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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.

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  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).

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    $\begingroup$ 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. $\endgroup$ – heh Feb 4 at 18:45
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    $\begingroup$ 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. :) $\endgroup$ – heh Feb 4 at 18:48
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    $\begingroup$ Literally googled "Hollywood bump" and found a source, at last. hollywoodreporter.com/news/… $\endgroup$ – heh Feb 4 at 18:49
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    $\begingroup$ @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 $\endgroup$ – 1muflon1 Feb 4 at 18:53
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    $\begingroup$ @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 $\endgroup$ – 1muflon1 Feb 4 at 18:59

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