Gross domestic product (GDP) is mainly used to denote the health of the economy of a country. It is calculated by countries around the world in their own way as an estimation of all finished goods and services produced within a country’s borders. Defining and calculating GDP depends on two different points, which each country calculates on the basis of its different sources, in which monetary value is also described.
The Indian organisation Central Statistics Office has a major contribution to the measurement of Gross Domestic Product (GDP). This will be discussed as follows.
Gross Domestic Product (GDP) is used to describe the economic situation of any country. The expansion of the economy is indicated by the growing GDP of that country. Gross Domestic Product (GDP) plays a major role in making better investment decisions. The concept of Gross Domestic Product (GDP) was introduced in 1934 by an American economist named Simon Kuznets.
Who Calculates GDP in India?
The main job of the Central Statistics Office is to collect economic data and maintain statistical records. Apart from this, it also performs the main functions of conducting annual surveys of industries and compilation of various indices like the Index of Industrial Production (IPI) and Consumer Price Index (CPI). The main work of the Central Statistics Office is the calculation of the country’s GDP and other figures.
In addition to this, the various federal and state governments are responsible for collecting and compiling data. This is accomplished by coordinating agencies and departments for which specific data points for manufacturing, crop yield, or commodities are compiled.
GDP Calculation Formula
GDP is calculated using the following formula:
Y = C + I + G + (X − M)
- C here denotes consumption, which includes services, non-durables and durables.
- G represents government expenditure, which includes salaries of employees, construction of roads and railways, airports, schools and expenditure on the army.
- I denotes the expenditure, which consists of expenditure on housing and equipment.
- The difference between total imports and exports is called net exports, denoted by (X-M).
- Here, Y stands for Gross Domestic Product.
GDP Calculation Methodologies
GDP, or Gross Domestic Product, can be measured in three ways:
1. Income Approach
All economic expenditures should equal the entire revenue created by the production of all economic products and services, according to the income approach to computing gross domestic product (GDP). It also includes the output of the final product or service, which is called the producer’s input.
GDP=Total National Income +Sales Taxes+Depreciation +Net Foreign Factor Income
2. Expenditure Approach
This is the exact opposite of the income approach, which starts with money spent on goods and services. We also measure the overall expenditure on goods and services made by all entities within the country’s domestic borders.
GDP= Consumption Expenditure + Investment Expenditure + Government Expenditure + Exports minus Imports (EX-IM)
3. Output (Production) Approach
The output approach focuses on determining a country’s total output by calculating the total value of all commodities and services produced. The income approach compares a country’s overall output to the total factor income obtained by its population or citizens.
GDP (as per output method) = Real GDP (GDP at constant prices) – Taxes + Subsidies
Figure of Factor Cost
The factor cost figure is generated by accumulating data for each sector’s net change in value over a given time period. This includes mainly eight areas: agriculture, forestry, and fishing, mining and quarrying, manufacturing, electricity, gas, water supply, and other utility services, construction, trade, hotels, transport, communication and broadcasting, financial, real estate, and professional services, public administration, defence, and other services.
The Methodology Used to Calculate India’s Gross Domestic Product
India’s GDP calculation process is done in two different ways, in which different figures are seen. The first calculation is made on the basis of economic activity, which is done at factor cost. The second method is calculated on expenses, which are based on market prices. The current market price is used to calculate nominal GDP and inflation-adjusted for real GDP. On the basis of these four figures, GDP at factor cost is calculated, and then it is published.
Limitations of GDP
The level of prices in a country is not taken into consideration by GDP. The cost of living rises as a result of inflation, lowering one’s standard of life. GDP, as a measure of welfare, does not account for the loss of welfare as a result of this reduction.
- GDP does not include any welfare indicators.
- Only market transactions are included in GDP.
- The distribution of income is not described by GDP.
- GDP isn’t a good indicator of what’s being created.
- Externalities are ignored by GDP.
- The Social Progress Index measures how much people have progressed in their lives.
Conclusion
GDP is significant because it provides information on the size and performance of an economy. The pace of increase in real GDP is frequently used as a gauge of the economy’s overall health. An increase in real GDP is viewed as a sign that the economy is performing well in general.
GDP is used to determine the growth of an economy, which mainly reflects a country’s total output during a year. It is considered to be a better measure not only for the growth of the economy but also for assessing the performance of the economy.