What is GDP and how it is calculated?

GDP stands for Gross Domestic Product. It is the grand total value of all final goods services produced in the country, during a year period. It is one of the ways to calculate the income of an economy.  Here gross means total, while domestic means activities which are carried out within the nation. Simon Kuznets, The Economist from the USA, first deliberated the idea of GDP,  in the year 1934. When it comes to defining GDP it is very easy, but calculating GDP is difficult to understand. It is a Quantitative concept.

We hear, many people saying that a country’s GDP is doing great, it is at its worse situation, it is at the stage of its growth, etc.CSO  declares the GDP by counting the GDP of different sectors. Four methods that are –
1.consumption by household 2. investment by businesses 3. government expenditure on goods and services.

GDP calculated at market price is known as nominal  GDP while GDP calculated at constant prices called real GDP. In India GDP calculated at factor cost(GDPfc) was first used but, since January 2015 instead of GDP at factor cost, we started using GDP at Basic Prices. Between the factor cost and the market price is that Factor cost (is input cost )i.e cost of capital (Interest on loans, raw materials, labor, power, rent, etc). Factor cost is also known as product price.

The market price is what we get after adding the indirect tax to the factor cost of the product. GDP at the Basic price what is taken into consideration are production taxes and subsidies, product taxes and subsidies are not taken into consideration in GDP at factor cost. Both types of taxes and subsidies are taken into consideration.

This Export minus import concept is used in the way that this removes the amount we have spent on import, that is not produced within the country’s boundary, and the money goods and services which are exported are added, which is not sold in the country.

The price inflation we use the GDP deflator concept.GDP can also be calculated using the formula given below, we will try to elaborate it, GDP=GVA at basic price+product taxes -product subsidies. Where GVA means (gross value addition)GVA at Basic price=CE+OS/MI+CFC+production subsidies. CE= compensation of employeesOS= operating surplusMI= mixed incomeCFC= consumption of fixed capital(depreciation).

While studying the contribution of three different sectors that are, the Agriculture sector, service sector and industrial sector contribution in GDP, what you can conclude is, video mission of the agriculture sector in GDP constantly decreasing, the industrial sector is contributing on large scale but it is somewhat stable. And the service sector is contributing around 60% in the Indian GDP.  The agriculture sector’s less contribution to GDP is a positive sign.

You would also like our other blogs:
RBI and its role in Indian Economy
Geography it branches and Scope of Geography

Amar Ajnalkar


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