Gross Domestic Product (GDP) is the measure of country’s economic activity, calculated as the value of all final products (goods and services), which have been produced within a certain period of time in the country. The basic formula for computing GDP, according to the expenditure-based approach, is Y = C + E+ I + G, where C is consumer spending, E represents net exports (the difference between the values of exports and imports), I is the industry investment, or the purchase of new capital for future production, and G stands for governmental expenditures. Income-based approach, on the other hand, evaluates GDP as the value of earnings from the factors of production, adding taxes and subtracting the amount of subsidies granted.
The major problem with GDP is its inability to account for illegal products and services, home production and for the impact on the environment. Moreover, GDP does not fully reflect country’s well-being, because it does not show the distribution of its value among the population and fails to distinguish between the types of the goods produced in the economy.
Gross Domestic Product or GDP is the measure of all the goods and services, which have been produced in a country within a certain predefined period of time. GDP can be calculated using two different approaches: income-based and expenditure-based. According to the expenditure-based approach, GDP is computed as the sum of expenditures of private consumers, businesses (industry investment), government (governmental spending) and non-residents (net exports). Income-based approach, defines GDP in terms of the earnings in the economy. It is comprised of the income from labour and capital (factors of production), adjusted for taxes and subsidies. However, the values of GDP obtained using these two methods usually do not coincide. The difference in GDP calculated according to expenditure-based and income-based approaches is called statistical discrepancy. In order to reconcile the two values, it is common to halve statistical discrepancy and to add one half to the smallest of the two numbers, while subtracting the other half from the greater one. The resulting number is considered the true GDP measure. Nevertheless, GDP does not reflect economic activity, as it account for non-market economic transactions, such as illegal businesses and self-employment. It also does not reflect the state of the environment and income distribution in the country.