Gross Domestic Product

Introduction

• Gross Domestic Product (GDP) is the standard measure of the value of final goods and services produced by a country during a period (quarterly or annually). 
• It can also be defined as the market value of all the final goods and services produced within a country in a given time period. Here, ‘market value’ means the use of market prices to value production, ‘final goods and services’ means any goods and services produced for its final user, and not for intermediate consumption, within a country. 

Significance of GDP

• GDP represents the economic health of a country. Economists analyze GDP to find out whether the economy is in recession, depression or boom.
• It presents a sum of a country’s production or aggregate production level of an economy. 
• While framing fiscal and monetary policies, policymakers look to GDP when contemplating decisions on interest rates, tax and trade policies.
• GDP helps investors to manage their portfolios by providing them with guidance about the state of the economy.

Key facts about GDP

• GDP includes only final goods and services.
• Goods and services produced for intermediate consumption are not accounted for in GDP. 
• It only measures aggregate domestic production.
• To have a proper or actual value of domestic production, GDP is always calculated at a stable base year price.
• It gives an idea about the economic size of a country.  
• Conventionally, the GDP of developing nations is greater than the gross national income (GNP).

Methods of calculating GDP

• Production Method: Also known as the Value Added Method or Output Method. This method includes the value of the final product of the primary, secondary and tertiary sectors. It excludes transfer payments as there are no goods and services produced in return. 

• Income Method: It measures GDP by totalling all the domestic income earned by the private as well as government sectors. It includes all the factor incomes such as wages and salaries, rent, interest and profit. 

• Expenditure Method:  It attempts to calculate GDP by evaluating the sum of all final goods and services purchased in the economy. It excludes intermediate consumption or expenditure on intermediate goods & services.

Conclusion

• While GDP is the single most important indicator to capture these economic activities, it is not a good measure of societies’ well-being and only a limited measure of people’s material living standards.
• Countries often calculate GDP in their own currencies. In order to compare across countries, these estimates have to be converted into a common currency.