GDP and its three approaches THE CONTRACTOR IS ACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE COMMISSION

Objectives The gross domestic product (GDP) is to measure economic activity of a country during a given period, usually a year or a quarter. It is expressed in monetary units and is based on a price system. GDP can be expressed in prices of the current year or volume. At current prices, it is mostly used to calculate ratios, eg public debt to GDP. In volume, it provides a measure of economic growth.

Importance of GDP GDP plays a very important role in the economic analysis. In the EU, it plays a particularly important role: In the context of the Excessive Deficit Procedure, it is used in the calculation of the ratios of government deficit and debt; It allows to determine the aid to different regions; It is involved in the distribution of funding of the EU budget between the Member States.

The three GDP approaches What is the GDP measures the wealth created by the production. This wealth can be seen in three view points that respond to three questions: What is the value created, production approach; How it was used, expenditure approach; How it was distributed among economic sectors, income approach.

Production approach (1) During the production process, there is both creation and destruction of wealth. The wealth created is measured by production (output) The wealth destruction is measured by the intermediate consumption. The wealth created is actually the difference between output and intermediate consumption, that is to say the value added.

Production approach (2) GDP is calculated as the sum of value added. But there is a valuation problem: GDP is calculated at market prices, that is to say the price paid by users that include taxes on products and excludes subsidies on products; Output is valued at basic prices excluding taxes on products and including subsidies on products. GDP is calculated as: GDP = Σ VA + (taxes on products - subsidies) on products

Expenditure approach (1) The expenditure approach is derived from the account of goods and services: By passing the intermediate consumption in the left column and imports in the right column a new formula for calculating GDP is obtained. Output Taxes on products - Subsidies on products Imports Intermediate consumption Final consumption Gross capital formation Exports

Expenditure approach (1) GDP Final consumption Gross capital formation Exports - Imports This is the calculation of GDP in the expenditure approach. We can say that GDP is the sum of final uses less imports.

Income approach (1) The income approach is derived from the production approach and income accounts: To pass from value added to GDP, add taxes on products (D21) and deduct subsidies on products (D31). Value added Compensation of employees Other taxes on production (D29) - Other subsidies on production (D39) Gross operating surplus / mixed income

Income approach (2) The sum of taxes on products (D21) and other taxes on production (D29) is equal to taxes on production and imports (D2). The amount of subsidies on products (D31) and other subsidies on production (D39) is equal to subsidies (D3). GDP Compensation of employees Taxes on production and imports (D2) - Subsidies (D3) Gross operating surplus / mixed income

Summary of the three approaches

Domestic versus national Gross domestic product (at market prices) - primary income payable by resident institutional units to non-resident institutional units + primary income receivable by resident institutional units from the rest of the world Gross national income (at market prices) National income is not a production concept but an income concept.

Domestic versus national The ‘domestic’ concept is adequate for the measurement and analysis of production. The ‘national’ concept is adequate for the measurement and analysis of income. 'Primary income' is the income which resident units receive by virtue of their direct participation in the production process, and the income receivable by the owner of a financial asset or a natural resource in return for providing funds to, or putting the natural resource at the disposal of, another institutional unit.

GDP vs. GNI

Should we bring down GDP? GDP is the subject of much criticism: It does not measure well-being; It does not include domestic household activities; It grows with disasters; It does not take into account the environmental degradation. National accountants generally respond to this criticism by saying that the GDP has no other ambition than to measure economic activity. Much work, however, seek to improve or complement GDP to reflect the above-mentioned issues.

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