Gross Domestic Product

1. True increase in productivity and the amount of goods and services available to (and used by) the population.
2. Additional economic activity required because of natural or man-made disasters - for example, the replacement of windows required after an earthquake or protest.
3. The transformation of the relationships within a society from informal activity to business dealings. One example is the growing use of hired child-care providers to replace the caring of children by relatives.

Ironically, hiring a prostitute in Nevada increases GDP (and the illusion of prosperity) while sleeping with your wife does not (unless you pay her and report that fact). Unfortunately, the GDP is still being used to measure economic progress by the both the uninformed and those who should know better.

My mom pays me a few pounds a week to mow the lawn. I don't declare this to the Inland Revenue, and thus they have no record of it. Work happened, but it's not in the GDP. This is part of the informal economy.

It's really difficult to work out how much unpaid and undeclared paid work is carried out. Estimates abound, such as, of total work been done:

• Formal paid work: 46%.
• Undeclared paid work: 3%.
• Domestic unpaid work: 51%.

Anyway, the GDP is usually used to measure the rate of economic growth in an economy. Sometimes index numbers are used because of the massive figures we would otherwise have to deal with. GDP per capita is calculated by doing

GDP / population

and is a fair indication of the standard of living, although as the figure doesn't specify who the money belongs to, it could mean there are just a rich elite in the country with a lot of money, and the rest of the population are poor.

Reference: "Countries Still Rule the World", an article by Martin Wolf in the FT, 5^th February, 2002

y = c + i + g + n

C = consumption: the sum of all goods and services purchased, related to GDP (people will spend no matter what, but they will spend more if they have more)

I = investment: the sum of all private investment in the country, including construction and surplus inventory, proportional to GDP (it only happens when people have extra resources)

G = government spending: the sum of all government contracts, exogenous to GDP (the government will spend no matter what)

N = net exports: the sum of all exports minus the sum of all imports, inversely related to GDP (as GDP goes up, the country brings in more and sends out less)