Gross Domestic Product (GDP)

Gross Domestic Product (GDP)

Produced in the country: GDP of India includes only the market value of goods and services produced in India. For example the market value of apples produced in Kashmir are included in our GDP since Kashmir is in India. The market value of apples produced in California, even if they are sold in Indian markets, are not included in our GDP because California is in the U.S.

Produced during a time period

The GDP of a country measures the market value of goods and services produced only during the specified time period. The goods and services produced in earlier periods are not included.

In India the GDP is measured both annually and quarterly. The annual GDP is for a financial year which is from April 1st of say 2017 to March 31st 2018.

The modern concept of GDP was first developed by Simon Kuznets for a US Congress report in 1934.

Methods of GDP Calculating

1. Expenditure Approach: In this method, the GDP is measured by adding the expenditure on all the final goods and services produced in the country during a specified period. Y=C+I+G+(X−M)

2. The Income Approach: This method looks at GDP from the perspective of the earnings of the men and women who are involved in producing the goods and services. The income approach to measuring GDP (Y) is Y = wages + rent + interest + profit

3. Value-Added Approach: A cup of tea served to you in a hotel is a “final good”. The goods used to produce it , tea powder, milk, and sugar, are “intermediate goods” since they form a part of the final good, the cup of tea. One way to measure the market value of the cup of tea is to add the value produced by each intermediate good used to produce it. The sum of the value added by all the intermediate goods used in production gives us the total value of the final goods produced in the economy.

Value added method

Tea powder + Milk + Sugar = Tea

Value of intermediate goods = Value of final goods

Importance of GDP

1. Study of Economic Growth.

2. Problems of inflation and deflation.

3. Comparison with developed countries of the world.

4. Estimate the purchasing power.

5. Study of Public Sector.

6. Guide to economic planning.

Limitations of GDP

1. Several important goods and services are left out of the GDP: The GDP includes only the goods and services sold in the market. The services provided by parents to their children is very important but it is not included in the GDP because it is not sold in the market. Likewise clean air, which is vital for a healthy life, has no market value and is left out of the GDP.

2. GDP measures only quantity but not quality: In the 1970s schools and banks did not permit the use of ballpoint pens. This is because the ones available in India were of very poor quality. Since then, not only has there been a substantial increase in the quantity of ballpoint pens produced in India but their quality has also improved a lot. The improvement in quality of goods is very important but it is not captured by the GDP.

3. GDP does not tell us about the way income is distributed in the country: The GDP of a country may be growing rapidly but income may be distributed so unequally that only a small percentage of people may be benefitting from it.

4. The GDP does not tell us about the kind of life people are living: A high level of per capita real GDP can go hand-in-hand with very low health condition of people, an undemocratic political system, high pollution and suicide rate.

Estimation of GDP

The Central Statistical Organisation (CSO), under the Ministry of Statistical department keeps the records. It’s processes involves conducting an annual survey of industries and compilation of various indexes like the Index of Industrial Production (IIP) Consumer Price Index (CPI) etc.