Gross domestic product (GDP) is probably the most quoted and well-known indicator of total economic activity in New Zealand. Despite its limitations, GDP is widely accepted as the best measure of overall economic performance.
GDP provides a summary measure of the ‘size’ of the market economy – it has been described as combining ‘in a single figure, and with no double counting, all of the output (or production) carried out by all the firms, non-profit institutions, government bodies and households in a given country during a given period ... provided the production takes place within the country’s economic territory’.1
Flour purchased by a baker is an intermediate good. The baker does not consume the flour but uses it as an input in the manufacture of bread. When the household purchases the bread then this is a final goods purchase.
Gross domestic product is defined as the total market value of goods and services produced in a given time period in New Zealand, after deducting the costs of goods and services used in the process of production. There is no deduction for the cost of using fixed capital – the wear and tear on the machinery and buildings used in production. If the cost of using capital assets is taken into account, the resulting value is net domestic product (NDP).
Elements of GDP
The calculation of GDP has five important elements.
- Market value. GDP measures activities that produce goods and services for sale in the market, plus the non-market services of government and non-profit institutions, the rental value of dwellings occupied by owners, and people’s production of goods for their own use.
- Market prices. In order to sum the values of all of the goods and services that are produced, prices in the market are used. Government services which are provided free or at a reduced price, such as education and health services, are measured at their market costs of production.
- No double counting. Goods and services can be divided into two categories: final, which is goods and services actually used or consumed by individuals and businesses; and intermediate, which is goods and services purchased for further use in the production process. GDP only measures the value of final goods and services produced.
- Domestic production. GDP is confined to production that takes place within New Zealand’s geographical area, regardless of whether the employers or owners of labour and capital that contribute to production are resident or non-resident.
- Defined period. GDP is a ‘flow’ statistic, it measures value added over a stated period, usually for a quarter or for a year.
Production, income and expenditure
The economy can be viewed as a circular flow of money, with each stage in the flow providing a different measure of GDP.
- Production – GDP(P). In the first stage, goods and services are produced. GDP(P) combines the value added by all producers. Individual industries’ contribution to GDP is their total output minus their intermediate consumption (goods and services they used to make their products). GDP(P) also includes the net taxes on production (such as import duties and GST) which are not paid by producers.
- Income – GDP(I). In the next stage incomes are generated and paid to the individuals and groups who own the means of production: labour, capital invested, land, natural resources and entrepreneurship. GDP(I) measures the incomes earned from domestic production including wages, salaries and gross operating surpluses.
- Expenditure – GDP(E). In the final stage incomes are spent on items produced. GDP(E) measures the value of goods and services produced within New Zealand for final use. This is obtained by first measuring internal demand, the gross national expenditure (GNE), and then adding exports and deducting imports.
In theory all three approaches result in the same total, but in practice they are often a little different because of different data sources, and measurement and timing issues.