Learn what GDP is, its importance, and how to calculate it in simple ways. Understand India’s GDP and its role in shaping the economy.
GDP is a key indicator of a country’s economic health and growth.
India’s GDP is the center of attention as the latest Q2 numbers released on Friday came in as a shocker. During July-September 2024 (Q2 FY25), the Indian economy grew at its slowest pace in the last seven quarters (from Q3 FY23) at 5.4 per cent, well below the 6.5 per cent consensus. Chief Economic Adviser V. Anantha Nageswaran said Q2 GDP no Disappointing, but there are some bright spots and the overall growth estimate of 6.5 per cent in FY25 is “not at risk”.
What is GDP?
Gross domestic product (GDP) is an important measure of a country’s economic health. In simple terms, GDP represents the total value of all goods and services produced within a country’s borders in a specific period, usually a quarter or a year. It serves as an indicator of a country’s economic performance and is widely used to compare the economic strength of different countries.
Why is GDP important?
GDP provides valuable insight into an economy’s size, growth rate and overall health. It helps policy makers, businesses and investors make informed decisions. A growing GDP indicates a growing economy, while a shrinking GDP can signal economic distress.
GDP in India is a key parameter that influences government policies, budget allocation and financial markets. It reflects the effectiveness of initiatives like “Make in India” and helps measure progress in sectors like agriculture, manufacturing and services.
Types of GDP
1. Nominal GDP:
It is the gross economic output measured in current prices. It doesn’t account for inflation, so it can give a distorted view of growth if prices change significantly.
2. Real GDP:
Real GDP is adjusted for inflation, using constant prices to provide a clearer picture of economic growth. It is the preferred measure for comparing economic performance over time.
3. GDP per Capita:
This metric divides GDP by population, showing average income or economic output per person. It is a useful measure to understand the standard of living in a country.
How is GDP calculated?
There are three main ways to calculate GDP:
1. Method of production
Also known as the value-added method, this approach summarizes the value added at each stage of production. It focuses on industries and sectors, calculating the total output produced in the economy.
Formula:
GDP = Gross Value of Output – Value of Intermediate Consumption
2. Expenditure method
This method calculates GDP by adding up all the expenditures made in the economy. It includes consumption, investment, government spending, and net exports (exports – imports).
Formula:
GDP = C + I + G + (X – M)
where:
– C = private consumption
– I = Investment by business
– G = Government Expenditure
– X = Exports
– M = Imports
3. Income method
This method aggregates all income received in the economy, including wages, rents, interest, and profits.
Formula:
GDP = wages + rent + interest + profit + taxes on production and imports – subsidies
Calculation of India’s GDP
In India, the Ministry of Statistics and Program Implementation (MoSPI) is responsible for calculating GDP. It uses both production and expenditure methods to ensure accuracy. Data are collected from a variety of sources, including industrial surveys, agricultural production, and financial reports of companies.
India’s GDP is released quarterly, and plays an important role in shaping economic policies such as interest rates, fiscal measures, and investment incentives.
Limitations of GDP
Although GDP is a comprehensive measure, it has some limitations:
1. Does not reflect income distribution: GDP growth does not show how wealth is distributed among citizens.
2. Ignores the informal economy: In countries like India, a significant part of the economy operates informally, which cannot be fully captured.
3. Environmental Effects: GDP does not consider environmental degradation or sustainability.
4. Non-monetary transactions: This includes unpaid work such as housework or volunteering.