The Gross Domestic Product (GDP) is one of the most common indicators that has been used to track economic health of a country. The calculation of a country’s GDP is calculated by considering different factors, mainly its consumption and investment.
Economists majorly use GDP to determine if an economy is growing or witnessing a recession.
It represents a total of the country’s production and includes all purchases of goods and services produced.
GDP is a result of all the spending that have happened in a country. This includes consumer spending, Investment expenditure, government spending and net exports. This therefore portrays an overall image of an economy.
It also gives an insight to investors which highlights the trend of the economy by comparing GDP levels.
The concept of GDP was developed as an indicator during the Great Depression and a war planning tool during WWII, when the primary goal of the government was to stimulate industrial production.
It later on went to become an official instrument of US economic policy in 1946 after its success as a utility during the war.
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How is GDP measured?
There are typically three ways of calculating GDP which are used worldwide. The first is by adding the amount that every person has earned in a year. It could also be calculated by adding up what everyone spent in a year. Both these measures are said to give out the same numbers.
In case of India, the GDP is calculated in the following manner-
Expenditure approach, Income approach Value-added approachFollowing is a simple way to calculate the GDP. GDP = consumption + investment + government spending) + (exports-imports) and the formula is GDP = C + I + G + (X-M) where:
C= spending by consumers,
I= investment by businesses,
G= government spending and
(X-M)= net exports, that is, the value of exports minus imports. Net exports may be negative i.e. imports are more than exports.
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Why is GDP important ?
GDP is important because it gives out information and determines the size of the economy and how it’s performing.
The growth rate of real GDP is often used as an indicator of the general health of the economy.
Widely, it’s believed that growth in real GDP is interpreted as a sign that the economy is doing well. When real GDP is growing strongly, the employment in a country is likely to be increasing. This because companies and organisations are on a lookout more workers and employees and the cycle of economy and earning keeps going on.
In a case wherein a country’s GDP is shrinking, the employment declines and many people end up losing their jobs which in return does not help in the growth or a country or its economy.
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How does GDP help a country to grow?
GDP is important and helps a country to grow because it provides information about the size of the economy and how its performing. The growth rate of real GDP is often used as an indicator of the general health of the economy. In broader terms, an increase in real GDP is interpreted as a sign that the economy is doing well.
GDP helps policymakers and central banks to identify whether the economy is contracting or expanding and take necessary action and help in taking corrective measures to get on the right path.
It also enables policymakers, economists, and businesses to analyze the impact of variables such as monetary and fiscal policy, economic shocks, and tax and spending plans.
How can GDP affect you?
If GDP is growing, the government will use it as key to say that it is doing a good job of managing the economy. On the other hand, if it witnesses a dip, the opposition political parties will point at the government and say that it’s doing a poor job.
GDP helps government to make a decision as to how much it can spend on public services and how much it needs to raise in taxes.
If GDP is growing, people will pay more tax simply because they’re earning and spending more. In this scenario it always means that the government to spend on public services, such as schools, police and hospitals.
Growing GDP means better quality of life, with better facilities.
Let’s look at expected growth and predictions-
India’s gross domestic product (GDP) is projected to grow at 9.2 per cent to Rs 147.5 lakh crore in 2021-22, Minister of State for Finance Pankaj Chaudhary announced on February 8,2022.
The Indian economy is predicted to grow at 9.2 per cent in the current financial year 2021-22 and this is in comparison with a contraction of 7.3 per cent in the previous fiscal. The performance was subdued because of the improvement in the performance of agriculture and manufacturing sectors, a recent government data shows.
Recording its worst-ever performance in more than four decades, India had registered a de-growth of 7.3 per cent for the fiscal year 2020-21. And it was behind by several major economies who too were hit hardest by the COVID-19 pandemic.
In a recently released data, it revealed estimates of National Income for 2021-22, the Ministry of Statistics announced that the growth in real gross domestic product (GDP) during 2021-22 is estimated at 9.2 per cent as compared to the contraction of 7.3 per cent in 2020-21.
“Real GVA at Basic Prices is estimated at Rs 135.22 lakh crore in 2021-22, as against Rs 124.53 lakh crore in 2020-21, showing a growth of 8.6 percent,” the data showed.
Let’s take a look at numbers-
The service sector in the country contributed s 50% of GDP and this largely remains the fastest growing sector.
The stock markets in the country, the Bombay Stock Exchange and National Stock Exchanges are some of the world’s largest stock exchanges going by the numbers of market capitalization.
Considering the fact that nearly 66% of India’s population is rural, it contributes almost 50% of India’s GDP.
India has the world’s 4th largest foreign-exchange reserves worth $631.953 billion.