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Gross Domestic Product

This article discusses the important concepts of Gross Domestic Product like the Key Facts, Significance, Problems with GDP etc.

Gross Domestic Product

  • Gross domestic product (GDP) is the standard measure of the value of final goods and services produced by a country for a particular time
  • Simply put, it is the market value of all the final goods and services produced within a nation in a given time
  • Here, market value means the use of market prices to value production
  • Final goods and services are produced for their final user and not for intermediate consumption
  • The calculation of GDP can be done on a quarterly, monthly, half-yearly, or annual basis
  • In India, GDP is computed at the Country level (Nations GDP), State level (Gross State Domestic Product), and the district level (District Gross Domestic Product)
  • Commonly, GDP is measured in domestic currencies

Important Points

        The idea of computation of GDP at the District level was first put forward by Niti Aayog as it helps to eliminate the imperatives forced by the absence of solid information on the most recent circumstance at the region level

      Moreover, such decentralised mechanisms of computation of GDP help in facilitating better resource management for policy implementation at micro and macro levels

     In India, GDP estimation is performed by the Central Statistical Office (CSO). Under the Fiscal Responsibility and Budget Management Act 2003 and Rules thereunder, the Ministry of Finance uses the GDP numbers (at current prices) to peg the financial targets

Key Facts about GDP

  • GDP takes into account only final goods and services
  • Goods and services produced for intermediate consumption are not considered for  GDP
  • It only measures aggregate domestic production
  • GDP is always calculated at a stable base year price to compute a proper or actual value of domestic production
  • It gives an idea about the economic size of a nation
  • GDP still is not a good measure of social well-being
  • Conventionally, the GDP of developing nations is greater than gross national income (GNP)

Significance of GDP

  • GDP is a measure of the economic health of a country
  • A negative GDP growth reflects bad signals for the economic status Economists analyze GDP to figure out whether the economy is under recession, depression, or boom
  • It puts forward a sum of a country’s production, in other words, the aggregate production level of an economy
  • It can also be used as an indicator for most governments and economic decision-makers for planning and devising various policies
  • GDP helps the investors to manage their portfolios by offering them guidance regarding the state of the economy
  • While framing fiscal and monetary policies, policymakers take note of GDP when contemplating decisions on interest rates, trade policies, and tax

GDP Growth Rate

  • In India, contributions to GDP are broadly categorized into three sectors – agriculture, industry, and services
  • GDP is estimated over market prices, and there is a base year for the computation
  • The GDP growth rate calculates the rate of growth of the economy
  • It does this by comparing the country’s GDP in one quarter with that in the previous quarter of the last year
  • The GDP growth rate depends on four major components: personal consumption, private investment, government spending, and net trade
  • In the Indian context, GDP growth is driven by personal consumption, which includes the critical sector of retail sales
  • When the economy expands, the GDP growth rate becomes positive as consumption, investment, government expenditure, and trade volume increase. On the flip side, when the economy contracts, the GDP growth rate becomes negative, and the nation’s economy is said to be slowing down or in a state of recession
  • The GDP growth rate is a valuable measure of economic health. Its value gets changed in the four phases of the business cycle — peak, contraction, trough, and expansion

Problems with GDP

  • The GDP is designed to assess the market as an incentive for a whole scope of items and administrations inside a nation’s lines
  • Since the measurement focuses on market price, many aspects of society—including many aspects that factor into economic well-being—aren’t incorporated in the GDP numbers
  • One of the major problems associated with GDP is that it doesn’t count environmental costs
  • For instance, the price of plastic is low because it doesn’t include the cost of pollution
  • GDP doesn’t measure how these costs impact society’s curriculum
  • Another drawback is that GDP doesn’t include unpaid services
  • It leaves out child care and volunteer work, for example, despite their significant role in the economy and quality of life of a nation
  • Also, GDP does not take into account the shadow or black economy
  • It underestimates economic output in countries where the majority of the population receives their income from illegal activities
  • These products are not taxed and do not show up in government records, and although they can estimate, they cannot accurately measure this output
  • One of the estimates referenced by the Bureau of Labor Statistics presents the shadow economy’s size as around 8.8% of the GDP

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Frequently asked questions

Get answers to the most common queries related to the UPSC Examination Preparation.

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