Learn about GDP

The full form of GDP is Gross Domestic Product. A country’s Gross Domestic Product is the total monetary value of all final economic goods and services produced during a given period in local currency. 

GDP is the broadest measure of economic activity in a country. It indicates private expenditures, government spending, investments, as well as net exports.

In addition to indicating a country’s economic health, the GDP also indicates its living standard. In other words, as the GDP increases, so does the living standard of the people in that particular country.

GDP provides key guidance to policymakers, investors, and businesses when making strategic decisions, despite its limitations.

History

During the English-Dutch war of 1654-1676, William Petty invented GDP as an in-depth tool to curb unfair taxation. The concept was further developed by Charles Davenant. Simon Kuznets, an economist from the United States, developed the modern concept in 1934. At the Bretton Woods conference in 1944, it was adopted as the primary indicator of an economy.

Types of GDP

There are several types of GDP:

• Nominal GDP – An economy’s nominal GDP is calculated using current prices to assess economic production. This means both inflations and deflations in a given year are taken into account during calculation.

A comparison of quarterly output within the same year is done by using the nominal GDP.

• Real GDP – An economy’s Real GDP is defined as the number of goods and services produced in a given year, with prices held constant from the previous years so that inflation or deflation can be separated from the output. 
• Gross National Product (GNP) – A country’s GNP measures its residents’ output regardless of where their economic activity is located. The investments made by a country’s residents in foreign countries count towards the GNP. However, investments pumped into the country from foreign residents do not. In other words, while GDP is measured by location, GNP is measured by nationality.
• GDP per capita – GDP per capita measures the country’s economic output per person. By calculating the amount of output or income per individual in an economy, we can determine the average productivity or living standard of the economy.
• GDP growth rate – GDP growth rate measures an economy’s growth rate over time by comparing the annual (or quarterly) changes in its economic output. Economic policymakers typically express this measure as a percentage rate since GDP growth is thought to be closely tied to inflation and unemployment rates.

Components of GDP

The main components of GDP are –

• Consumption (private)
• Fixed investment
• Government purchases (i.e. government consumption)
• Change in inventories
• Net exports

Functions of GDP

Functions of Gross Domestic Product are –

• A country’s gross domestic product is a measure of its economic health.
• A country’s GDP is the total value of all products and services produced within its borders for a given period of time.
• GDP can be used by economists to determine whether an economy is growing or going through a recession.
• An economy in decline means lower earnings and lower stock prices for investors.

How to calculate GDP?

There are mainly three ways to calculate the GDP of a country –

• Expenditure Approach

The most popular GDP formula is the expenditure approach, which is based on the money spent by various groups in the economy.

GDP = C + G + I + NX

Here,

C = Consumer spending or all private spending within a country’s economy

G = Total  expenditures by the government

I = The summation of a country’s investments spent on capital equipment, inventories, and housing.

NX = Net exports

• Product (Output) Approach

An approach based on production is essentially the reverse of an approach based on expenditures. A production approach estimates economic output instead of measuring the inputs that are associated with it, deducting the costs of intermediate goods consumed in the process. 

• Income Approach

The third way of calculating GDP is the income approach, which sits in the middle of the other two. The income approach measures all the factors of production, such as rent collected by landowners, wages paid to workers, and the profit of corporations.   

GDP = Total national Income + Depreciation + Net foreign factor income + Sales tax

Drawbacks of GDP

• Transactions outside the market are excluded.
• Lack of information regarding whether or not the nation’s growth rate is sustainable.
• From the analysis, income inequality in society is not represented.
• Treating the replacement of depreciated capital in the same manner as creating new equity.
• Inadequate accounting for all the costs incurred by production or consumption of goods or services, such as the effect on human health and the environment. 

GDP in India

In India, the Gross Domestic Product (GDP) is calculated by the Central Statistics Office. There are two methods for calculating India’s GDP, one using economic activity (at factor cost), and the other using expenditure (at market prices).

With a GDP of $2.66 trillion, India is the world’s sixth-largest economy, surpassing Italy and France for fifth place in 2021.

Conclusion

GDP is, therefore, the total monetary value of goods and services produced in an economy during a given time. The growth of GDP alone does not reflect the development of a nation or the well-being of its citizens, but it does reflect the nation’s economic health. In this material, we have learned about the GDP full form and the functions and drawbacks of GDP.

Modifications have been made to the GDP formula to increase its accuracy and specificity over the past decades. GDP calculation methods have also undergone significant changes since their conception. As industry activity and the usage of intangible assets evolve, calculations are made to keep pace.