What is the Full Form of GDP & Definition? |

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While reading the financial news, it becomes difficult to understand the news as there are many terms that boggle our minds. In this article we will be understanding such terms:

GDP: Gross Domestic Product

Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. To understand GDP, let us take an example- There is a country named XYZ, where only tea, milk and sugar is produced.

Tea: 10 kg with price 10 per kg

Milk: 10 kg with price 20 per kg

Sugar: 5 kg with price 10 per kg

The goods used by the population:

Black tea: products used tea and water only: 5 kg : price pf black tea: 20pr kg : total value 100Rs
Milk tea: products used tea, sugar and milk: 5 kg of each : Price of milk tea: 50 per kg : total value: 250Rs
Milk:5 kg: price 5* 20: 100Rs

(These are assumptions, just to explain the concept the quantities are simplified)

So you need to understand there are products which are used as the raw form eg milk as well as finished good like tea. So the value added in GDP is the final forms in which it is consumed.

GDP: 100 +250+100 : 450

Second thing, the GDP is normally calculated over a period of time, You must have read in the news about quarterly prediction of GDP, that means GDP for 3 months. Annual GDP prediction meaning the time period an year.

Third thing, In GDP, the word domestic means the products produced within the boundary of the country.

Fourth Thing, Gross word : As you know with time the price of each product changes. lets us assume that in 2012 the price of milk was 10 rs per kg but in 2022 it is 20rs per kg. In both years the production is same ( 10 kg) then the GDP in 2012 will be 100 and in 2022 it will 200. But there is no actual increase in the product. Gross includes inflation and does not give clear prediction of increase in the production.

To avoid that error, there is Real GDP:

Real Gross Domestic Product (Real GDP)

Real GDP is a macroeconomic measure of the value of economic output adjusted for price changes (i.e. inflation or deflation).

So when real GDP of 2012 and 2022 is checked then it will be equal as price are adjusted according to inflation and deflation. The earlier GDP is called Nominal GDP where we consider the prices of the present year. But when we use GDP Deflator to adjust inflation/ deflation then it is called Real GDP.

GDP Deflator

GDP Deflator measures the changes in prices for all the goods and services produced in an economy.

GDP Deflator : (Nominal GDP/ Real GDP)* 100

Will be continuing this discussion in next articles, You can give us feedback and can suggest topics for further discussion.

How GDP is calculated?

There are three ways by which GDP is calculated

Income Approach
Value added Approach
Expenditure Approach

Income Approach

An approach to calculate GDP that involves adding up all of the income earned within the borders of a country in a given year; the income approach adds up wages, rents, interest, and profits.

Y=w+i+r+p

Economists define four factors of production: land, labor, capital and entrepreneurship

So these factors earn in one way

Labor : earn wages that is represented by w in the formula

capital: earn interest- ‘i’

land : earn rent -‘r’

enterprenuership: earn profit- ‘p’

Value Added Approach/ Production Approach

The production approach sums the “value-added” at each stage of production, where value-added is defined as total sales less the value of intermediate inputs into the production process. For example, flour would be an intermediate input and bread the final product; or an architect’s services would be an intermediate input and the building the final product.

Expenditure Approach

The expenditure approach adds up the value of purchases made by final users—for example, the consumption of food, televisions, and medical services by households; the investments in machinery by companies; and the purchases of goods and services by the government and foreigners.

Y=C+I+G+X−M

Where

C= consumption by people
I= Investment
G= Government expenditure
X= exports
M= imports

Across the world, GDP are calculated and forecasted. To maintain standard in calculation there is System of National Accounts, 1993. To provide information that is useful in economic analysis and formulation of macroeconomic policy

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