplied by
the citizens of a country. Unlike Gross Domestic Product (GDP), which defines
production based on the geographical location of production, GNP allocates
production based on location of ownership.
GNP does not distinguish between qualitative improvements in the state of
the technical arts (e.g., increasing computer processing speeds), and
quantitative increases in goods (e.g., number of computers produced), and
considers both to be forms of "economic growth".
Net national product (NNP) refers to gross national product (GNP), i.e. the total market value
of all final goods and services produced by the factors of production of a country or other polity during a given time period,
minus depreciation.[1]
Similarly, net domestic product (NDP) corresponds to gross domestic product (GDP) minus depreciation.[2]
Depreciation describes the devaluation of fixed capital through wear and tear
associated with its use in productive activities.
In national accounting, net national product (NNP) and net domestic product (NDP)
are given by the two following formulas:
cross-border
comparison and PPP
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.
- Current currency exchange rate is the exchange rate
in the international foreign
exchange market.
- Purchasing power parity exchange rate is the exchange rate based on the purchasing
power parity (PPP) of a currency relative
to a selected standard (usually the United
States dollar). This is a comparative (and
theoretical) exchange rate, the only way to directly realize this rate is
to sell an entire CPI basket in one country, convert the cash at the
currency market rate & then rebuy that same basket of goods in the
other country (with the converted cash). Going from country to country,
the distribution of prices within the basket will vary; typically,
non-tradable purchases will consume a greater proportion of the basket's
total cost in the higher GDP country, per the Balassa-Samuelson
effect.
The ranking of countries may differ
significantly based on which method is used.
- The current exchange rate method converts the
value of goods and services using global currency exchange rates.
The method can offer better indications of a country's international
purchasing power. For instance, if 10% of GDP is being spent on buying
hi-tech foreign arms, the number of weapons purchased is entirely governed
by current exchange rates, since arms are a traded product bought
on the international market. There is no meaningful 'local' price distinct
from the international price for high technology goods.
- The purchasing power parity method accounts for
the relative effective domestic purchasing power of the average producer
or consumer within an economy. The method can provide a better indicator
of the living standards especially of less developed countries, because it
compensates for the weakness of local currencies in the international
markets. It also offers better indication of total national wealth. For
example, India ranks 10th by nominal GDP, but 3rd by PPP. The PPP method
of GDP conversion is more relevant to non-traded goods and services. In
the above example if hi-tech weapons are to be produced internally their
amount will be governed by GDP(PPP) rather than nominal GDP.
There is a clear pattern of the purchasing
power parity method decreasing the disparity in GDP between high and low
income (GDP) countries, as compared to the current exchange rate method.
This finding is called the Penn effect.