What is GDP and how it is calculated?
What is GDP?
Gross Domestic Product is the gross value of everything produced in a country whether it is small or big. It doesn’t matter if the good is produced by the citizen of a country or by a foreigner if it is made within the boundaries of the country, it will be included in the GDP. While calculating the GDP of a country, there can occur a few problems like double counting. To avoid this problem, the value of the finished product is added and not the elements required while making it.
The most common word we here at the place of economy is size. For example, the ‘size’ of an economy.
There is a formula for calculating GDP:
C + I + G + (X – M)
In the upper formula, initials stand for-
C – Personal Consumption Expenditure
B – Business Investment
G – Government Spending
(X – M) – Exports minus Imports
What are the types of GDP?
There are different ways of calculating the GDP of a country but before that let us understand the different types of GDP.
Nominal GDP – It is a raw measurement of GDP that includes the increase in price.
Real GDP – Bureau of Economic Analysis removes the effects of inflation to compare the GDP of a particular year. Otherwise, it might seem like the company is growing where actually it is suffering from double-digit inflation. In this type, a price deflator is used to measure real GDP. It tells you the increase in price since the base year. The result is then multiplied by the Nominal GDP. There are three most important distinctions made by BEA ( Bureau of Economic Analysis)
To remove the impact of exchange rates and trade policies, incomes from the company of the country and by the foreigners are excluded.
The effects of inflation are also excluded, e.g. the value of a new engine will not be added until it is assembled in the vehicle
The value of the final product is counted and not of the items included in the manufacturing of the product.
Growth Rate – In this type, the growth rate is known from quarter to quarter. It tells exactly whether the economy is growing quicker or slower than the previous quarter.
The concept is very easy. If the economy produces less than the quarter before, then it contracts and the growth rate is negative. This shows a recession and if it stays for a longer period of time it turns into depression.
If there is a very high growth rate in an economy then also it can create a problem as it will result in inflation. The ideal growth rate is between 2 and 3 percent.
GDP per capita – This type is a little different from the rest and is the best way to compare GDP between countries. It divides GDP by the number of residents and also measures the country’s standard of living.
How GDP Affects Us?
GDP plays an important part in the lives of individuals. At the ground level, it affects personal finance, investments, and job growth.
Investors compare the GDP of different countries in search of the best international opportunities
Shares of the companies are also purchased by the investors based on the GDP of the country
GDP of India (World’s Fastest Growing Economy)
Talking about the GDP of India, there has been observed the highest growth in the last two quarters of Financial Year, 2019. The Indian economy grew at a rate of 7.1 percent.
There are a few points that must be kept in mind regarding the Indian Economy
From the year 1960 to 2013, the Indian economy’s average share was 1.8%
Between the financial years 2014-2015 and 2017-2018, there has been a growth rate of 7.3%. it falls among the fastest growth rates.
According to the International Monetary Fund (IMF), the Indian economy is regarded as the fastest growing economy among the major economies of the world.
There are a few cons associated with GDP. It doesn’t count the environmental factors like in the case of plastics. They are regarded as cheap but is very harmful to the environment, which is not taken into consideration. Secondly, it doesn’t even count the unpaid services like childcare which are valuable services offered by people. Another significant flaw in GDP is, that it doesn’t show the black money.
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