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Gross Domestic Product Dr Awdhesh Singh, IRS (Retd.) Director, Awdhesh Academy, Former Commissioner, Customs & Indirect Taxes (Central Excise/GST)
Meaning of GDP The Gross Domestic Product (GDP) of a country provides a measure of the monetary value of the goods and services that country produces in a specific year. . GDP is an important statistic that indicates whether an economy is growing or contracting Governments often release an annualized GDP estimate for each quarter and also for an entire year to indicate the health of the economy.
How GDP data help decision making .Providing a quantitative figure for GDP helps a government make decisions such as whether to stimulate the economy by pumping money into it if the economy is not growing fast enough and needs a stimulus In the case that the economy is getting overheated, a government could also act to prevent it from doing so. .Businesses can also use GDP as a guide to decide how best to expand or contract their production and other business activities Investors watch GDP since it provides a framework for investment decisions.
Calculating GDP Based on Spending One way of arriving at the GDP of a country is to calculate the monies spent by the different groups that participate in the economy. For instance, consumers spend money to buy various goods and services, and businesses spend money as they invest in their business activities, by buying machinery, for instance. Governments also spend money. All these activities contribute to the GDP of a country Also, some of the goods and services that an economy produces are exported overseas. And some of the products and services that are consumed within the country are imports from overseas. The GDP calculation, therefore, also accounts for spending on exports and imports. Thus, a country's GDP is a measure of consumer spending (C) plus business investment (I) and government spending (G) as well as its net exports, which is exports minus imports (X-M).
The Income Approach for calculating GDP Income earned by all the factors of production in an economy includes the wages paid to labor, the rent earned by land, the return on capital in the form of interest, as well as an entrepreneur's profits. An entrepreneur's profits could be invested in his own business, or it could be an investment in any outside business. All this constitutes national income With the income approach, the GDP of a country is calculated as its national income plus its indirect business taxes and depreciation, as well as its net foreign factor income.
Adjustment for Inflation .Considering that GDP is based on a monetary value of an economy's output, it is subject to inflationary pressure. Economists have come up with an adjustment for inflation to arrive at an economy's real GDP, rather than its nominal GDP. By adjusting the output in any given year for inflation so that it reflects the price levels that prevailed in a reference year, called "the base year," economists adjust for the inflation effect. This way, it is possible to compare a country's GDP from one year to another and see if there is any real growth.
Drawbacks GDP is a convenient way to get an idea about the state of an economy, it is by no means a perfect approach. There is no accounting for activities that are not part of the legalized or formal economy. .Some activities that provide value are not factored into GDP. For instance, if you hire a maid to keep your house clean, a cook to prepare your meals and a nanny to care for your children, you will pay these hired helpers and such payments factor into GDP. On the other hand, if you do your own cooking and cleaning and care for your children without hiring a nanny, these activities do not contribute to GDP.
References .https://www.investopedia.com/articles/investing/ 051415/how-calculate-gdp-country.asp