Gross domestic product or GDP is widely regarded as the world’s most powerful statistical indicator of national development and progress.
It’s the monetary measure of the market price of all the goods and services which are produced during a specific period of your time.
Mean standard of living or per capita GDP is the ratio of the GDP to the total population of the region.
The GDP could be made on the basis of the industry or sector of the economy. According to the International Monetary Fund (IMF), India is ranked at 139th position based on a per capita income.
From 2014 -2018, India was regarded as the fastest growing major economy among the world, leaving China behind.
Since January 1 1995, India has been a member of the World Trade Organization and has been ranked 63rd on ease of doing business index and 68th on Global Competitiveness Report.
Who calculates the Gross domestic product?
The national government statistical agency measures the Gross domestic product in a country. Private organizations are not allowed to intervene as they do not have permission to access the information to measure it.
According to Organisation for Economic Co-operation and Development (OECD), GDP is “the standard measure of the value of final goods and services produced by a country during a period…in order to compare across countries these estimates have to be converted into a common currency”.
According to the IMF, the definition states that “GDP measures the monetary value of final goods and services- those that are bought by the final user—produced in a country in a given period of time (say a quarter or a year). It counts all of the output generated within the borders of a country.
History of GDP
There is an ancient story that goes behind the invention of GDP. As the unfair taxation of the landlords during the warfare between the Dutch and the English in the 17th century, William Petty came with the basic concept of GDP to counter the illegal acts of the landlords towards the poor.
As time passed, in 1695, Charles Davenant developed GDP according to the needs of that time.
Simon Kuznets is the first person to develop the modern GDP for a United States Congress report in 1934.
After the conference of Bretton Woods, Gross domestic product became the main tool for the country’s economy and to measure it. In 1991, as the US adopted GDP keeping aside the GNP (gross national product) many other nations used the same method for their country as well.
According to an academic economist, “The actual number for GDP is, therefore the product of a vast patchwork of statistics and a complicated set of processes carried out on the raw data to fit them to the conceptual framework.”
Also Read: GVA vs GDP: What gives a better estimate?
With its advent, many changes and amendments were recorded as a part to improve its quality and measures. It is calculated with many terms and conditions as it cannot cross its leeway in any possible case. In every country, there is a different set of styles and measures which are adopted to measure it.
Different types of Gross domestic product
Broadly we can categorise the Gross domestic product into two ways:
In Nominal GDP it takes the current market price into account without factoring in inflation and deflation. Therefore, it aims to look at the natural movement of prices in the market without any intervention from outside or within the market and tracks the gradual increase of an economy’s value over time.
In Real GDP it counts the overall rise in price levels in the country. It is believed that most of the economists to measure the GDP growth and to study use this method. Therefore, it is calculated using the price deflator. Real GDP unveils the real growth and real-time measurement in one year or next.
HOW IS GDP CALCULATED?
There are three methods by which the GDP of a country can be measured.
The output method measures the total calculation of the monetary or market value of all the goods and services which are produced within the boundary of the country.
Let’s assume output method as ‘A’ and constant prices as B’’
GDP (A) = Real GDP (B) – Taxes + Subsidies
2. Expenditure Method
The total expenditure incurred by all the entities on goods and services within the domestic boundaries of the country. For an instance, let us assume that consumer expenditure is W, investment expenditure is B and G is the government spending and X-BM is the net export (export minus import). Therefore, the formula goes like this
Expenditure method = W + B + Y + (X – BM) W
3. Income Method
It measures the total income earned by the factors of production that is labor and capital within the domestic range of a country.
GDP = GDP Factor cost + Taxes – Subsidies
How GDP is calculated in India
The GDP works differently in every country according to their contribution to fields in which they tied up and measure it accordingly. In India, the main contributors or contributing factors are
- Industry and services
- Allied services
In-order to calculate the GDP of India there are two different methods involved. They are widely based on economic activity (at factor cost) and expenditure (at market price).
According to the user, both the methods, if adopted, have advantages. To assess the performance of various industry sectors, the factor cost GDP details are useful.
To collect the data for measuring the GDP of India is done by the Central Statistics Office under the Ministry of Statistics and Program Implementation.
By conducting an annual survey of industries and compilation of varied indexes like the index of industrial production (IIP) and consumer price index (CPI) in coordination with different federal and state governments, the Central Statistics Office calculates the GDP of India.
GDP at market price = GDP at factor cost + Indirect Taxes-Subsidies
Old Vs new patterns of measuring the GDP
There is a broad difference in what and how we measure the GDP today. The difference lies in old and new patterns which were followed.
Old pattern: At first, the GDP was used to measure manufacturing and trading activities.
New pattern: Nowadays, a new system called gross value added (GVA) is used to measure.
Old pattern: At first, the GDP was first estimated by using the IIP data. By the time it was replaced with an annual survey of industries (ASI).
New Pattern: The MCA 21 data launched and commenced in the year 2006, is an e-governance initiative of the ministry of corporate affairs.
Old Pattern: The production in the farm was used as a proxy to count the agriculture incomes.
New Pattern: With the advent of new methodology, data is collected to calculate the value addition in the agricultural sector.
Old Pattern: Very few Nonbanking Financial Companies (NBFC) and mutual funds were considered in financial activity.
New Pattern: The coverage has been expended by including stockbrokers, pensions and funds.
Why is Gross domestic product important?
- It is the representation of economic production and growth.
- It is important to study the economy of the country.
- GDP is the total horoscope of the country’s progress and development in one-two years.
- When the economy is fit, the level of unemployment happens to be less in a country. Unfit GDP may summon the situation in a country like less jobs and recessions.
- Economists usually look at GDP on a different level in one to two years. They analyse and produce results in which it displays two sides of GDP i.e. how much is the current analysis and the other is how we can increase the rate. Therefore, it also helps us to identify the deficit in the country, and the government should actually work to correct its measures.
- In short, the GDP is capable of conveying a set of information about the country’s economy. It remains useful and a data point for economists and investors.