Everything You Need to Know About GDP

Gross Domestic Product or GDP is a parameter that measures economic growth. 

In technical terms, GDP is the final monetary value of all goods and services produced within the geographical boundaries of a country within a certain period (like one accounting year). This excludes everything related to foreign embassies located in the country or imports. 

A country’s GDP can be measured in 3 different ways – the production approach, the expenditure approach, and the income approach. The final statement thus prepared can be used to compare the overall economic growth of the two countries. 

This article discusses the methods of calculating GDP, focuses on the GDP of India and talks about GDP per capita. 

Methods to measure the GDP of a country

There are three methods or approaches to measure a country’s GDP according to the guidelines of the International Monetary Fund. These include –

1. The Production or Output Method:

The Production or Output method measures the national income in terms of the monetary value of overall goods produced within the geographical territories of a country. The formula used for calculating the same is given below –

GDP of a country = Real GDP – Taxes + subsidies

Real GDP is measured using adjusted prices with the base year to keep the inflation in mind and give more accurate results. On the other hand, Nominal GDP is measured using the current year’s prices. 

2. The Expenditure Method:

The expenditure method deals with GDP and spending. It is the calculation of all the money spent on goods and services within the geographical boundaries. It takes four components into account. These are consumption, investment, government and export minus imports. These are explained below –

• Consumption Expenditure (C) includes all the expenditures incurred by the household units or the consumers, for example, Groceries, furniture etc.
• Investment Expenditure (I) – Business or Industrial units are investing in their activities in the form of capital, land, labour etc. is known as investment expenditure. For example, ABC limited buys 100 kg of potatoes for processing. 
• Government Expenditure (G) – Government expenditure includes all the spending on the development work and mainly transfer payments made. For example, The government of India donates $10,000 to a country in need. 
• Net Exports (E-I) – Net export calculates all the expenditure on the exports to other countries while deducting the imports of the goods by the country. 

Adding all these components together will give a country’s GDP according to the expenditure method.

3. The Income Method:

Unlike the expenditure method, the income approach calculates the total income generated in the economy through the factors of production, i.e. land, labour, capital and entrepreneur. 

The GDP calculated through this method is the summation of national income, sales tax, depreciation and net foreign factor income. The product thus obtained will give the GDP at factor cost. To convert it to the product at market cost, add taxes and deduct subsidies from it. 

The formula is: GDP (Factor income) = National income + sales tax + depreciation + net factor income from abroad

GDP (Market cost) = GDP (factor cost) + (Indirect taxes – subsidies) 

Here, net factor income from abroad denotes the difference between GNP and GDP. That means the difference between the income generated by foreign citizens outside their country of origin and income generated by Indian citizens outside the boundaries of India if talking in the context of our country.

This data is collected and calculated by any country’s central statistical organisation (CSO). In India, it’s monitored by the Ministry of Statistical and Program Implementation. 

GDP of India

The GDP of India rules down to the contribution made by three sectors – Primary, secondary and tertiary sectors. The tertiary sector contributes the most to the GDP of the country. The data collection for this calculation is done through various annual surveys of the industries and other units while cooperating with other departments and cells. 

The GDP of India is calculated through either the production method or the expenditure method. Today, the GDP of India stood at $2622.98 billion in 2020, thus standing at the 7th position in the world. It is projected to reach $3450 billion by 2023. 

GDP per capita

GDP per capita means the country’s entire economic output per population of the country. GDP per capita helps in knowing the standard of living of people living in a country, thus measuring their socio-economic status and quality of life. The formula for GDP per capita is given below –

GDP of a country and the population of the country:

A developed nation has higher per capita GDP. India’s GDP per capita was last recorded to be $1797.76. On the other hand, the USA has a GDP per capita of $58,510. 

Conclusion

The GDP of a country is the final monetary value of all goods and services produced within the geographical boundaries of a country within a certain period. 

There are three methods of calculating the GDP of a country – Income, Output and Expenditure approach. India uses the latter two for the calculation of the same. 

GDP per capita of a country means the entire economic output of the country divided by the country’s population. It helps in measuring the prosperity of a nation.