When someone talks about the progress of any country. He/she uses the term GDP many times i.e GDP of any country increases or decreases by XYZ percent. Have you ever wonder what is GDP and how it is calculated? So don`t worry if you do not know about GDP because after reading this blog you will be able to understand what is GDP and how it is calculated.
What is GDP (Gross Domestic Product)?
Gross Domestic Product (GDP) is defined as the monetary value of all final goods and services produced within a country in each year.
- It includes every goods and service produced in the country.
- Exports are also included.
- Imports are excluded.
- Finished and Capital goods also included.
For Example: If a country only produced 500 cars of worth rupees 20 crores in one year than the total GDP of the country is 20 crores.
How to Calculate GDP?
There are two ways of measuring GDP:
- Income Approach
- Expenditure Approach
Income Approach
In this approach we calculate income earned by all factors of production.
Four factors of production are Land, Labour,Capital and Management.
Formula for Calculating GDP:
GDP(Market Cost) = GDP(factor cost) + Indirect taxes + subsidies.
Where,
- National Income = wages + Rent + Interest + Profit + Depreciation + Net foreign factor income.
- NFFI(Net foreign factor income) = Income earned by the rest of the world in this country – Income earned by this country in the rest of the world.
- GDP( Factor cost) = Net National Income + Depreciation + NFFI.
Expenditure Approach.
In this approach we calculate money spent on goods and services.
Formula for calculating GDP as follows:
GDP = Consumption + Investment + Govt. Expenditure + (Exports – Imports).
where,
- Consumption = Money spent on buying goods and services.
- Investment = Money invested on house, shares etc.
- Govt. Expenditure = Money spent on people welfare, construction of bridges, roads, etc.
GDP of India
Every body is currently worry about the continuous decrement in GDP of India. Up to date it is decrease at a level of -23%. Main reason for this decrement is Covid – 19. Have a look what expert say about this.
