What is GDP?

Gross domestic product, or GDP, is the total value of the goods and services produced in a country during a specific period,like a year or quarter. GDP is the broadest financial measurement of a country's total economic activity, and the GDP growth rate is an important indicator of a country's economic performance. It is used as a benchmark for international comparisons and as a broad measure of economic progress.

While nominal GDP is evaluated at current market prices, real GDP is given in constant prices, i.e. the prices are adjusted for inflation. The latter is also referred to as constant-price GDP. Real GDP is arrived at after adjusting for inflation and is

Calculation methods

GDP is calculated based on three methods

Expenditure method - Under the expenditure method, the total expenditure incurred by all entities on goods and services within the domestic boundaries of a country is calculated.

Under this method, GDP = C + I + G +(X – M),

Where C is the consumption by the nation's residents;

I is the investment;

G is government spending;

X are the exports,

And M is the imports.

Income method - The income method takes into account the income generated by the basic factors of production in a country: Land, labour, capital and organisation.

Under this method, GDP = Employees' compensation + Rent and royalty + Business cash flow + Net interest.

Output method -Under the output, or production, method, GDP = value of output in the economy – intermediate consumption. Here, the value of output comprises sales plus change in stock, and intermediate consumption refers to the goods and services that are used up during production.

In India, the Central Statistics Office (CSO), under the ministry of statistics and programme implementation, calculates the country's GDP. The CSO prepares quarterly estimates of GDP at both current and constant prices. Presently, India uses 2011-12 as the base year to calculate GDP.

Impact on Indian economy

High year-on-year GDP is essential to meet the growing needs of the large population of a country like India. GDP growth rate numbers help the government to frame policies and also guide investors to make better decisions related to their investments.

A constantly rising GDP is bound to have a positive effect on poverty, healthcare, literacy and employment. In India, contributions to the GDP are tracked from three broad sectors, namely agriculture & allied services, industry, and services. Each of these sectors employs a huge number of people. In the 21st century, over the past several years India has witnessed a large, growing middle class, with millions of people being lifted out of poverty. This was reflected in the rising annual per capita GDP. However, in recent months, the global Covid-19 pandemic has severely hit countries worldwide, including India.

Impact on consumers

A high GDP growth rate leads to better employment opportunities, more disposable income and gives consumers the power to purchase. Consumers in India play a huge role in the nationʼs GDP curve. Private consumption is one of the drivers of the economy and is estimated to account for close to 60% of GDP. Economic uncertainty and a fall in jobs and incomes lead to a reduction in private consumption. Lower incomes lead to lower discretionary spending. Consumer confidence is considered a marker for the economy's condition. For instance, the Covid-19 pandemic, which has affected economies and livelihoods across the globe, has seen both the GDP growth and consumer confidence being hit in India in recent months. The April-June quarter of Financial Year 2021, which witnessed India's GDP reducing by 23.9%, also saw private consumption contracting by 26.7%.

Role of financial services

Financial services play an important role in a country's economic development. Banks, by providing finance to businesses, play a crucial role in boosting trade and industry, thus driving GDP growth. Moreover, financial institutions also provide a boost by proving loans to consumers and investors. This boosts consumption, which ultimately helps in GDP growth. Banks also help in sustaining high growth and are required to maintain a healthy credit-to-GDP ratio. Credit-to-GDP ratio is a measure of a country's public debt compared to its GDP. It is seen as an indicator of credit expansion in a country. It tends to rise during an economic boom and to fall during a bust.

Global use of GDP

GDP is used worldwide to measure the economic health of a country. Economists use GDP figures to figure out whether a country's economy is in recession, depression or boom. Countries that have higher GDPs generally have access to better health and education facilities, for instance. Richer countries can afford to spend more on research and development.

Though a country's GDP is usually calculated by its respective statistical agency, most countries follow established international standards while calculating. As GDP is calculated in the currency of the respective country, while comparing the GDP of the two countries, the usual method followed is converting the currencies of the two countries into US dollars.

GDP and the Pandemic

The pandemic proved to be an ideal illustration to understand how GDP is related to productivity and growth. The pandemic led to massive underutilisation of labour and capital. Trade, in general, got reduced, particularly during the lockdowns. There were drops in travel and movement, an increase in the trade costs and a general fall in the demand. As a result, studies showed that the global GDP would fall by 2% because of the pandemic. Developing countries like India were expected to experience an above-average fall in GDP. News reports showed that Indiaʼs GDP contracted by more than 10% during the year. As things return to normal, the GDP will improve but it will be a gradual process. Thus, like the economy, GDP thrives on positive market demand and trade.

GDP, though, may not bring to the fore every aspect of the standard of living in a country. It might not cover certain aspects that could be considered important to the well-being of the average citizen. For instance, increased production might also lead to environmental damage, or come at some such similar cost. Some experts point out that increased GDP in some countries does not necessarily lead to a higher standard of living, particularly concerning vital fields like healthcare and education. Nevertheless, GDP remains one of the most important indicators of national and international economic performance.

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