What Is GDP And How It Is Calculated?

New Delhi: GDP which stands for Gross Domestic Product represents the total sum of final goods and services produced within a country during a period of time, basically one year. It is an important microeconomic parameter that reflects the efficiency and effectiveness of an economy.

It is the most commonly used measure of economic activity and it is linked to many socio-economic parameters such as poverty, unemployment, the standard of living, education, health level, etc.

Since, the increasing GDP has a positive impact on poverty, health services, education, employment, etc. in the economy. Therefore, it is very important to understand the concept of GDP for the economic welfare of the state.

Types of GDP

Though the GDP is easy to define, however, at the same time it is difficult to calculate. It is the sum total of total goods and services by unit price. The problem is that prices are constantly changing from place to place within the country. For this reason, it becomes difficult to compare. Therefore, there are many indirect and average calculation methods based on tax, which reveal estimations and errors.

1: Real GDP

One method is to calculate GDP by keeping the price fixed or fixed in a base year. It is called real GDP which shows the variation of goods and services at fixed prices in the base year. The base year of the Indian economy is considered to be 2011-12.

2: Nominal GDP

When GDP is calculated on the basis of the current market price, it is called nominal GDP. Real GDP better reflects economic growth based on the government perspective and is beneficial for comparison. Unreal GDP is that which affects the citizens more directly.

The ratio of nominal GDP to real GDP is called the cost inflation index or CII. The Whole Selling Price Index (WPI) and Consumer Price Index (CPI) are drawn from CII data to present a realistic picture of inflation as it affects the common man. Most of these indices are derived by aggregating GDP data and are closely linked.

How to Calculate GDP?

This equation can be used in the calculation of GDP.

Gross Domestic Product = Private Consumption + Gross Investment + Government Investment + Government Expenditure + (Exports - Imports).

The GDP deflator is extremely important as it measures price inflation.

It is calculated by dividing the unrealized (nominal) GDP by the real GDP and multiplying by 100 (based on the formula).

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