Gross Domestic Product (GDP)


Gross Domestic Product measures the aggregate production of final goods and services taking place within the domestic economy during a year.

But the whole of it may not accrue to the citizens of the country.

For example, a citizen of India working in Saudi Arabia may be earning her wage and it will be included in the Saudi Arabian GDP.

Gross domestic product (GDP) is the broadest quantitative measure of a nation’s total economic activity.

More specifically, GDP represents the monetary value of all goods and services produced within a nation’s geographic borders over a specified period of time.

 

Nominal and Real GDP

When the money value of goods and services included in GDP is estimated on the prices of current year, it is called GDP at current prices or nominal GDP.

Here current prices mean the prices of the year of which GDP is estimated.

For example, for estimating GDP for the year 2012-13 if we use the prices prevailing in the year 2012-13, we shall get nominal GDP.

On the other hand, when the value of goods and services included in GDP is estimated on the prices of base year, we get GDP at constant prices or real GDP.

Increase in real GDP implies increase in the production of goods and services.

Therefore, the calculation of GDP at constant prices or real GDP gives us the correct picture of the economic performance of an economy.

 

Gross Domestic Product at Market Price

It is the money value of all the final goods and services produced within the domestic territory of a country during an accounting year.

GDPMP [Market Price] = Net domestic product at FC (Factor Cost) + Depreciation + Net Indirect tax.

 

Gross Domestic Product at Factor Cost

It is the value of all final goods and services produced within domestic territory of a country which does not include net indirect tax.

GDPFC [Factor Cost] = GDPMP [Market Price] – Indirect tax + Subsidy

 

GDP is used as an indicator of the economic health of a country

GDP can be used to compare the productivity of various countries with a high degree of accuracy.

It is a quantitative concept.

GDP indicates the ‘internal’ strength of the economy.

It is used by the IMF/WB in the comparative analyses of its member nations.