What is Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the final monetary value of the goods and services produced within the country during a specified period of time, normally a year. In simple terms, GDP is the measure of the country's economic output in a year. In India, contributions to GDP are mainly divided into three broad sectors — agriculture, industry, and services. GDP is measured over market prices and there is a base year for the computation. The GDP growth rate measures how fast the economy is growing. It does this by comparing the country's gross domestic product in one quarter with that in the previous one, and with the same quarter of the previous year.

 

The GDP growth rate is driven by GDP’s four components. The main driver is personal consumption, which includes the critical sector of retail sales. The second component is business investment, including construction and inventory levels. The third is government spending whose largest categories are social security benefits, defence spending, and medicare benefits. The government often increases spending to jump-start the economy during a recession. The fourth is net trade.

 

When the economy is expanding, the GDP growth rate is positive. If the economy grows, so do businesses, jobs and personal income. If it contracts, then businesses hold off investing in new purchases. They delay hiring new employees until they are confident that the economy will improve. Those delays further depress the economy. Without jobs, consumers have less money to spend. If the GDP growth rate turns negative, the country's economy is said to be in a state of recession.

 

The GDP growth rate is the most important indicator of economic health. It changes during the four phases of the business cycle — peak, contraction, trough, and expansion.

 

Nominal GDP is the value of all final goods and services that an economy produces during a given year; it is not adjusted for inflation. It is calculated by using the prices that are current in the year in which the output is produced. Nominal GDP takes into account all of the changes that occurred for all goods and services produced during the year. If prices change from one period to the next and the output does not change, the nominal GDP would change even though the output remained constant.

 

Real GDP, on the other hand, is the total value of all final goods and services that the economy produces during a given year, accounting for inflation. It is calculated using the prices of a selected base year. To calculate Real GDP, you must determine how much of GDP has been changed by inflation since the base year, and divide out the inflation each year. Real GDP, therefore, accounts for the fact that if prices change but output doesn’t, nominal GDP would change.

 

In January 2015, the government moved to the new base year of 2011-12 from the earlier base year of 2004-05 for national accounts. The base year of national accounts had previously been revised in January 2010. In the new series, the Central Statistics Office (CSO) did away with GDP at factor cost and adopted the international practice of valuing industry-wise estimates in gross value added (GVA) at basic prices.