<ol>
<li><p>Yes but note economic development is more broad than just GDP. GDP measures economic output of a country and higher GDP correlates with higher development and it can be also used as a measure of economic development but more narrowly GDP is just a measure of output.</p></li>
<li><p>This is correct, GDP can’t measure things like home production. It’s a disadvantage of GDP but I would not necessarily say it implies it’s not a good measure. Sometimes alternative measures can be even less appropriate but if you care mainly not just about output but development there are certainly measures that might be more appropriate. For example, often development economics uses the number of people in absolute poverty as development indicator, or access to education or other factors. There is also Human Development Index (HDI) that includes GDP but tries to also combine more indicators in it such as environmental quality and again education. But for some research purposes GDP might still be the best development indicator - it’s highly case specific. For example, GDP is quite objective and data on it are easily available, even if you would consider HDI superior measure, GDP might still win thanks to data availability as having large number of observations is often important.</p></li>
<li><p>Yes real GDP is inflation adjusted. This is important because value of money changes across time dollar today is not same dollar as dollar year ago. This situation is like if in physics length of a meter would change every year. Real GDP corrects for this. However, this only adjusts for changes in value of dollar across time. If you are doing some cross-country comparison you should also think about adjusting for purchasing power parity (the fact a dollar can have different buying power across countries).</p></li>
</ol>

