What Is Gross Domestic Product (GDP)?

What Is Gross Domestic Product (GDP)?

What is Gross Domestic Product (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. As a broad measure of overall domestic production, it functions as a comprehensive scorecard of a given country’s economic health.

Though GDP is typically calculated on an annual basis, it is sometimes calculated on a quarterly basis as well.

KEY TAKEAWAYS
  1. Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country during a specific period.
  2. GDP provides an economic snapshot of a country, used to estimate the size of an economy and growth rate.
  3. GDP can be calculated in three ways, using expenditures, production, or incomes. It can be adjusted for inflation and population to provide deeper insights.
  4. Though it has limitations, GDP is a key tool to guide policymakers, investors, and businesses in strategic decision making.


Understanding Gross Domestic Product (GDP)

The calculation of a country's GDP encompasses all private and public consumption, government outlays, investments, additions to private inventories, paid-in construction costs, and the foreign balance of trade. (Exports are added to the value and imports are subtracted).

Of all the components that make up a country's GDP, the foreign balance of trade is especially important. The GDP of a country tends to increase when the total value of goods and services that domestic producers sell to foreign countries exceeds the total value of foreign goods and services that domestic consumers buy. When this situation occurs, a country is said to have a trade surplus. If the opposite situation occurs–if the amount that domestic consumers spend on foreign products is greater than the total sum of what domestic producers are able to sell to foreign consumers–it is called a trade deficit. In this situation, the GDP of a country tends to decrease.

In addition, there are several types of GDP measurements:

  1. Nominal GDP: GDP evaluated at current market prices
  2. Real GDP: Real GDP is an inflation-adjusted measure that reflects both the value and the quantity of goods and services produced by an economy in a given year.
  3. GDP Growth Rate: The GDP growth rate compares one quarter of a country's GDP to the previous quarter in order to measure how fast an economy is growing.
  4. GDP Per Capita: GDP per capita is a measurement of the GDP per person in a country's population; it is a useful way to compare GDP data between various countries.
  5. 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 as a result 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.

India's GDP is calculated with two different methods, one based on economic activity (at factor cost), and the second on expenditure (at market prices).

The factor cost method assesses the performance of eight different industries.

The expenditure-based method indicates how different areas of the economy are performing, such as trade, investments and personal consumption.

Both methods have advantages for the end-user, depending upon their needs. To assess the performance of different industry sectors, the factor cost GDP details are useful. Expenditure-based GDP calculations indicate how different areas of the economy are performing—whether the trade is improving, or whether investments are on the decline.

Timelines for India's GDP

Each quarter’s data are released with a lag of two months from the last working day of the quarter. Annual GDP data are released on May 31, with a lag of two months. (The financial year in India follows an April-to-March schedule.) The first figures released are quarterly estimates. As more and more accurate datasets become available, the calculated figures are revised to final numbers.

No one knows precisely why India's fiscal year runs from April 1 to March 31. Most likely, it's a holdover from the centuries of British rule (the U.K. also follows an April-to-March schedule). As it happens, April 1 marks Vaisakha, the beginning of the Hindu New Year, so the date already has a special "new" meaning for many Indians.

Less romantically, many crops are harvested in February and March. Agriculture remains a significant component of the Indian economy. Starting the new year in April allows time to estimate the income from crop yields.

Source : Investopedia

Chart 1 : India's GDP Story Since Economic Liberalisation
From average growth of 7% to contraction of 7%



Chart 1 : India's GDP story since economic liberlisation. Source : McKinsey and Express Research GrOup.
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Chart 2 : Percentage Change in key indicators



Chart 2 : Percentage change in key indicators. Source : Ministry of Statistics and Programme Implementation

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