Significance

The most important measure of economic activity in a country,

the Gross Domestic Product is the crossing point of three sides
of the economy: expenditure, output, and income.
As a measure of well-being of a country for international and
temporal comparisons, it provides a good first approximation. Still,
it ignores many crucial elements of general well-being, like
environment conservation, safety, life expectance, and population
literacy. In this respect, one should rather look at the Human
Development Index.
Composition
To measure economic activity, one needs a meaningful
aggregation of all kinds of productions. The territory's productions
are the crossing result of 1) effective demand, 2) production
capabilities, and 3) income. Income arises from payments
distributed to production factors and it provides the necessary
finance for demand.

A numerical example will explain the fact that GDP is expressive of

these three sides or, in other words, of the contemporary action of
buyers,
sellers,
producers
and
the
income
receivers.
Italy's GDP in 1996 can be computed as a sum from three lists of
components [1]:

In the first column, attention is given to the buyers. GDP is then

measured as the sum of all domestic and foreign effective demand
for national goods. Domestic demand is the sum of household,
government,
and
firm
expenditure
(respectively
called: consumption, public
expenditure,
and investment).
Foreigners buy national goods as exports.
Domestic demand is attracted not only by national goods but also
by imports, which reduce the GDP sum. A minuscule additional
element is the change in inventories (the goods that nobody wants
at the moment).
The second column shows the position of the sellers and the kind
of things they sell: GDP is now obtained by summing up "value
added" over the economic branches of the economy. VAT revenue is
added to obtain GDP.
The third column points at the remuneration of production factors
(labour and capital) with the share of the state. The same income
serves as source of finance for the demand of the first column.
This identity expenditure = output = income holds always as a
matter of definition and national accountancy conventions[2].
Determinants
The three sides of GDP interact to determine the aggregate. An
increase of effective demand (consumption, investment, public

expenditure, exports) will increase GDP, provided national producers

can meet the quality/price requirements of buyers. If not, imports
will grow instead. If national production cannot grow for physical
reasons, firms producing already at full capacity probably will decide
to raise prices, vanishing effective demand with inflation.
The diffusion of technological and organizational innovation can
impact
on productivity,
on
product/process
quality
and
oncosts (thus potentially on value added). Capital accumulation and
the increase of labour quality and motivation are important
ingredients for a growing GDP.
Short term business cycles and long term trends can be - to a
certain extent - traced back to the individual growth path of
heterogeneous firms, as this paper points out.
Impact on other variables
GDP can manifest manyfold interactions with its components,
giving rise to positive and negative loops. One of the most
important is the link between consumption and income. Other
feedback loops are included in this interactive map.
Movements in GDP have a number of effects on specific markets.
For instance, energy consumption and greenhouse gases' emissions
can be linked to it, unless proper strategies are undertaken.
Long-term trends
Never is GDP at the same level year after year. The most common
GDP trend is a continuous growth with periods of acceleration and
deceleration. Some episodes of absolute fall are afterwards
overwhelmed by further growth. Decades can be quite different in
terms of average rate of GDP growth.
In many countries, especially small and in the Third World,
growth is hectic and irregular, with frequent and deep absolute falls
and booms.

Wars are a distinctive source of GDP sinking. Oil crises have

exerted recessionary pressure all over the world (with the partial
exception of oil producer countries).
On a global scale, the distance between the richest and the
poorest countries is increasing, whereas locally there exist
"convergence clubs" in which distances are getting smaller. A few
developing countries have taken off and reached a high
development stage.
Business

cycle

behaviour

To a large extent, GDP evolution "is" the cycle. It is in fact with

respect to GDP dynamics that other variables are defined as procyclical (if they follow a similar path) or anti-cyclical. A recession is
often defined as a two-quarter absolute reduction of GDP.
Growth
in
GDP
is
particularly
pronounced
during expansionary and booming phases, culminating in peaks,
which open the gates towards recession or even depression. They
last until a trough is reached, often thanks to specific policies and
favourable international conditions, which is followed by recovery,
when the losses cumulated are reverted back.
Beyond GDP: the proposal of the Quality Domestic Product
and its nowcasting
The GDP has a number of evident limitation as main indicator
for economic policies. Our institute is on the forefront of the
research on alternatives. The EWI has not only been quoted as a
reference source by the EU Parliament Background Report on
"Beyond GDP - Alternative progress indicators to Gross Domestic
Product (GDP) as a means towards sustainable development", and
assured the presence to the starting conference, but has
participated, in the person of his director, to the reflections, building
blocks, formulas, simplifications and empirical estimation of the
Quality Domestic Product - the share of GDP which is of "good

quality" (according to a multi-criteria definition), carried out by the

Scientific Commitee on behalf of the Italian Foundation "Symbola".
This work, which is on-going across the years, produced in
2007 this report [in Italian language] and can lead to industrial,
territorial and other policies to improve the composition of GDP in
mature and developing countries.
In 2014 we published here a nowcasting technique for the Quality
Domestic Product.
Please feel free to contact us for further details and possible
cooperation.
Data
Exports, Imports and the other GDP components (1946-2007) for
171 countries
GDP data from 136 countries: a long term time series
GDP and per-capita GDP in all countries of the world since centuries
ago
GDP dynamics (1969-2009) - 192 countries
Data
for
all
the
variables
in
IS-LM
model
EU data for all the variables in IS-LM model (Germany, France, Italy,
Spain, UK, Switzerland and other 13 European countries)
National income and gross national product, by components Canada
(1926-1976)
Human Development Index (162 countries)
Formal

models

An interactive map of how the economy works according to a basic

macroeconomic scheme: the IS-LM model
A new approach to business fluctuations: heterogeneous interacting
agents, scaling laws and financial fragility

Links
Recent GDP figures all over the world
Recent world GDP forecast
NOTES
[1] Some simplifications apply. Data source: ISTAT.
[2] Looking at the same transaction two identities hold: The
quantity sold is always equal to the quantity bought. Moneyspent is
always equal to money obtained.
I buy an apple. The seller has sold an apple. I've spent a dollar.
He has got a dollar. Even if I don't like apples or I think that a dollar
is too much for an apple.