This is a common word thrown around by economists and news channel everyday, explaining how the GDP has dropped by 2% to how the growth is being shortened or how the GDP may grow in future. But most people in India don’t even know the meaning of GDP and this the irony of our country. So if you don’t know what GDP is? How it is calculated? What are the factors taken into account while calculating the GDP? Let us know here at Truly Global.
GDP(gross domestic product) in India is calculated by Central Statistic Office. It is the premier statistic for measuring the overall performance of an economy, it measures the value of production within the nations borders. As the definition goes it is the number of price all the products produced within a country. It’s not an easy task to calculate the total price of every good as it sounds, the team of statistic officers get in touch with retailers and consumers to get to know more about current market for every product from a toothpick to airplanes. We can easily understand by dividing expenditure into 4 parts:
Consumer expenditure - goods and services sold to households
Government expenditure- goods and services sold to the government
Investment expenditure- expenditure by business on plant and equipment
Net exports- exports-imports( import is subtracted because the goods we import are produced in different country)
By adding all these up the team of officers get a number which is known as GDP, but we should adjust for price changes like if our GDP increases that may not mean our production is increasing there maybe inflation leading to increase in the GDP so there is something known as real GDP where prices of goods of a base year is taken and the GDP is calculated, if this real GDP increases this means the production of a country is increasing and the country is growing
But there maybe Indians in settled outside the country and their production is included while calculating Gross National Product (GNP- value of production by a country’s citizens).
Method of Calculation
India's GDP is calculated with two different methods, one based on economic activity (at factor cost), and the second on expenditure (at market prices).
The factor cost method assesses the performance of eight different industries.
Eight industries include:-
Agriculture, forestry, and fishing
Mining and quarrying
Manufacturing
Electricity, gas and water supply
Construction
Trade, hotels, transport, and communication
Financing, insurance, real estate, and business services
Community, social and personal services
The expenditure-based method indicates how different areas of the economy are performing, such as trade, investments and personal consumption.
But there are many people who believe calculating GDP is not a right way to assess an economy because there are circumstances when price of a service or a good is not taken into account, example where your friend is a mechanic and you go to him to repair your car and he does not charge you so the statistical team won’t get to know the cost of your car repair and that price won’t go into the GDP, it would also be incorrect to count second hand sales as the production of the goods sold is counted in the GDP of the year of manufacture but when you sell it the amount you receive is also calculated in the current year’s GDP which is wrong.The money made in illegal gambling, prostitution, drugs are also not taken into account as the money that is earned is hid to the government. Like this there are many circumstances where production is not included and in the GDP this is known as underground economy. Many people believe that underground economy is about 50% of the GDP calculated.
So before you go dancing in joy after hearing the news of growth of GDP 11.5% what you must do is see the base year that this GDP is being compared to. For example recently I.M.F said India will grow around 11.5% in FY22 which is true but 11.5% from, -23% which is quite common because the economy took a hit when the economy was completely closed and any recovery from a state like that would be a V shaped one. The second thing you have to keep in mind before jumping is that if the GDP is real or nominal and try to always see the real GDP because nominal GDP isn’t adjusted to inflation and in most of the cases the growth seen would only be due to inflation.
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