GDP Full Form

GDP stands for Gross Domestic Product. This includes the total market value of all the products, goods, and services produced within a country in a given time duration. It is used to measure the size of an economy and overall growth or decline in the nation’s economy. It indicates the economic health of a country as well as it also specifies the living standard of the people of a specific country, i.e. as the GDP increases the living standard of the people of that particular country increases.

History

The basic idea of GDP was given by William Petty to defend landlords against unfair taxation between the English and the Dutch between the years 1652 and 1674. Later, this method was further developed by Charles Davenant. Its modern theory was first to be developed by Simon Kuznets in 1934. After the Bretton Woods conference in 1944, it became the chief tool to measure the economy of a country.

A country having good GDP is considered to be a good country for living. The Central Statistical Office (CSO) in India is in charge of calculating GDP. In India, three main sectors contribute to GDP; industry, service sector, and agriculture including allied services.

Types of GDP

• Nominal GDP – At current market rates, it is the total monetary value of all goods and services produced. This includes all price changes in the current year caused by inflation or deflation.

• Real GDP – the total value of all goods and services produced at constant prices. The prices used to calculate the GDP are based on a specific base year or the previous year. Because it is already an inflation-adjusted measurement, the effects of inflation are removed, this provides a more accurate account of economic growth.

• Actual GDP – the measurement of all outputs in real-time at any interval or at any given time. It demonstrates the current state of the economy's business.

• Potential GDP – ideal economic condition with 100 percent employment in all sectors and consistent growth

How to Calculate GDP

There are many methods to calculate GDP. If the talks are about a simple approach, it will be equal to the total of consumption, gross investment, and government spending plus the value of exports, minus imports.

Formula to Calculate GDP:

GDP = C + I + G + NX  

Or

GDP = private consumption + gross investment + government spending + Net Exports 

where consumption (C) refers to private-consumption expenditures by households and nonprofit organizations, investment (I) refers to business expenditures and home purchases by households, government spending (G) refers to government expenditures on goods and services, and net exports (NX) refers to a country's exports minus imports.

Methods to calculate GDP

Following are the different approaches to calculate GDP:

• Production approach

• Income approach

• Expenditure approach

This is the method used to measure the size of an economy and the overall growth or decline in the economy of a nation. This specifically indicates the economic health of a country as well as specifies the living standard of the people of a specific country, i.e. as the GDP is a method for increasing the living standard of the people of that country. A country that has good GDP is considered a good country for living purposes. In India, we have three main sectors which contribute to GDP; industry, service sector, and agriculture including allied services. GDP is the original indicator to determine the growth of a country’s economy. There are many approaches to calculating GDP.

If we talk about a simple approach, it is equal to the total of private consumption, gross investment, and government spending plus the value of exports, minus imports i.e. the formula to calculate GDP = private consumption + gross investment + government spending + (exports – imports).

GDP can be measured by three methods, namely,

1. Output Method: Also known as Value Added Approach, this method determines how much value is added at each stage of production.  This measures the monetary or market value of all the goods and services produced within the borders of the country. 

The Output method is used to:

• Determine the gross domestic product (GDP) from a variety of economic activities. 

• Calculate the intermediate consumption, which is the cost of the materials, supplies, and services used in the final goods or services production.

• To calculate the gross value added, subtract intermediate consumption from gross value.

The gross value added = the difference between the gross value of output - value of intermediate consumption.

The value of output =  the total value of sales of goods and services plus the value of inventory changes.

The term "GDP at factor cost" refers to the sum of gross value added across all economic sectors.

To avoid a distorted measure of GDP due to price level changes, GDP at constant prices of real GDP is computed. 

GDP (as per output method) = Real GDP (GDP at constant prices) – Taxes + Subsidies.

Economic activities (i.e. industries) are divided into numerous sectors in order to calculate the production of the domestic product. Following the classification of economic activities, the output of each sector is determined using one of two methods:

• By multiplying each sector's output by its market price and combining the results together

• By compiling data on gross sales and inventories from company records and combining them.