CC BY-SA 4.0
2020-02-04T18:08:52.627Z
I think it's valid to worry that GDP no longer is an adequate measure of economic activity.  One has to remember that it was developed (not so long ago) in the context of a heavily-industrialized economy that revolved around widget-production in factories.  It is one thing to say that we have no better measure in terms of rigor and broad adoption (we don't); it's another to say that it still does what it was invented to do (it probably doesn't).
heh
CC BY-SA 4.0
2020-02-04T18:19:58.917Z
@heh I would disagree with this. GDP was always able to capture value of for example services - which is what most developed economies are about. In this sense GDP still does what it is supposed to do. Even in the past GDP was not equipped to handle shadow economy or non-market transactions/goods - that’s one of its biggest flaws, but the size of shadow economy does not depend on how industrialized country is, rather it depends on how easy/necessary it is to avoid the formal economy or what’s the demand for non-market goods (like environment).
1muflon1
CC BY-SA 4.0
2020-02-04T18:28:34.027Z
This is incorrect - the US Bureau of Labor Statistics redefined GDP under Bush Jr (I believe) to include certain previously-ignored sectors such as artistic works, that led to a one-time and significant "boost" to GDP as activities of major sectors like the Hollywood film industry were suddenly accounted for.  The inability of GDP to properly track technological change is also problematic, leading to much controversy around the notion of "hedonic adjustment".  This is aside from shadow economies or household goods and services.
heh
CC BY-SA 4.0
2020-02-04T18:31:14.420Z
I believe GDP measures (or accounting practices - or both) have also been changed by the Bureau of Economic Analysis so that research and development spending, which was once considered an expense, is now tracked as an investment - resulting in revisions to a number of key macro measures.
heh
CC BY-SA 4.0
2020-02-04T18:31:40.267Z
https://www.nsf.gov/news/news_summ.jsp?cntn_id=134742
heh
CC BY-SA 4.0
2020-02-04T18:34:02.550Z
You are completely right on technological change issue. That’s completely valid point but I would not say that makes GDP less accurate today - if anything the pace of technological change was faster during industrial revolution than in the present- at least that’s argument put forward (and well supported) by Robert Gordon in his the rise and fall of American growth. I also did not know that fact about change in methodology- but doesn’t that support my point that the methodology of GDP estimation (since we can’t really just calculate it) evolves to keep track of these changes?
1muflon1
CC BY-SA 4.0
2020-02-04T18:45:48.650Z
These are just examples, and the failure of GDP to fully capture activity in the services sector is partially reflected in the "Hollywood bump" -- which, again, only happened this century.  The trouble with having to continually update an inadequate metric is that there is a necessary lag, which in the case of GDP appears to be something on the order of 50 years.  In the meantime, policy is being written on the strength of what the out-dated metric says year-over-year.  And this doesn't even get into the fact that these updates are not uniform across the globe, in scope or pacing.
heh
CC BY-SA 4.0
2020-02-04T18:48:02.360Z
Again - not to dispute that GDP is the best we've got, especially for interjurisdictional comparison.  But it is hardly a settled question that it is adequate - I would say that what we're really doing is just hoping and praying that the uncounted segments of the economy change more slowly than our definition of the metric does.  Which is probably not the case, but also not a matter we can settle using the woefully restrictive comments feature on StackExchange.  :)
heh
CC BY-SA 4.0
2020-02-04T18:49:21.730Z
Literally googled "Hollywood bump" and found a source, at last. 
 https://www.hollywoodreporter.com/news/hollywood-creative-industries-add-504-662691
heh
CC BY-SA 4.0
2020-02-04T18:53:52.307Z
@heh I think this are all good (+1) points in saying that GDP is imperfect and I completely agree on all these points, but I still don’t see how this would imply that GDP would be less applicable to modern economy in principle than to industrial economy. I am not saying that might have not occurred empirically for example there is large shift in preferences for non-market goods like environment in developed countries - but I would also not say it’s because GDP was developed for industrial economies it’s somehow automatically less relevant now especially given the methodology is being updated
1muflon1
CC BY-SA 4.0
2020-02-04T18:57:32.160Z
So as a summary do you all agree to use the Real-GDP to measure economic activity ? Also, I learnt about GDP per capita. Is this a better measurement to compare  economic activity of countries than Real-GDP+PPP ?
Illep
CC BY-SA 4.0
2020-02-04T18:59:06.417Z
@Illep you can have real GDP per capita +PPP yes per capita GDP is definitely better as we usually care about welfare per person not state per se. however even per capita GDP needs to adjust for inflation or PPP. I think for many practical purposes it’s good measure of economic activity but there are definitely occasions where you want to go for something different. Usually it’s always best to compare economic development across multiple dimensions. GDP has great practical use in sense it’s easy to calculate, its relatively rigorous measure and its recorded for long time but it has flaws too
1muflon1
CC BY-SA 4.0
2020-02-04T19:10:07.227Z
This might be a dumb question, sorry i am a newbie. Does Real-GDP have issues with not considering shadow economies and non market transaction ?
Illep
CC BY-SA 4.0
2020-02-04T19:15:43.210Z
@Illep we’ll issue is that GDP (real, nominal or however adjusted) simply ignores these. From a point of GDP shadow economy or non-market transactions (NMT) do not exist because they are not officially recorded. So while in Amsterdam price of joint enters GDP in Italy it does not because it’s not part of formal economy. This creates a problems. However, note these problems arise from the fact that shadow economy is by definition hard/impossible to measure so while this is serious drawback of GDP there is no simple way how to correct for it. In NMT the measurements can be sometimes make but...
1muflon1
CC BY-SA 4.0
2020-02-04T19:16:26.960Z
@Illep, these are all challenges for GDP that are not trivial to address and as a result, one should simply keep them in mind.  I cannot recommend a "better" alternative to GDP, suitably adjusted (e.g., using Real GDP for intertemporal comparison, PPP for interjurisdictional comparison).  As with any analysis, it is just important to understand the limitations behind the numbers rather than take them at face value.
heh
CC BY-SA 4.0
2020-02-04T19:20:54.910Z
It is difficult to rigorously calculate value of let’s say clean air. It’s not impossible, but it requires serious econometrics and involves a lot of uncertainty making measures of NMT always open to criticism and it also makes it extremely hard to agree on single measurements of those. So the point is that while you should be aware GDP has these flaws it might still be the best thing around in many cases (but definitely not always). You should always think hard whether you should not include additional measures or replace GDP altogether in your analysis. Answer might change from case to case
1muflon1
CC BY-SA 4.0
2020-02-04T19:25:11.073Z
@1muflon1 Leaving aside preference shifts, "hedonic adjustments" and the like, I don't think it's controversial to say that developed economies have transitioned away from the sector allocation that was prevalent in the post-WWI era.  This is ultimately a matter of debate, but what is certainly clear is that if even such a keystone metric as GDP is subject to definitional reform, it should be used with care and full understanding of what it does and does not capture.  That's a point on which we both clearly agree. :)
heh
CC BY-SA 4.0
2020-02-04T17:53:00.410Z
2020-02-04T20:24:41.203Z
2020-02-04T20:24:41.203Z
1muflon1
<p>I am totally new to Economics. I have issues understanding GDP and real GDP. I have listed 3 statements below, can someone tell me if those makes sense ?</p>

