The gross domestic product (GDP) is one of the measurement criteria of national income and gives the total amount produced within the geographic boundaries of a particular nation in a certain fixed period of time, say a financial year (in India).
We can define GDP in following 3 ways, which directly or indirectly leads to the same conclusion:-
1.GDP is equivalent to the total expenditures for all final products and services produced within the nation in a predetermined period of time (generally a year time consisting of three sixty five days).
2.It is equivalent to the sum of the value added at every phase of production (usually work in progress stage) by all the industries within a nation, plus taxes less subsidies on products during the period.
3.It is equivalent to the sum of the income generated by production in the nation in the given period of time viz., employees’ compensation, taxes on production and imports less subsidies and profits (gross).
The common procedure adopted for the measurement of GDP is the expenditure method (EM).
Mathematically, it is given by:-
GDP = Cp + Ig + Gs + (Ex Im).
Where
Cp= consumption
Ig= investment (gross)
Gs=Spending of government
Ex=Exports
Im= Imports
Theoretically, the above equation can be explained as:-
Gross Domestic Product is nothing but the total market value of all final product and services produced in a nation in a given year and is equal to total consumer consumption, gross investment and government spending adding the value of exports to it and subtracting the value of imports from it.
There are various sectors that contribute towards the GDP of India and require special attention while calculating
GDP. These sectors can be studied under three divisions, viz.
1.Primary sector or agriculture segment,
2.Secondary or manufacturing segment
3.Tertiary sector or service segment.
Five Components of Gross Domestic Product
So from above equation, we arrive at the five components of GDP and can be explained one by one in the following manner:-
Consumption (Cp)
Excluding new housing it includes everything that falls under household’s personal expenditure such as expenditures on food, clothes, fuel, education etc.
Investment (Gross) (Ig)
Investment in financial products will not be considered as Investment as it is mere conversion of money from one financial instrument to another, where as in this equation Investment will be the one where money is converted into physical goods or services by the purchase of computers, machines or household equipments.
Spending of Government (Gs)
It usually includes the expenditure incurred by the Government on final products and services which are consumed directly and are not used as a raw material for the manufacturing of a new product. So salaries paid to Government employees or expenditure incurred on national security will be a part of Government spending but Social security or other individual benefits will not be a part of it.
Net Exports (NEx) or [Export (Ex) minus Import (Im)]
Ex stands for gross exports which incorporate all product and services produced for consumption of a foreign countries and Im stands for gross imports which involves any product or services imported for consumption.
In Net Exports (NEx) component we observed that exports are added into it since goods produced may be used for the consumption of other countries and imports are subtracted since they are already included in the first three components above and also to avoid from calculating foreign supply as domestic supply.
The Indian GDP is calculated by the Expenditure Method which not only assists to measure the National Income but also help in judging the accomplishment, functioning and operations of the nation. It also assist the nation to predict the progress of the economy, deciding the demand and supply situation prevalent in the country, recognizing the purchasing power of the citizens, the per capita earnings as well as the situation of the country in the international community.
Click the XML Icon Above to Receive GPS Articles Via RSS!