The gross value of output at factor cost is then calculated by adding the value of output from all sectors. The GVA (=GDP) at factor cost is calculated by subtracting each sector's intermediate consumption from the gross output value. The "GVA (GDP) at producer pricing" is calculated by adding indirect tax minus subsidies to GVA (GDP) at factor cost.

2. Expenditure Method: This measures the total expenditure incurred by all entities on goods and services within the domestic boundaries of a country. GDP (as per expenditure method) = C + I + G + (X-IM) 

C: Consumption expenditure, I: Investment expenditure, G: Government spending, and (X-IM): Exports minus imports, that is, net exports.

•  In the preceding formula, consumption refers to consumer spending or private consumption expenditure. Consumers spend money on monopolized goods and services such as groceries and spa treatments. Consumer spending is the most important contributor to GDP, accounting for more than two-thirds of Indian GDP. As a result, consumer confidence has a significant impact on economic growth.

A high confidence level on a scale indicates that consumers are willing to spend money on goods and services, whereas a low confidence level reflects skepticism about the future and a refusal to spend.

• The government spending mentioned in the formula represents government consumption expenditure and gross investment done in the name of the government.

Governments must spend money on things like equipment, infrastructure, and payroll. When consumer spending and business investment are both down, government spending may become more prominent in a country's GDP.

• Capital expenditures or private domestic investments are examples of investments. Businesses must spend money to invest in their business activities and thus grow.

Business investment is critical to a country's GDP because it increases an economy's productive capacity while also creating more job opportunities.

• Net exports are calculated by dividing total exports by total imports (NX = Exports - Imports).

Net exports are the goods and services produced by an economy and exported to other countries, less the number of imports purchased by an economy's domestic consumers.

This calculation takes into account all expenditures incurred by companies based in a specific country, regardless of whether the companies are foreign.

3. Income Method: It measures the total income earned by the factors of production, that is, labor and capital within the domestic boundaries of a country. 

The GDP income approach methodology begins with the revenue earned from the production of goods and services. Using the income approach method, we compute the income earned by all sources of production in an economy.

The inputs utilized to create the finished product or service are known as production factors. Land, Labor, Capital, and Management are thus the components of production for a firm functioning within a country's borders.

The Income method to calculate GDP is as follows:

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

Here, 

1. Total National Income: The total of all wages, rents, interest, and profits

2. Sales taxes: Government taxes imposed on purchases of goods and services

3. Depreciation: Amount attributed to an asset based on its useful life

4. Net Foreign Factor Income: The difference in total income generated by citizens and businesses outside their home country versus total income generated by foreign citizens and businesses within that country.

When we add taxes and subtract subsidies, we get the Gross Domestic Product formula at market value.

GDP (market cost) = GDP at factor cost + Indirect Taxes – Subsidies.

GDP Method used in India

In India, the GDP is calculated using two different methods, yielding figures that are nevertheless within a narrow range.

The first is based on economic activity (at factor cost), while the second is based on expenditure (at market prices). Additional calculations are performed to arrive at nominal GDP (using current market prices) and real GDP (inflation-adjusted).

1. The Factor Cost Figure

The factor cost figure is computed by gathering data on the net change in value for each sector over a given time period. This cost takes into account the following eight industry sectors:

1. Primary industries include agriculture, forestry, and fishing. 

2. Mining and quarrying are examples of secondary industries.

3. Manufacturing

4. Utility services such as electricity, gas, water supply, and others

5. Building 

6. Trade, hotels, transportation, communication, and broadcasting

7. Financial, real estate, and professional services are included in this category.

8. Government administration, defence, and other services
   
   

2. The Expenditure Figure

The expenditure (at market prices) method entails aggregating domestic expenditure on final goods and services across various channels over a given time period. It takes into account household consumption expenses, net investments (capital formation), government costs, and net trade (exports minus imports).

Conclusion

The Gross Domestic Product (GDP) is an important indicator for assessing a country's overall economic health and standard of living. It refers to a country's economic output and growth. The rate of GDP growth is one indicator of a country's economic health. This rate expresses the percentage change in economic output over monthly, quarterly, or annual time periods.