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Gross Domestic Product

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The Gross Domestic Product (GDP) is the total monetary or market worth of all finished products and services produced within the borders of a country during a certain time period. It is updated on a regular basis to reflect changes in the production structure, relative pricing, and enhanced economic activity documentation. GDP is a measure of the monetary value of a country’s economic activities. The GDP of a country is estimated by taking into account all private and public consumption, government expenditures, investments, private inventory additions, paid-in building expenses, and the international trade balance. The foreign trade balance is the most important of all the components of a country’s GDP.

When the total value of products and services sold by local producers to foreign nations surpasses the total value of foreign goods and services bought by domestic consumers, a country’s GDP rises. When this occurs, a country is said to have a trade surplus. A trade imbalance occurs when the amount of money spent by domestic consumers on foreign goods exceeds the total amount of money that domestic producers can sell to international clients. A country’s GDP is likely to suffer as a result of this condition.

Brief History of GDP

  1. In reaction to the Great Depression in 1937, Simon Kuznets, an economist at the National Bureau of Economic Research, presented the notion of GDP in a report to the United States Congress.
  2. Gross National Product (GNP) was the most extensively used metric at the time. Following the Bretton Woods conference in 1944, GDP was widely accepted as the principal method of measuring national economies.
  3. However, beginning in the 1950s, a number of economists and policymakers began to question GDP.
  4. Most experts, such as Arthur Okun, claimed that GDP is an absolute indicator of economic performance, claiming that any increase in GDP results in a commensurate decrease in unemployment.

Types of GDP

  • Real GDP: Real gross domestic product (real GDP), also known as constant-price GDP, inflation-corrected GDP, and so on, reflects the value of all goods and services generated by an economy in a given year (in base-year prices).
  • Nominal GDP: Nominal GDP is a measure of a country’s economic production that takes current prices into account. In other words, it ignores inflation and the rate at which prices rise, both of which may overestimate the rate of growth. All goods and services counted in nominal GDP are evaluated at the prices at which they were actually sold that year.
  • GDP Per Capita: The GDP per capita is a measure of a country’s GDP per person in its population. It indicates that in a particular economy, the amount of output or revenue per person can be used to assess average productivity or living standards. GDP per capita numbers are available in nominal, real (inflation-adjusted), and PPP (purchasing power parity) terms.
  • GDP Purchasing Power Parity (PPP): Although purchasing power parity (PPP) is not a direct measure of GDP, economists use it to compare one country’s GDP to that of other countries in dollars by a method that considers differences in local prices and living costs to make cross-country comparisons of real output, real income, and living standards.

Estimating GDP

  1. India’s GDP is calculated using two distinct approaches, generating numbers that are similar but not identical.
  2. One on economic activity (At cost) and the other on spending(at market prices) are the two methods.
  3. Among the four mentioned metrics, the GDP at factor cost is the most extensively observed and published.

Formula for Calculating GDP

GDP = C + I + G + IX

Where C = Consumption

I = Investment

G = Government Expenditure

IX = Export – Import

GDP Statistics of India

The Ministry of Statistics and Programme Implementation (MoSPI) has published the First Advance Estimates (FAE) for the current fiscal year (2021-22). According to the MoSPI, India’s GDP will increase by 9.2 percent in 2021-22. GDP enables policymakers and central banks to identify whether the economy is contracting or expanding, whether it needs stimulus or restraint, and whether a threat such as a recession or inflation is approaching. GDP, like any other indicator, is not without problems. Governments have experimented with a range of nuanced improvements over the last several decades in an attempt to increase GDP precision and specificity. Since its beginnings, GDP calculation methodologies have evolved to keep up with changing measures of economic activity as well as the production and consumption of new and developing types of intangible assets.

Pros of GDP

  • GDP is uniform and is therefore easy to calculate and measure across all countries.
  • It also helps analysts and policy-makers. It easily guides, adjusts, and implements economic policy.
  • It is widely used in different parts of the world.
  • It is a good indicator of the state of the economy and the provision of services.
  • A useful figure for comparing countries.

Cons of GDP

  • It does not consider the real value of money as it uses price × volume.
  • It does not accurately measure the changes due to the adjustment with inflation.
  • It can hide inequalities as it does not show the distribution of wealth or determine a nation’s poverty.
  • Sometimes, the value of GDP can be misleading as people develop a misconception that if the GDP of the country is high, then the lifestyle of the country will be good, but it is not true in every case.

FAQs on Gross Domestic Product

Question 1: Why is the primary sector called agriculture and the related sector?


Because agriculture, dairy, fisheries, and forestry produce the majority of the natural items we consume. This industry is also known as agriculture and related areas.

Question 2: Which occupation belongs to the primary sector?


Dairy, fishing and forestry.

Question 3: How do we get the Gross Domestic Product (GDP) of a country?


The Gross Domestic Product of a country is calculated by adding the output from the three sectors.

Question 4: Write a short note on the final goods.


These items are intended for final consumption. Biscuits, for example, are a final good. These are available for purchase in the market. It already includes the value of the intermediate items. The value of final goods and services is considered in calculating a country’s GDP. GDP is calculated by adding the output of three industries.

Question 5: Write a short note on intermediate goods.


Intermediate items are depleted in the production of finished goods and services. The value of final products includes the value of all intermediate goods employed in the production of the final goods. Wheat and wheat flour, for example, are intermediary items needed in the production of biscuits in a factory. To avoid double counting, intermediate items are not included in GDP. For example, if the value of wheat and wheat flour is counted, the value is counted twice or three times.

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Last Updated : 02 Nov, 2022
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