<ol>
<li><p>GDP Gross Domestic Product is used to get an idea of the nations economic development.</p></li>
<li><p>GDP excludes production that does NOT go through markets hence, GDP is not considered as a good measurement to measure the economic development.</p></li>
<li><p>Real GDP on the other hand is inflation-adjusted unlike GDP alone. and can be the best choice to use to measure a countries Economic development.</p></li>
</ol>

<macroeconomics><gdp><economic-growth>
Understanding GDP vs Real GDP
Illep
# Understanding GDP vs Real GDP

(Asked by: username_0 on 2020-02-04)

I am totally new to Economics. I have issues understanding GDP and real GDP. I have listed 3 statements below, can someone tell me if those makes sense ?

1. GDP Gross Domestic Product is used to get an idea of the nations economic development.
2. GDP excludes production that does NOT go through markets hence, GDP is not considered as a good measurement to measure the economic development.
3. Real GDP on the other hand is inflation-adjusted unlike GDP alone. and can be the best choice to use to measure a countries Economic development.

**Tags:** macroeconomics, gdp, economic-growth

---

## 1 answers

### Answer by username_1 on 2020-02-04. Score: 2

1. Yes but note economic development is more broad than just GDP. GDP measures economic output of a country and higher GDP correlates with higher development and it can be also used as a measure of economic development but more narrowly GDP is just a measure of output.
2. This is correct, GDP can’t measure things like home production. It’s a disadvantage of GDP but I would not necessarily say it implies it’s not a good measure. Sometimes alternative measures can be even less appropriate but if you care mainly not just about output but development there are certainly measures that might be more appropriate. For example, often development economics uses the number of people in absolute poverty as development indicator, or access to education or other factors. There is also Human Development Index (HDI) that includes GDP but tries to also combine more indicators in it such as environmental quality and again education. But for some research purposes GDP might still be the best development indicator - it’s highly case specific. For example, GDP is quite objective and data on it are easily available, even if you would consider HDI superior measure, GDP might still win thanks to data availability as having large number of observations is often important.
3. Yes real GDP is inflation adjusted. This is important because value of money changes across time dollar today is not same dollar as dollar year ago. This situation is like if in physics length of a meter would change every year. Real GDP corrects for this. However, this only adjusts for changes in value of dollar across time. If you are doing some cross-country comparison you should also think about adjusting for purchasing power parity (the fact a dollar can have different buying power across countries).

