GDP is an abbreviation of Gross Domestic Product. Good GDP is considered an indicator of a healthy economy in any country. It is the financial summation of all final goods and services that any country has produced in an accounting year. Therefore, growth in GDP shows the overall progress of the country. It is not only a predominant economic indicator to economists but also to investors. Economists can employ GDP to see whether the country experiences growth or decline. Investors can use GDP to make smart decisions related to their investments. Apart from economists and investors, is GDP important for ordinary people in the country? Let’s find out.
What is GDP?
GDP comprises goods and services produced for sale in the market. This includes some non-market products like hospitals or education services provided by the government.
GDP is the total value of goods and services produced in a country within a specific time structure.
GDP has a big impact on the whole economic system. It is one of the essential indicators of the strength of an economy.
Types of GDP
- Nominal GDP – Estimated GDP at current prices is called ‘Nominal GDP’.
GDP at current prices is the market value of the final goods and services produced within the domestic territory during an accounting year, as estimated using the current year’s prices.
- Real GDP – Estimation of GDP at constant prices is called ‘Real GDP’. The GDP at constant prices is the market value of the final goods and services in the domestic area during a year, as rated using the base year prices.
Economists compare real GDP to nominal GDP to formulate a GDP price deflator. This GDP price deflator is used to measure the country’s economy.
How is GDP Measured?
There are three ways of measuring the GDP. They are:
- Output: The aggregate value of the production of goods and services by all sectors of the economy, i.e., agriculture sector, manufacturing sector, fuel, formation, the service sector, and government sector or public sector. This affects the common man because when the demand for the goods decreases, the economic rate also decreases, and the common man’s income also falls.
- Expenditure: The cost of goods and services consumed by the household sector and government and investment in machinery and buildings. This also includes the value of exports, excluding imports.
- Income: The value of the income generated by the labour and employees, mostly in terms of earnings, profit, and wages.
How GDP Affects the Economy of a Country
GDP affects the economy in various ways. It is analysed to measure the economic activities of a country. GDP increases when the produced goods and services are put up in the market. This increases the percentage of the payment received. A decrease in GDP increases the unemployment rate. India has observed good GDP growth in the past few years, which has resulted in higher consumption of goods and services, resulting in more jobs.
Is GDP important to common people?
GDP impacts the common man in various ways.
- When GDP growth is low, it starts a recession period that impacts the commoner’s earning capacity, decreasing wages. It can lead to unemployment, salary deductions, and lower wages.
- A positive effect is seen among the common people when there is a growth in the GDP.
- Due to the high inflation rate, the common man suffers more as they have to live on a lower wage or salary. The inflation rate is high when the GDP growth is low.
- The common man’s income also starts decreasing when the GDP rate decreases.
- The impact of the GDP on the common man becomes negative when the employment rate starts decreasing due to the decreasing rate of the Gross Domestic Product.
- When the GDP rate decreases, the economic rate also impacts the common man due to inflation, income, and production.
Limitations
Is GDP important to ordinary people always? As much as good GDP has positive effects on the country’s economy, it has a few limitations.
- Economists Jean Dreze and Amartya Sen have said that growth in GDP does not necessarily lead to higher living standards in fields such as healthcare and education. Along with this, political liberty does not improve with GDP. In countries such as China, there is good GDP, but there are a lot of political restrictions.
- Since GDP is just an aggregate, it does not take into account how the money is distributed among the common people. A country may have a good economy, but there will be a huge gap between the rich and poor.
Conclusion
GDP plays a crucial role in determining the economic condition of a country. It includes all the activities to earn an income and predominantly affects the employment rate. It primarily impacts the common person’s income, affecting the employment rate. To put it simply, a country with a high GDP is a good economy, while a country with a low GDP is a poor economy. Therefore, growth in GDP is always a good indicator of a healthy economy. A healthy economy is good for the common man to earn an income and live well.