Gross Domestic Product (GDP), the total value of goods and services produced in a country over a period of time. GDP may be calculated in three ways: (1) by adding up the value of all goods and services produced, (2) by adding up the expenditure on goods and services at the time of sale, or (3) by adding up producers’ incomes from the sale of goods or services. However, it is difficult to measure GDP precisely, partly because every country has an unofficial economy, often called a black economy, that consists of transactions not reported to government.

GDP measures a country’s economic activity regardless of who owns the productive assets in that country. For example, the output of United States-owned companies based in Australia is considered part of Australia’s GDP rather than part of the U.S. GDP. Most countries now consider GDP to be the best measure of economic activity. However, until as recently as the early 1990s, the United States, Germany, and Japan commonly used the Gross National Product (GNP) to measure economic activity. GNP is the total of incomes earned by residents of a country regardless of where the assets are located. In other words, the income earned by a U.S.-owned business based in Australia would be considered part of the U.S. GNP, not Australia’s.

Many economists use the GDP to measure the standard of living in a country. They divide a country’s GDP by its population to arrive at GDP per head. The figure is then often converted into U.S. dollars to allow for comparisons between countries. If GDP grows at a higher rate than the population, standards of living are said to be rising. If the population is growing at a higher rate than GDP, living standards are said to be falling. GDP per head does not take the cost of living into account. As a result, some people believe it more accurate to judge living standards in other ways.

One estimate of living standards is the Human Development Index, published for the first time in 1990 by the United Nations Development Program. It uses a scale of 1 to 100 and takes into account GDP per head, adult literacy, and life expectancy.