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It's a single number with a huge amount of significance.
Its creators warned people not to give it the kind of significance it has today, but those warnings have been forgotten.
We're suffering for it, too.
I'm going to show you where "GDP" comes from, what it signifies, and how it's calculated.
By the end, hopefully the number will be far less daunting.
What is gross domestic product?
GDP stands for "gross domestic product".
It is an estimate of the total (i.e. gross) amount of goods and services that are produced in an economy in a specific time-frame.
So, quarterly GDP refers to the economic production that has occurred in a three-month period, and annual GDP refers to a 12-month period.
Why do we care about it?
Because it lets us track how the economy is performing and changing over time, and how much income we're earning from it all.
That's important for a whole range of reasons, which we'll get to.
But first, I want to show you how to calculate GDP.
And to do that, I'm going to show you where the number originated.
A little Australian history
It's strange to think about, but economists haven't been estimating GDP for that long.
It wasn't until the 1930s and 1940s that the number was developed.
But that's not to say statisticians hadn't tried, before then, to estimate a nation's economic output or "national income."
In Australia, a man called Timothy Coghlan, in his role as first government statistician for New South Wales, which he held from 1886 to 1905, was a pioneer of national income estimates.
In 1949, the economist Heinz Arndt looked back at Coghlan's efforts to start producing annual estimates of the national income of NSW in 1887.
The task Coghlan had set himself was huge, because he had to compile his figures without any income tax data (income tax wasn't introduced to NSW until 1897).
But he'd created a foundation of rudimentary statistics, and he used them to generate other estimates for things like output by industry, and general consumption.
"It would seem that his estimates were the first official estimates of national income anywhere, and he also seems to have been the first to have attempted parallel estimates of national income, output and expenditure on lines at least approaching modern techniques," Arndt argued.
Unfortunately, Coghlan's work wasn't sustained.
But let's jump to the 1930s.
That's where the story of GDP properly starts to take shape.
It's easy to forget now, but in the Great Depression politicians didn't have access to quality statistics so they couldn't say how bad the economic situation really was.
In the United States, it took Congress to ask an expert, in 1932, to produce estimates of "total national income" so they could get a clearer picture.
That task fell to Simon Kuznets, an young Russian-born economist, and staff from the National Bureau of Economic Research.
The project set Kuznets on the path to winning the economics version of the Nobel Prize decades later.
The economist delivered his report in early 1934, and a few months later, in a more readable version, he explained how data-poor US officials had been before the project was commissioned.
"How extensive was the contraction in the volume of economic activity, year by year, from the peak attained in 1929?" he asked.
"What was the impact of the current depression upon the various branches of the economic system, and upon the various factors of production?
"These questions cannot be answered fully, even with the most skilful utilisation of the available data. But attempts at an all-inclusive statistical picture can be made.
"[These] national income measurements represent such an attempt to describe the total activity of the national economy under one aspect, viz, the size of the final net product," he said.
Kuznets's work was so meticulous it set the blueprint for modern national accounting.
He estimated that unemployment had expanded rapidly in the US, from 2.2 million people in 1929, to 5.3 million in 1930, to 9.7 million in 1931, and to 14.4 million in 1932.
He said total labour income had declined by a whopping 40 per cent between 1929 and 1932, and total entrepreneurial income (which included farmers) had declined by even more, at 45 per cent.
He said wage earners were hit harder and earlier than salary earners.
But the incomes of government employees (army and navy employees, postal service employees, civil service officials) held up relatively well during the crash.
And on and on.
A warning about the number: it ignores things of value
But Kuznets also warned in his report against the misuse of his national income measurement.
He said people needed to understand that his method of calculating national income relied heavily on valuing economic work that was bought and sold in the market place.
He said if people wanted a number that captured the total amount of economic activity in the economy they would have to understand that his calculation didn't include things like unpaid housework.
It also failed to account for the distribution of income, so it ignored inequality, he said.
"The welfare of a nation can ... scarcely be inferred from a measurement of national income as defined above," he cautioned.
But over the next few years he refined his work.
In 1937, he produced a report called National Income and Capital Formation: 1919-1935 that included estimates of "gross national product."
Gross national product was designed to capture, in a single number, the value of all goods and services produced by individuals and businesses in the US economy, including by US businesses with operations overseas.
He said gross national product could be measured in three different ways, and they should all produce an identical number.
And after the Second World War broke out, his estimate of GNP was produced annually to help authorities with their war time planning.
It also contributed to the development of GDP, which differs from GNP by counting only the value of goods and services produced within a country.
What about Australia?
Australia's first official estimates of national income were published in 1938.
The first official set of "National Accounts" — which produced estimates of income and expenditure — was published in 1945.
It was the same year in which the Curtin Labor government published its White Paper of Full Employment.
Australian policymakers relied on the new national accounts to maintain full employment for the next 30 years.
And in 1947, the United Nations began to get as many countries as possible to adopt a standardised system of national accounts so the framework could go international.
It helped to establish the international obsession with GDP growth, which had benefits and consequences.
How to calculate GDP
Which brings us to the final section.
Fast forward to 2022 and statisticians calculate GDP using three different approaches:
- Production approach: the total "value added" from goods and services produced in the economy
- Income approach: the total income earned by employees and businesses
- Expenditure approach: the total value of spending by consumers, businesses and governments on final goods and services
Theoretically, they're supposed to produce an identical number because they're all calculating the same national output in different ways, but there's often some difference between them.
To overcome that fact, the ABS produces an average of the three measures to get the best approximation.
The ABS comes up with the numbers by collecting an enormous amount of data from households, companies and government agencies every quarter.
Now, when you hear economists talking about "aggregate demand," they're referring to the expenditure approach.
It's the one that aligns with the famous identity that comes from Keynesian economics:
Y = C + I + G + (X − M)
That identity says the total level of spending in the economy (Y) is equal to consumption, plus investment, plus government spending, plus exports minus imports.
When the ABS publishes its quarterly GDP numbers it produces figures for all three approaches.
But the graphic below shows the June quarter GDP figures with the expenditure approach.
According to the ABS, the economy grew in the June quarter by 0.9 per cent, and it hit an annual pace of 3.6 per cent.
Try adding up the numbers below to see how closely they align with those headline figures.
Did you get it?
It's close enough. And hopefully it's demystified the numbers a little bit.
And now we've established how the numbers are put together, we can start to think of the pitfalls of the method.
And there are many: measurements of GDP are completely blind to things like species extinction, environmental destruction, soil depletion, and rising global temperature, for instance.
But that will be a topic for another article.