GDP concept and statistics 1 Definition of GDP and GNP

The market value of all goods and services produced in an economy is gross output. For an open economy with trade, gross output comprises consumption, investment, government and imports of goods and services. Government is a separate consumption/expenditure unit unlike consumers and firms. These three economic actors have different functions and behavior. Non-durable consumption goods like food are distinguished from durable investment goods like cars. Non-durables appreciate or depreciate in value over their life span. They may further generate an income stream as company cars and taxis. Exports earn the country foreign exchange while imports expend that. Thus, net exports (exports less imports) constitute a component of gross output. Gross output based on territorial or geographical basis of a country is gross domestic product (GDP). Based on nationality, gross national product (GNP) is measured. Both are valid measures, depending on geography or nationality basis. 2 What is counted, what is not

Starting with GDP, it includes goods and services produced by non-nationals working in the country, exclude those of nationals abroad. Subtraction of such net income abroad gives GNP. Income and product are used interchangeably. Workers repatriate part of their product back home as income. Such remitted income is available statistically. Worrying about large remittances is misguided. Foreign workers earn to feed families back home. Poor expatriates have low purchasing power in the country, but they contribute to producing its GDP. If GDP exceeds GNP, more non-nationals produce output in the country than its nationals doing the same abroad. A developed countrys GNP usually exceeds GDP. GDP is a production measure not a measure of welfare (MEW) which relates to consumption and well-being. MEW is hard to define and measure as a single indicator. A physical quality of life index (PQLI) is a composite index of GDP, health and education, mainly. Including communication, security, safety, environment and others is traded-off with more statistics and issues. GDP becomes a proxy for standards of living and welfare by default. It is not designed as anything, but a production measure.

Market value is stressed in GDP definition. Non-marketed home produced goods and services are not in GDP. Developing countries with large home subsistence and low urbanization need imputed values for domestic food production, haircuts, utility from nature, for more accurate GDP estimate. Black market activities are not counted simply because their activities are unknown, unreported. GDP statistics are from industrial surveys and censuses for all industries and service sectors. Literacy, proper accounts from registered establishments are important for accuracy. Annual nominal GDP at current market prices include all taxes or subsidies levied on output. GDP at factor cost is less taxes and subsidies, also called ex-factory price. 3 Intertemporal and international comparison

Intertemporal comparison needs nominal GDP deflated by GDP deflator, removing any inflationary price effect. The result is a real GDP time series measuring economic growth. Nominal GDP less inflation is real GDP. International comparison requires GDP of various countries priced in their own currencies be converted to a standard currency, usually the US dollar, using the official exchange rate. However, the official exchange rate may be manipulated for all sorts of reasons to make it inaccurate or unreliable. A purchasing power parity (PPP) concept is best understood by the popular McDonald hamburger standard. As a standardized product, big Mac priced in various currencies is one crude, but simple measure of purchasing power or exchange rate. The International Monetary Fund (IMF) computes a sophisticated PPP using an internationally traded basket of goods and services for countries GDP at PPP dollars. Despite United Nations classification standards, in practice, economic systems and countries have conceptual and statistical difficulties. Developing countries with different industrial structures lack funding, manpower and technical expertise, making international GDP comparison problematic. For both intertemporal and international GDP comparison, GDP per capita (GDP/population) is more useful. As population grows, more GDP is produced. Small counties GDP per capita may match large countries. A defining GDP per capita (say, US$15,000) may separate developed and developing economies. 4 Conclusion

GDP is the first and single indicator of interest, domestically and abroad. Conceptually, GDP is a pure production measure. GDP per capita is used as a proxy for living standard and measure of welfare over time within a country and in international

comparison. Understanding the concept, statistical computation and quality of statistics is important to use GDP figures correctly. Other national accounting concepts like GNP, gross national income (GNI), gross national saving (GNS) are derived from GDP. Production is easier to estimate than income. But concepts like disposable income and others have their policy uses. Department of Planning and Economy Abu Dhabi