2.11 Economy: what is GDP?

The development of production at the national economy level is described by gross domestic product or GDP. Sometimes people talk about the national income, which in fact describes the same entity from a slightly different angle. The value of production always turns into income for some party in society.

The definition of gross domestic product is included in the broad statistical system known as the national accounts, which are compiled on the basis of international guidelines. The instigators behind the national accounts include the United Nations and the European Union.

GDP is defined as including all economic activity in society that generates value, all goods production and services. GDP indicates the total value of production in society (value added produced). It does not include productive activities for which no wage or other compensation is paid (e.g. sales proceeds). This means that housework, for example, is excluded from national income calculations. One reason for this is the difficulty of placing an exact monetary value on housework.

For purposes of describing how advanced a particular society is in economic terms, GDP is divided by the number of population. In principle, this figure indicates how much is produced on average by each citizen in society. The higher the GDP per capita, the wealthier the society. This indicator tells us nothing about how the total wealth in society is divided among its different groups and members.

GDP per capita in countries of the world from the richest to the poorest in 2006

Gross domestic product or GDP is calculated from total production in a certain state or region. If, for example, Finnish companies have invested in foreign countries, the profit generated by those investments will not show up in GDP figures. Accordingly, production by foreign companies in Finland is recorded as part of Finland's GDP. Gross national income or GNI, then, includes the production and incomes of all citizens and business enterprises of a certain country: it includes the income received by Finnish nationals and enterprises abroad, while the income of foreign nationals and enterprises in Finland is excluded.

The grey economy refers to economic activities that are included in the national accounts but that for one reason or another are not included in official records and systems. If you have a haircut and your barber does not report what you paid him or her as income in his or her tax return, this is an instance of grey economy. Grey economic activities can also be entirely acceptable, for instance if friends occasionally exchange favours. Other activities, though, have adverse and detrimental effects for the broader society, distorting competition (causing rival, tax-paying businesses to suffer) and reducing the level of tax revenue (causing other taxpayers to suffer). One way of assessing the extent of the grey economy in the national accounts is to compare the figures obtained from different statistical sources. Building statistics, for example, can be used to estimate the total amount of building materials used and even to assess labour needs. When these figures are then compared with the tax authorities' data on taxes paid, we can gain some idea of the extent of the grey economy in the building construction sector.

Criminal economic activity is sometimes referred to as the black economy. This includes trade in stolen goods or drug trafficking, for example. These kinds of activities should also be included in GDP figures. However, since crime is by definition something that is done as secretly as possible, it is even harder to capture in the statistics than the grey economy. The figures presented are often estimates by experts based on indirect indicators, for instance regular assessments that are added on to figures on drug trade known to the police.

Next lesson: Ways of displaying statistics