What is GDP – 5 Essential details !

GDP – Gross Domestic Product 

We hear the word GDP in news many times . But What is GDP ? In macroeconomics , most economists and policymakers measure the health of the overall economy by examining GDP or Gross Domestic Product . Gross means Total , Domestic means within a country’s borders and Products means value of all goods and services produced .

Gross Domestic Product is the value of all final goods and services produced within a country’s borders in a given year . Note the words ‘ final goods ‘ and ‘ in a given year ‘ .

Final goods : 

Final goods are also called finished goods . A final good is not sold again as a part of another good . For example : If a baker buys flour , sugar , and chocolates is not considered as a final good , because the baker uses these goods to make cakes which is a final good . Sugar , flour and chocolates are intermediate goods used to make finished goods (final goods) .

There are some goods which are used to make a final good but still considered as a final good . These are called Capital goods .

For Example : If a farmer buys a tractor to do farming and produce paddy , etc . The tractor is considered as a final good . Even though the paddy ,etc are final goods . The tractor is considered as capital goods because It is not sold again as a part of another good .

In a given year : 

GDP only counts production in a given year means if GDP is counted for FY 2023 – 2024 , The Production made during the FY 2023 – 2024 is considered .

For Example :  A car manufactured and produced in FY 2022 – 2023 and Resold in FY 2023 – 2024 is not counted in GDP .  GDP only considers the current year produced value of a final good .

Formula to Calculate GDP : 

lets see how the GDP is calculated :

GDP = C + I + G + NX

Where,

 C = Consumption

 G = Government Spendings on Development of Country

  I = Investments made by people on Stocks , Real Estates and Gold , etc .

NX = Net Exports (total exports – imports )

For Example : Lets calculate x country GDP

 Consumption = 1,00,00,000

 Government Spendings = 1,00,00,000

 Investments = 1,00,00,000

 NX = 1,00,00,000

GDP = 1,00,00,000 +  1,00,00,000 +  1,00,00,000 +  1,00,00,000 =  4CR 

Rules to be followed to calculate GDP : 

1. Produced within a Country : 

Goods or services produced or  manufactured within a country are counted in GDP . Goods  produced in one country and sold in our country are not considered in GDP in our country .  For Example : Consider GDP of India , If  a car is manufactured in the US and Sold in India . The Value is not added to the GDP of India . It increased the GDP of the US .

In the same way if a movie is produced in India and made collections (Profit ) in other countries, It increases GDP of India . 

2. Final goods and services : 

Government economists often divide final goods and services into four categories . 

• 1. Consumer Goods and Services 
• 2. Business Goods and Services
• 3. Government Goods and Services
• 4. Net Exports = Total Exports – Imports

Government calculates GDP by adding sales made by all above four final goods and services . 

Government also calculates GDP by adding all incomes of people , companies and government in the economy . 

3. GDP Ignore :

Income generated from black market , illegal goods and unreported transactions such as cash payments that are not recorded , decentralized transactions . 

GDP counts Goods and Services that are  even produced after a disaster . For example : if a building is built right after a disaster like an earthquake , GDP increases .

4. Quantity vs Quality : 

GDP only focuses on the quantity of goods and services produced within a country . It does not consider the quality of goods and services . This is a demerit of GDP .

Calculation of GDP : 

GDP is calculated by different economists and policy makers in different ways to know the economy of a country . But most popular methods of calculating GDP are : 

1. Nominal GDP : 

Nominal GDP is a GDP measured in current prices 

2. Real GDP :

Real GDP is measured in constant ,  or unchanging prices . In other words , Real GDP is a Nominal GDP adjusted for inflation .Real GDP is a more accurate way to measure economic growth of a country , since inflation disturbs the actual prices of goods and services  .

3. GDP per Capita : 

GDP per Capita is calculated by taking a country’s GDP and dividing it with its population .

For example look at the following image depicting GDP of Germany and China  and GDP per capita of both  at the top . 

India’s GDP in 2024 : 

India’s GDP in 2024 is $3.937 trillion and ranks 5th position in world economy . GDP depicts development and quality of life in a country . It grows only when the manufacturing sector develops faster in a country. Government of India already made initiatives to develop manufacture sector by implementing following schemes : 

• Prime minister Employment Generation Program (PMEGP)
• Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE)
• Coir Vikas Yojana (CVY)
• Skill Upgradation and Mahila Coir Yojana (MCY)
• Start-up India 
• Atma Nirbhar Bharat

These Schemes by Government of India helps many entrepreneurs , inventors , small scale businessmen and women to develop their ideas and make them grow , which eventually increases economic growth .

Conclusion : 

GDP continues to be a metric for government and policy makers to calculate the development and planning for future economic growth of its country . But GDP alone is not helpful when studying a country’s economy as it does not consider other aspects like Happiness Index , Quality of goods and services , black market , illegal goods , quality working hours , depletion of a country’s natural wealth , negative effects of pollution ,etcetera. Even though GDP remains as a Primary way to quickly measure the health of an economy . 

FAQs

1. What is a GDP in simple terms?

Gross Domestic Product is the value of all final goods and services produced within a country’s borders in a given year . Note the words ‘ final goods ‘ and ‘ in a given year ‘ .

2. How to increase GDP?

India’s GDP in 2024 is $3.937 trillion and ranks 5th position in world economy . GDP depicts development and quality of life in a country . GSP increases only when the manufacturing sector develops faster in a country.

3. What is the formula for GDP ?

GDP = C + I + G + NX

Where,

 C = Consumption

 G = Government Spendings on Development of Country

  I = Investments made by people on Stocks , Real Estates and Gold , etc .

NX = Net Exports (total exports – imports )

4.  Who calculates GDP in India?

Ministry of Statistics and Programme Implementation, Government of India Calculates GDP in India.

5. Drawbacks of GDP ?

GDP does not consider other aspects like Happiness Index , Quality of goods and services , black market , illegal goods , quality working hours , depletion of a country’s natural wealth , negative effects of pollution ,etcetera.

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