Contents
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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