Value of all final goods and services produced within a country within a given time period, usually one year. GDP thus includes the production of foreign-owned firms within the country, but excludes the income from domestically-owned firms located abroad. Intermediate goods, such as plastic and steel, are not included, in order to avoid double counting, because they will be turned into final goods. Household goods are included because they are intended for consumption or use rather than to be turned into other goods. GDP changes as total output and/or prices change. A rise in total output means that an economy is growing; two consecutive quarters of decline in total output is the technical definition of recession. Optimal economic growth with full employment is considered to be in the range between 2% and 2.5%. GDP needs to be adjusted to account for inflation because it is affected by changes in prices as well as by changes in output. Inflation-adjusted GDP, known as real GDP, is calculated by dividing nominal GDP by the appropriate price index.
See also gross national product (GNP).
Output is derived from expenditure on goods and services by firms, consumers, and government net of imports; and income (in the form of wages, salaries, interest, rent, and profits) is derived from the production of goods and services. Therefore, GDP can be measured either by the sum of total output or expenditure or incomes. However, in practice there is usually a slight discrepancy between the three because of the highly-complex calculations involved.
GDP ignores unpaid work and natural capital (for example, a forest is regarded as having no value until it is felled), and counts as economic benefits the costs of prisons, pollution, and so on, not distinguishing between desirable and undesirable consequences of economic activity.
GDP fluctuates in relation to the trade cycle and standard of living.
In the UK, the percentage increase in GDP from one year to the next is the standard measure of economic growth.
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