> **Comments:**
> **username_2**: I think it's valid to worry that GDP no longer is an adequate measure of economic activity.  One has to remember that it was developed (not so long ago) in the context of a heavily-industrialized economy that revolved around widget-production in factories.  It is one thing to say that we have no better measure in terms of rigor and broad adoption (we don't); it's another to say that it still does what it was invented to do (it probably doesn't).  
> **username_1**: @heh I would disagree with this. GDP was always able to capture value of for example services - which is what most developed economies are about. In this sense GDP still does what it is supposed to do. Even in the past GDP was not equipped to handle shadow economy or non-market transactions/goods - that’s one of its biggest flaws, but the size of shadow economy does not depend on how industrialized country is, rather it depends on how easy/necessary it is to avoid the formal economy or what’s the demand for non-market goods (like environment).  
> **username_2**: This is incorrect - the US Bureau of Labor Statistics redefined GDP under Bush Jr (I believe) to include certain previously-ignored sectors such as artistic works, that led to a one-time and significant "boost" to GDP as activities of major sectors like the Hollywood film industry were suddenly accounted for.  The inability of GDP to properly track technological change is also problematic, leading to much controversy around the notion of "hedonic adjustment".  This is aside from shadow economies or household goods and services.  
> **username_2**: I believe GDP measures (or accounting practices - or both) have also been changed by the Bureau of Economic Analysis so that research and development spending, which was once considered an expense, is now tracked as an investment - resulting in revisions to a number of key macro measures.  
> **username_2**: https://www.nsf.gov/news/news_summ.jsp?cntn_id=134742  
> **username_1**: You are completely right on technological change issue. That’s completely valid point but I would not say that makes GDP less accurate today - if anything the pace of technological change was faster during industrial revolution than in the present- at least that’s argument put forward (and well supported) by Robert Gordon in his the rise and fall of American growth. I also did not know that fact about change in methodology- but doesn’t that support my point that the methodology of GDP estimation (since we can’t really just calculate it) evolves to keep track of these changes?  
> **username_2**: These are just examples, and the failure of GDP to fully capture activity in the services sector is partially reflected in the "Hollywood bump" -- which, again, only happened this century.  The trouble with having to continually update an inadequate metric is that there is a necessary lag, which in the case of GDP appears to be something on the order of 50 years.  In the meantime, policy is being written on the strength of what the out-dated metric says year-over-year.  And this doesn't even get into the fact that these updates are not uniform across the globe, in scope or pacing.  
> **username_2**: Again - not to dispute that GDP is the best we've got, especially for interjurisdictional comparison.  But it is hardly a settled question that it is adequate - I would say that what we're really doing is just hoping and praying that the uncounted segments of the economy change more slowly than our definition of the metric does.  Which is probably not the case, but also not a matter we can settle using the woefully restrictive comments feature on StackExchange.  :)  
> **username_2**: Literally googled "Hollywood bump" and found a source, at last.   https://www.hollywoodreporter.com/news/hollywood-creative-industries-add-504-662691  
> **username_1**: @heh I think this are all good (+1) points in saying that GDP is imperfect and I completely agree on all these points, but I still don’t see how this would imply that GDP would be less applicable to modern economy in principle than to industrial economy. I am not saying that might have not occurred empirically for example there is large shift in preferences for non-market goods like environment in developed countries - but I would also not say it’s because GDP was developed for industrial economies it’s somehow automatically less relevant now especially given the methodology is being updated  
> **username_0**: So as a summary do you all agree to use the Real-GDP to measure economic activity ? Also, I learnt about GDP per capita. Is this a better measurement to compare  economic activity of countries than Real-GDP+PPP ?  
> **username_1**: @Illep you can have real GDP per capita +PPP yes per capita GDP is definitely better as we usually care about welfare per person not state per se. however even per capita GDP needs to adjust for inflation or PPP. I think for many practical purposes it’s good measure of economic activity but there are definitely occasions where you want to go for something different. Usually it’s always best to compare economic development across multiple dimensions. GDP has great practical use in sense it’s easy to calculate, its relatively rigorous measure and its recorded for long time but it has flaws too  
> **username_0**: This might be a dumb question, sorry i am a newbie. Does Real-GDP have issues with not considering shadow economies and non market transaction ?  
> **username_1**: @Illep we’ll issue is that GDP (real, nominal or however adjusted) simply ignores these. From a point of GDP shadow economy or non-market transactions (NMT) do not exist because they are not officially recorded. So while in Amsterdam price of joint enters GDP in Italy it does not because it’s not part of formal economy. This creates a problems. However, note these problems arise from the fact that shadow economy is by definition hard/impossible to measure so while this is serious drawback of GDP there is no simple way how to correct for it. In NMT the measurements can be sometimes make but...  
> **username_2**: @Illep, these are all challenges for GDP that are not trivial to address and as a result, one should simply keep them in mind.  I cannot recommend a "better" alternative to GDP, suitably adjusted (e.g., using Real GDP for intertemporal comparison, PPP for interjurisdictional comparison).  As with any analysis, it is just important to understand the limitations behind the numbers rather than take them at face value.  
> **username_1**: It is difficult to rigorously calculate value of let’s say clean air. It’s not impossible, but it requires serious econometrics and involves a lot of uncertainty making measures of NMT always open to criticism and it also makes it extremely hard to agree on single measurements of those. So the point is that while you should be aware GDP has these flaws it might still be the best thing around in many cases (but definitely not always). You should always think hard whether you should not include additional measures or replace GDP altogether in your analysis. Answer might change from case to case  
> **username_2**: @1muflon1 Leaving aside preference shifts, "hedonic adjustments" and the like, I don't think it's controversial to say that developed economies have transitioned away from the sector allocation that was prevalent in the post-WWI era.  This is ultimately a matter of debate, but what is certainly clear is that if even such a keystone metric as GDP is subject to definitional reform, it should be used with care and full understanding of what it does and does not capture.  That's a point on which we both clearly agree. :)  

---

