Gross Domestic Product (GDP)

GDP acts as an economic health indicator for a nation. It is equivalent to the monetary measure of the total market value of all final goods and services produced in a country over a given time period. The typical monetary measurement is quarterly or annual. The GDP of a country represents the development scenario and allows policymakers to make informed decisions by analyzing the national income. 

 

Want to learn more and understand the key concept of GDP from a different angle? Have a look at this video! 

 

 

The Key Components of GDP

India has a fast-growing economy, and by analyzing the data provided by GDP, the investors and policymakers address the challenges and work on structuring the reforms. The components in the GDP after proper calculation provide a sneak into the overall economic health and suggest ways to handle them. 

The key components of GDP are:

• Consumption (C): All the essentials like food, clothing, and education are consumed by a household, and all this accounts for a large portion of Indian GDP 
• Investment (I): All the expenses by the businesses over infrastructural expansion to produce goods and services. Capital investments and Foreign direct investments are gateway passes to these investments. 
• Government Spending (G): The expenses made by the government for the advancements in the public sectors such as education, healthcare, or defense. Make in India and Digital India were the initiatives by the government. 
• Net Exports (X-M): The total difference between the export and import of goods and services. When the net export slope is positive, there is an increment in the GDP. 

 

Methods for Measuring the Gross Domestic Product

The methods for measuring GDP are different ways of getting an insight into the economy from various perspectives. There are three different ways of calculating the GDP, and to get a clear picture of the economic state, three of them play an equal role in it. 

The three strategies used to obtain the market value of all the goods and services produced are to consider the individuals and their services. 

Methods for Measuring GDP 

The three primary methods for measuring the GDP are: 

• Production Method 
• Income Method 
• Expenditure Method 

 

1. Production Method (Output Method) 

The output method measures the total value of goods and services produced in different sectors during a specific period. As the name suggests, the economy's total output is calculated using this method, and it tackles the whole measurement on an industry-by-industry basis. To avoid double-counting, a simple value-added method is used where the sum of value added by every industry is put together at each stage. 

Example: If a farmer sells vegetables to a shop owner for $1,000 and the shop owner sells food items made from that vegetable for $1,000, only $500 (the shop owner's value addition) is included in the GDP to avoid double-counting. 

 

2. Income Method 

All the earnings received by individuals and businesses in a year in wages, rent, or profits are added together for calculation by the income method. The total market value of the products by the producers is what they are paid; the total income is the total value of the product. 

Example: If the total wage of a company is 500 crore, rent is 200 crore, interest is 100 crore, and the profits generated are 400 crore, then GDP = 500 + 200 + 100 + 400 = 1,200 crore 

 

3. Expenditure Method 

All or any organized sector buys products all year round, so the expenditure method is based on the same idea. Calculating the total expenditure on goods and services must equal the value of everything produced. All the spending by individuals, businesses, and the government is calculated to give total value. 

The formula for calculating GDP by the expenditure method is: 

 

GDP = C + I + G + (X - M) Where,  C = Consumption  I = Investment  G = Government Spending  X - M = Net Exports (Exports - Imports)

 

Example: If in a year, the household spending C is 6,000 crore, the business investment I is 2,000 crore, and G government spending is 3,000 crore with X - M = Net Exports 1,000 crore, then 

GDP = 6,000 + 2,000 + 3,000 + 1,000 = 12,000 crore

 

What are the Recent Developments in the Indian GDP?

The Indian economy has suffered the highs and lows many times in the past few decades. The COVID-19 fiasco brought about several unexpected turns of events. With the development in the IT industry, several other industries have experienced a significant change in the work force. The shift has contributed majorly to the GDP. The government initiatives in the past few years have been in accordance with the reforms in global technology and trade. India has been known for its import and export business; the early merchants during the ancient period established a strong foundation for trade, which has now been a long-term contributor to the growth scale. The Ministry of Statistics and Programme Implementation (MoSPI) has reflected stability despite the global uncertainties. India's agricultural and service sector is to be held responsible for the economic stability. 

 

What are the key Challenges faced by the GDP in India?

• The high unemployment rate limits the growth.
• The purchasing power of the consumer takes a hit when there is a rise in inflation
• The dependency on global trade makes the nation vulnerable 
• High dependency on the agricultural sector, which is reliable on the weather conditions 
• There are infrastructure gaps, like in rural areas which limit the growth 

 

Explore More 

• Minimum Support Price
• Consumer Equilibrium Utility Analysis
• Public Distribution System 
• Bureaucracy

 

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Frequently Asked Questions (FAQs)

How is the GDP significant to the country?

The GDP of a nation holds a mirror to the economic health, offering a breakdown of the progress made in development. 

What is the frequency of GDP calculation in India?

The GDP in India is calculated on a quarterly or annual basis by the MoSPI. 

What are the factors that can increase the GDP of a nation?

The key factors that can enhance the GDP of the nation are investment in infrastructure, promotion of exports, and encouraging innovation and entrepreneurship. 

What is the impact of the service sector on the GDP?

The service sector includes IT, banking, and telecommunication, which contributes to the GDP majorly.