What is GDP ?
GDP means "Gross Domestic Product" it is the value of all final goods and services produced within a country in each year that is the Geographic area of the country.
Now explain each term in detail the measurement of GDP:
Involves counting the production of millions of different goods and services,smartphones,cars, music, downloads,computers,Steel,bananas,college education and all other new goods and services.
In the current year something them into a total Rupee value and GDP counts the good and services produced within the country and hence does not consider the products that the country imports from some other country.
For example - Car manufactured in India and exported to Europe would be included in the GDP but the bottle of wine manufactured in Scotland and imported in India would not be included in the calculation of GDP.
GDP calculations only considered as the product that are produced in the year of calculation. If mobile is produced and sold for rupees 6000 it would be included in the calculation of GDP but if someone buys a second hand.
GDP is that it only includes finished goods and not intermediate goods unless they are capital goods.
What is difference between finished and intermediate goods :
1.finished goods are those goods which cannot be sold again and are purchased for their final used for example when a person buys a t-shirt it is considered a finished good and its price is included in the calculation of GDP.
2.Intermediate goods are those goods which are used to make a finished good for example cotton yarn used to make the shirt one by is comes and intermediate goods and its price is not included in the calculation of GDP.
Per capital goods are goods that are used as intermediate goods to produce the final product but it still included in the calculation of GDP.
For Example -A tractor is used by farmers for producing a Potato A final good but it is still included in the calculation of GDP.
What is GDP and why and how did he number tells the size of a country's economy look for various ways to calculate GDP majorly there are two approaches.
First is income approach income approach starts with the income earned from the production of goods and services under Income approach. We calculate the income earned by all the factors of production in an economy what are the factors of production. Production are the inputs which goes into producing final product or service they are usually four factors of production for a business, labour, capital, land and Management in this approach.
We calculate income from each of these factors of production which includes wages got by the labour rent on by the land return on capital in form of interest as well as business profits earned by management.
Sum of all these incomes constitutes national income and is a way to calculate GDP is the formula of national income net is:
1. INCOME APPROACH
GDP (Factor Cost)=Net National Income+ Depreciation+ NFFI
GDP (Market Cost)=GDP (Factor Cost)+Indirect Taxes-Subsidies
4 Factors- Labour, Land, Capital & Management
National Income= Wages+ Rent+ Profits+ Interest+ Depreciation+ Net Foreign factor income (NFFI)
2. EXPENDITURE APPROACH
Sum of money spent on goods and services.
GPD =Consumption +Investment + Govt. Expenditure +(Export -Import)
Invest India business activities by buying machinery for themselves and government also send me all these activities contribute to the GDP of a country.
So, mathematically GDP is calculated by this approach with this popular GDP is equal to consumption + investments + government expenditures + exports - imports.
Consumption means -You paid for food gas bill etc.
Investments means -You bought house invested in shares extra.
Government expenditure means - Government constructed a Bridge Road money spent on that exports example of pair of shoes are made in India and exported to Europe imports for example address is made in Spain and is imported to India.
Few drawbacks of GDP
1. GDP calculations doesn't include underground economy or black money butter and cash transactions that take place outside of recorded. Marketplace is referred to as underground economy for the money is referred to as Black money. This is not included in GDP statistics. These activities are sometimes legal ones that are Undertaker's ways to avoid taxes and sometimes. They are out right illegal acts such as trafficking in illegal drugs.
2. Non market production are not measured in GDP calculation goods and services produced but not exchange for Mani are known as non market productions. There are not measured even though they have value for instance if you grow your own food the value of that food will not be included in GDP.
3. GDP could be Calculation complexities and different ways of calculating GDP as a concept.GDP was introduced when market was manufacturing given but now with majorly services driven expenditures calculating.GDP has become a complex mechanism statisticians take many exemptions and factors to calculate . Complex outputs such as financial services housing services.
Exp: Where most of the houses are self owned government services which are free extra part of calculation is adjusted for inflation and finding the GDP deflector.
4. Changes in quality of the product may not be attributed in the GDP calculation this year Smartphone might cost more than last year but if so it will also do more it is difficult for statisticians to attribute change in price to change in quality as well due to this inflation impact sometimes overstated is calculation because more difficult in services price of haircut may have not just increase due to inflation but also due to better services provided by the barber which is almost impossible to determine by a statistician with all these from till.
GDP is the most important parameter to define country's economic health.
