Groos domestic product (GDP )

GDP 

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. Current GDP of India is $2.10 trillion. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health. The concept of GDP was first proposed in 1937 in a report to the U.S. Congress in response to the Great Depression, conceived of and presented by an economist at the National Bureau of Economic Research, Simon Kuznets. At the time, the preeminent system of measurement was GNP. After the Bretton Woods conference in 1944, GDP was widely adopted as the standard means for measuring national economies, although ironically, the U.S. continued to use GNP as its official measure of economic welfare until 1991, after which it switched to GDP.Gross domestic product (GDP) is the monetary value of all finished goods and services made within a country during a specific period.GDP provides an economic snapshot of a country, used to estimate the size of an economy and growth rate.GDP can be calculated in three ways, using expenditures, production, or incomes. It can be adjusted for inflation and population to provide deeper insights. Though it has limitations, GDP is a key tool to guide policy-makers, investors, and businesses in strategic decision-making.

TYPES OF GROSS DOMESTIC PRODUCT

GDP can be reported in several ways, each of which provides slightly different information.

1. Real Gross Domestic Product :- 

Real GDP is the GDP after inflation has been taken into account. Real GDP is an inflation-adjusted measure that reflects the quantity of goods and services produced by an economy in a given year, with prices held constant from year to year to separate out the impact of inflation or deflation from the trend in output over time. Since GDP is based on the monetary value of goods and services, it is subject to inflation. Rising prices will tend to increase a country’s GDP, but this does not necessarily reflect any change in the quantity or quality of goods and services produced. Thus, by looking just at an economy’s nominal GDP, it can be difficult to tell whether the figure has risen because of a real expansion in production or simply because prices rose. Economists use a process that adjusts for inflation to arrive at an economy’s real GDP. By adjusting the output in any given year for the price levels that prevailed in a reference year, called the base year, economists can adjust for inflation’s impact. This way, it is possible to compare a country’s GDP from one year to another and see if there is any real growth. Nominal GDP is usually higher than real GDP because inflation is typically a positive number. Real GDP accounts for changes in market value and thus narrows the difference between output figures from year to year. If there is a large discrepancy between a nation’s real GDP and nominal GDP, this may be an indicator of significant inflation or deflation in its economy.

2. Nominal Gross Domestic Product :- 

Nominal GDP is the GDP at current prices (i.e. with inflation). Nominal GDP is an assessment of economic production in an economy that includes current prices in its calculation. In other words, it doesn’t strip out inflation or the pace of rising prices, which can inflate the growth figure. All goods and services counted in nominal GDP are valued at the prices that those goods and services are actually sold for in that year. Nominal GDP is used when comparing different quarters of output within the same year. When comparing the GDP of two or more years, real GDP is used.

3. Gross National Product (GNP) :- GNP related measure of the economy's total output product is gross national product (GNP), which is the market value of all final goods and services produced by a nation in a single year. Goods and services produced within a nation's boundaries by foreign citizens and firms are excluded from GNP

4. Net Gross Domestic Product. :- NDP is an annual measure of the economic output of a nation that is adjusted to account for depreciation. It is calculated by subtracting depreciation from the gross domestic product (GDP). NDP is the GDP after depreciation has been taken into account. Net domestic product (NDP) is an annual measure of the economic output of a nation that is adjusted to account for depreciation. It is calculated by subtracting depreciation from the gross domestic product (GDP).NDP, along with GDP, gross national income (GNI), disposable income, and personal income, is one of the key gauges of economic growth that is reported on a quarterly basis by the Bureau of Economic Analysis (BEA).An increase in NDP would indicate growing economic health, while a decrease would indicate economic stagnation.

How to calculate GDP ?

The formula to calculate GDP is of three types – Expenditure Approach, Income Approach, and Production Approach.

 Expenditure Approach –There are three main groups of expenditure household, business, and the government. By adding all-expense we get the below equation.

GDP = C + I + G +NX

Where,

C = All private consumption/ consumer spending in the economy. It includes durable goods, nondurable goods, and services.

I = All of a country’s investment in capital equipment, housing, etc.

G = All of the country’s government spending. It includes the salaries of a government employee, construction, maintenance, etc.

NX= Net country export – Net country import

This can also be written as:-

GDP = Consumption + Investment + Government Spending + Net Export

Expenditure Approach is a commonly used method for the calculation of GDP.

 Income Approach –

The income approach is a way for calculation of GDP by total income generated by goods and services.

GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income

Where,

Total national income = Sum of rent, salaries profit.

Sales Taxes = Tax imposed by a government on sales of goods and services.

Depreciation = the decrease in the value of an asset.

Net Foreign Factor Income = Income earn by a foreign factor like the amount of foreign company or foreign person earn from the country and it is also the 

difference between a country citizen and country earn.

Production or Value-Added Approach –

From the name, it is clear that value is added at the time of production. It is also known as the reverse of the expenditure approach. To estimate the gross value-added total cost of economic output is reduced by the cost of intermediate goods that are used for the production of final goods.

Gross Value Added = Gross Value of Output – Value of Intermediate Consumption

GDP = Sum of all value-added to products during the production of a process.

Production approach: sum of the “value-added” (total sales minus the value of intermediate inputs) at each stage of production.

Sectoral Composition of GDP in India

The Sectoral composition of GDP in India has undergone substantial changes since 1950-51. The share of agriculture has declined while that of industrial and service sectors has increased. Economic activities can be divided into three categories primary activities, secondary activities and tertiary activities. Primary activities include:- agriculture, forestry and logging, and fishing. Secondary. activities include mining and quarrying, manufacturing, electricity, gas and water supply, and construction. Tertiary activities include :- trade, hotels and restaurant, transport (railways, road, air, waterways), storage, communication, banking and insurance, real estate, and public administration and defence. The tertiary activities are also called-sir-vice activities.

Limitations of GDP

Household production :- Housework (cleaning, cooking) and volunteer work are not part of GDP, because these don’t generate payment.

Underground production :-
●Payments that typically get under-reported or even unreported.
●A cash-only restaurant under-reports its revenues on tax forms.
Illegal business activities: selling drugs, gun-for-hire.

Leisure time :-Only values generated by working are included in GDP.But leisure has value too — some people actually pay not to go to work.

Environmental quality :-
●Pollution is not subtracted from GDP
●Deteriorating atmosphere is not counted against GDP.

Improved product quality
●(Real) GDP mainly measures quantity, but doesn’t take into account.
●the value of improvements in product quality.
●Health and life expectancy.
●Political freedom and social justice.