Often, we evaluate it by comparing how much more money we earn now than in previous years. Similarly, when we want to understand the growth of a country, we look at its Gross Domestic Product (GDP). Just like income reflects individual progress, GDP reflects the economic progress of a nation.
So let’s understand about GDP
- What is GDP ?
- Types of GDP
- Why we calculate GDP?
- GDP on constant price and current price
- How GDP calculated?
- Advantages and limitations of GDP
What is Gross domestic product
Gross Domestic Product (GDP) is a monetary measure of the total value of all goods and services produced within a country during a specific period of time. Generally, GDP is calculated annually or quarterly.
In simple words, GDP is the final value of all goods and services produced within a country by individuals, institutions, businesses, or the government over a specific time period. When we sum up all these values, we get the GDP of the country.
For an example , the farmer produced wheet and sold it to dealer for $10 dollars, then dealer sale this wheet to biscuit factory for $15 dollars and finally factory produced biscuit packet from wheet and sold it for $20 dollars . the $20 dollars will be add in GDP of country. for avoid the double counting the last value of goods and services is count in GDP .
Types of GDP
Nominal GDP
Nominal GDP refers to the total value of all goods and services produced within a country, measured at current market prices.
This method of measuring GDP is not considered effective for understanding real growth, because the prices of goods and services generally increase over time. As a result, we may see false growth in GDP—sometimes the actual production of goods and services remains the same, but changes in prices can inflate the GDP figures.
Real GDP
When the GDP or we can say that, the total value of all goods and services are produced within the country are measured on constants price are called Real GDP . in this method we get real growth of GDP, because we avoid inflation in this method.
For an example, one firm manufactured 1000 unit’s of biscuits in 2015 and per unit priced as $10 dollars. the total GDP of firm is $10,000 dollars.
However in 2024 the firm also manufactured 1000 unit’s of biscuits and the price of per unit is $15 dollars . then the total GDP of firm is $15,000 dollars.
In this examples we learn that the GDP is also increased due to the inflation, and for avoiding this false GDP growth we use real GDP method. in real GDP method we use one base year and multipley the total value of goods and services to price of base year .
Base year / constant price – Base year is the year which is select for measuring Real GDP . the base year must have no any natural disaster or any another issues.
Why GDP calculated
This is the main question why we need to calculate GDP ? so here is the answer of this question.
1 To measure economy growth
Gross domestic product is the indicator of economy growth. if the GDP go high then it’s mean the economy of country also go high and vice versa. so basically we calculate the GDP because we wants to know about economy of country.
2 .To make policy
If you have clear idea of your income then you make plan’s for your expenditures . just like this if goverment know about economy of country then it is easy to making policy’s for economy. goverment have money which he spend on growth of economy and make policy’s for it . goverment make expenditures on sectors according to it’s need .
3 . for comparison with other countries
When any country developing at that time for comparison with other countries they use GDP of country. we seen in news that china is growing so fast and one day he surpass USA, we tell all this on GDP basis. we compare of GDP of China and America and then made conclusion.
With more than $22 trillion,USA have the largest GDP in the world.
4 . For investors
Everyone who invest their money they just want profit from their investments. if GDP of country is gone high that means the economy of country is healthy. so investors can make stretegy according to GDP and invest in different companies.
5 for comparison own growth
If you get 70% marks in 10 class and 80% in 11 class then you can say that you grow from previous time . like this if you want to measure growth of country then, GDP is one factor in which we can measure growth of country. time to time we compare our progress from previous results and that show how fast we grow .
India is fastest growing economy in the world .
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GDP on constant price and current price
Constant price – Real GDP is calculated on constant price. means in which we select the price of any year which is called base year and multipley present year production of goods and services with it .
Current price – Nominal GDP is measure on current price. means when the total production of goods and services within the country in particular period of time is calculated on current market price. we multiply present value of goods and services with present market price.
How GDP calculated?
There is three ways to calculate GDP. here it is
- Production approch
- Income approch
- Expenditure approch
1 Production approch
Production approach also known as value added approch. in this method we get GDP from the total final value of all goods and services producuced in country within the fix period of time .
Formula – Gross value of output – value of intermediate consumption
Gross value of output – Total final value of all goods and services.
Value of intermediate consumption – the expense made on making final goods. like cost of raw materials, services used for it or etc .
2 Income approch
In this method we calculate GDP of country through income of people’s, businesses, companies, investor’s and Public sectors and many more . we add them all and the sum of this incomes are called Gross domestic income ( GDI ) . GDI is equal to GDP .
This method is very complicated .
3 expenditure method
In this method we calculate GDP of country from total expenditure made in country from people, business investment, goverment expenditure and net export ( Export – import) .
Formula – Consumption expenditure + business investment + goverment expenditure + Net Export
Advantages and limitations of GDP
Limitations
1 . Income inequality
From the total GDP of country we find the GDP per capita. which means GDP from per person of country. but in this we cannot mention the income inequality, that’s why we cannot get true measurement of economic growth.
2 . No mesuare of well being
When we talk about GDP of country then we only talk about economic activities of country. but economy is not only thing which is important for country, the main focus of every country is to make better life for their citizens. and in GDP we cannot calculate it .
3 . Non Market transactions
Yes we calculate GDP on total production of goods and services in country within the particular period of time. but in GDP we not Calcute the transaction of goods and services which happens under the tables. like drugs sale , babysitting and other activities.
4 . Short term
We calculate GDP annually or quarterly. but this is hort period of time . maybe the economy collapsed due to some natural disaster or maybe economy boost due to some uncertain factor. so for some reason we cannot get sustainability in GDP.
5 . Environment issues
When we calculate GDP of any country then we see that the country who have more factories are top in the table. but this factory create more pollution and in GDP we did not mension this .
Advantages
We write above that why we calculate GDP?
Conclusion
So we learn that what is GDP and all about GDP. but the main thing is why we need to know about GDP?
GDP is not just a concept of economy but it is the parameter of our growth. if goverment of any country focus on economy that’s means he wants to create better place for people’s, where everyone can earn sufficient money for person use . and if GDP of any country continuously increasing that’s means the policy of government is working well.
