3.1 What is gross domestic product or GDP ...

One of the key concepts in the system of national accounts is that of gross domestic product (GDP), which describes the value of total production in a country or region. The gross value of production refers to the net sum of value added from production at the level of the whole national economy.

Activities contributing to a country's GDP are those that

In the national accounts the gross value of production is called output; in financial accounting the corresponding term is turnover (this is the amount of money that the business firm has received from sales of its products or services). Turnover does not directly describe the firm's financial performance, however, because it also has to put in money in order to generate production. From its turnover the firm will first deduct its spending for the acquisition of materials and services, wage costs and other depreciations in order to establish its true profits or losses. In the national accounts the term intermediate consumption corresponds to business expenditure and operating surplus to business profits.

Another important concept in the national accounts is that of value added, which refers to the difference between output and intermediate consumption, or the additional value generated by the factors of production. In the national accounts, gross added value includes such items as wages, indirect labour costs and the consumption of fixed capital. Business accounting does not recognise the concept of value added, but wages, indirect labour costs and depreciations are recorded as business expenses before profits. For individual business firms, then, it is important to know how much turnover and profit they have generated, whereas national accounting is interested in the sum "in-between" these two figures. The gross value added generated by all producers together represents the value added at basic prices for the whole national economy. When taxes on products at the national economy level are added to this gross value added at basic prices and when subsidies on products are deducted from this figure, we arrive at the GDP at market prices, which is the GDP statistic used in international comparisons.

Examples