Jan 23, 2006

GDP everywhere

What's GDP? Why does every business magazine pays more attention to this acronym? What's the relevance of GDP in a country's economy?

GDP or Gross Domestic Product is the total value of all products and services produced within a country in a specific time period. It is one of the measures of national income and output. It takes into account only the final products and services consumed by the end user and not the intermediate products, which will lead to double counting of economic activity. For example, in the automobile industry, the final consumer pays for a car and this payment includes the price of the tyres. So the value of the tyre manufactured is taken into account only at the end user level and not while the tyre is bought by the car manufacturing unit.

GDP is calculated by using the following expenditure method :-

GDP = Consumption + investment + exports - imports

Consumption - expenditure on house-hold items like food, electricity, rent etc. So if the per-capita standard of living increases, then GDP also increases.

Investment - Business investments like construction of a factory and purchase of machinery and equipment for the factory etc. Therefore, an increase in industrial activity directly contributes to an increase in GDP.

Exports - Goods and services produced for overseas consumption has to be added to calculate GDP

Imports - Goods from overseas markets has to be subtracted.

GDP per capita (GDP divided by the total population) is used as an indicator to measure the standard of living in an economy. GDP measurement standards are consistent across many countries and is calculated on a quarterly basis. India is ranked 4th after United States, China and Japan based on GDP. However India is ranked 125th based on GDP per capita because of it's huge population. The GDP of India has grown by 8.1% at the end of the first quarter of 2005-2006.

Source of Information : Wikipedia

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