An Overview of the GDP of a nation is crucial in understanding the economy of that nation. But, do you know how GDP is defined and how can it be an insight into the Economy of a nation?
GDP stands for Gross Domestic Product and it is the final value of total authorized goods and services officially produced within the territory of a country. It calculates the aggregate production; hence it works as economic indicator as well.
Let’s assume that there is a tree planted at some place within our country, but its mere presence does not result in an increment of GDP. However, if the tree is cut and its parts are sold, then there is an increment in GDP, resulted due to the exchange of money. Because, it directly enhances the economic activity. Whenever we purchase a bike and pays for it, there is an increase in GDP. Then, we would purchase petrol to ride the Bike, which would again result in increase in GDP. Conversely, the bike would generate air pollution, inhalation of which would make us sick. We would consult the doctor and would pay consultation fee, an activity which would further enhance the GDP. Therefore, more the sale of bikes in the country more will be the GDP and the Government also focusses on this aspect as it is one of the measures to increase GDP.
The Growth Rate fixed in every Financial Year is basically the increment in the GDP value. For example, the value of tires in a car is added when the car is being manufactured. Thereafter, the value of tires is re-added into the price of car, which is basically the enhanced value. It implies that the value of raw material is deducted from the value of finished product. Whatever, price is achieved is then added to the GDP. There is production of goods and services every year in any economy and there is comparatively less production for the purpose of export. In this manner, the GDP reflects the lifestyle of the concerned nation.
There are two ways of calculating GDP: First method is based on constant price, wherein, the rate of GDP and cost of production is determined on the basis of the value of a base year. Second method is based on the current price, wherein, inflation in the rate of production year is added into the GDP.
Gross Value Addition (GVA) = Total value of Production (Cost of the total sale of goods and services) – Intermediate consumption
The aggregate gross value of different economic activities is called production cost at Gross Domestic Product, in which, the addition of indirect tax and deduction of subsidy makes it product cost at market value.
Gross Domestic Product (GDP) on Production cost + Indirect Tax – Given subsidy = “Gross Domestic Product (GDP) on producer or market price”
Now, the question arises as to how the GDP is fixed in India, which in truth fixes out income.
In India, the rate of GDP is fixed on the basis of average enhancement or decline in the production in agriculture, manufacturing and service sector. If we say that there is a 2% increase in GDP of India, then it implies that the economy of India is growing at the rate of 2%. But often, in these statistics the inflation rate is not included. In India, the GDP is calculated in every three months and the figures of GDP depend on production rate of major economic sectors.
This fact cannot be denied that due to globalization, the income of the people is not limited to the extent of one country. People have now started earning abroad. This is why, in order to calculate National Income, Gross National Product is also considered. While considering the GNP, the value of production of goods and services in foreign countries is also added, no matter whether goods and services are utilized within or outside the country. As mentioned above, the inflation rate is also taken into consideration while calculating GDP. In order to maintain the ups and downs in costs of goods, many measures have been constructed. To reduce the effect of inflation, GDP deflector is also added. GDP deflector is a method which determines the level of cost of all domestic production of goods and services. It is used for adding actual increment in GDP in a given time period. For its calculation, there is fixation of a base year.
According to the economic condition of the country, the base year keep on changing from time to time so that every type of economic activity can be added in the GDP. In order to facilitate comparative compilation of GDP data at international level, every nation has to follow the System of National Accounts (SNA) 1993. It is released together by United Nations, European Union, International Monetary Fund, Organization for Economic Cooperation and Development and World Bank.
Do you know that a better indicator of GDP is Purchasing Power Parity (PPP)? Market Exchange Rate is determined by daily demand and supply of currency, which is mainly fixed by global trade of goods. However, there are certain goods which are not traded globally. The cost of such goods which are not internationally traded is comparatively lesser in the developing countries. In this condition, the conversion of GDP in dollar at exchange rate decreases the overall scenario of GDP of a developing country. Under the ambit of Purchasing Power Parity (PPP), the exchange rate is determined by comparing the amount of money paid for the purchasing same goods in two different countries.
GDP is represented by economic production and development. It greatly, influences every person and economy of the nation. Whether the GDP increases or decreases, it has an impact on share market in every situation. If the GDP is in negative, it stresses the investors, because negative GDP is an indicator of recession in the economy of that country. Due to this, the production declines, unemployment increases and the annual income of every person is adversely affected.
DISCLAIMER: JPL and its affiliates shall have no liability for any views, thoughts and comments expressed on this article.