What is GDP? What does Gross Domestic Product mean?
'Gross' means total, 'Domestic' means within the political boundaries, and 'Products' means goods and services produced within a year in the state. You can earn by only two ways: Either you produce something, like some people are producing cars, bottles, toys, and mobiles or you give some services like a doctor, lawyer, anyone provides services by working in a company, or a barber gives services by cutting hairs, the value of all these goods and services is called products in GDP.
Value means
if you have cut the hair in 100 dollars, then its value is 100 dollars, or if
you've bought a bottle for 10 dollars, then its value is 10 dollars, the value
of all these goods and services within a year within a country is called GDP.
Suppose a company in the USA goes to India to manufacture something. In that
case, it will be counted in the GDP of India. That will not be counted in the
GDP of the USA. That's why countries focus so much on making products in their
own country.
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| GDP |
Let's
understand this with the help of an example, assume there is a mall, some shops
are selling clothes in that, some are cutting hairs, a tarot card reader is
predicting the future, someone is selling utensils, Goods and services are
being sold on every floor. If we note the value of every sold item and service
and we do it for a year, and at last, we add them, that will be the GDP of that
mall for the year. In the same way, how much goods and services are produced in
a country within a year is its GDP.
Why is it needed to calculate the GDP? Why is so much effort needed to calculate GDP?
If the GDP is going up every year, it means the product is more in the country, the economy of the nation is good. If the GDP is falling every year, fewer goods and services are being produced in the nation. When the production is low, then the selling is also low. When there is less selling, the business will earn less money. Earning less money means the purchasing power of people is decreasing, and the economy is going down.
We get to know the economic health of a nation by its GDP. Government makes its policies according to its GDP. When the data of GDP is released, we get to know about the shortcomings of a country. Without knowing them, a country cannot improve them. The GDP of the USA is number one all over the world, USA's GDP is around 22.9 trillion dollars and the second is China with an economy of 18 trillion dollars whereas the GDP of India is 2.6 trillion dollars, GDP of Pakistan is 263.7 billion dollars and keeps on changing.
How is GDP calculated?
Let's assume there is any company that bought a battery from one place and a chip from another place and sold the mobile. So the battery that was bought at its price will be included in the GDP or not, and if that gets added, then the final mobile that would be sold the price of that mobile will also be added to the GDP or not? And if both their prices are added, then the battery price is added twice to the GDP. So by this, the process of calculating the GDP will be incorrect.
Assume Mark wants to eat an omelette and he buys the eggs from the market, then its price will have added to the GDP, but if someone from a bakery buys the eggs because he wants to make a cake for selling, then the price of that egg will not be added. The price of the final product, i.e. cake, will be added to the GDP. The same happens with every product. The concerned department of the country records all this information; for example, India Central Statistical Office records this data.
These departments
record which thing is paid for by the businessman and what things consumers are
buying? The products that are counted in this are the ones that are sold after
production. If Sam makes a wooden product and keeps it in his home, it will not
be counted in GDP production. Along with the goods and services, investment is
also counted in the GDP,
Types of GDP - Real GDP, Nominal GDP
The GDP
increases in only two cases, one is called Real GDP, and the other is called
Nominal GDP. If there is more production of goods and services, it is called
Real GDP. If the production is not much, but the prices of the products and
services have increased, it is called Nominal GDP. When the government presents
the data of GDP in front of you, you have to pay attention that if it is Real
GDP or Nominal GDP.
Base Year in GDP
The main
purpose of GDP is to tell the production of goods and services of the country.
So that's why the second case where the GDP is increasing due to the price if
we consider that, then we don't get to know the actual economy of the country.
To resolve this issue, a base year is taken. For example, the GDP of India is
calculated by taking the base year as 2011-12.
GDP with Constant Prices - GDP with Current Prices
When you see the data of GDP in the news, the data is written in two ways, the first is GDP at constant prices, and the second is GDP at current prices. When GDP at constant prices is written, that means 2011 is taken as the base year, while GDP at current prices means the base year is the current year. Whenever the product is made in a factory, the tax is not included. The price is called the factory price, and when the tax is added, it is called the market price. Before 2015, the GDP was calculated with factor price in India; after that, it is being calculated by the market price.
There is a
house where four people live in it, and their income is 100 dollars, the income
of the second house is 120 dollars, but there are 20 people in that house. Even
though the income of the second house is more, the first house will be managed
easily. The GDP of the UK and India is almost the same, but due to population,
IMF and the World Bank consider UK's economy better. The reason is that the GDP
of the UK and India is the same, but there is a huge difference in GDP per
capita. The per capita of the UK is around 40,000 dollars, whereas India's per
capita is 1900 dollars.
How to Calculate GDP of a Country?
There are many formulas to calculate the GDP. GDP by expenditure, GDP by income. GDP by production. When the government presents the data of GDP to you, then you have to pay attention to some things like Nominal GDP, Real GDP, GDP at constant price and GDP at the current price. The GDP is calculated in two ways:
The first is annually, and the second is quarterly. There are four quarters in a year, and the first quarter will be compared with the previous year's first quarter to compare the production of the rainy season with the rainy season of the previous year. In 2020, due to corona, the third-quarter rate of the GDP went down to 0.4% in India. The third quarter will be compared to the same quarter the next year, and the GDP rate will rise by little production because it was way down in corona times. So the GDP doesn't need to increase only because of production.
GDP rate is
calculated very simple; for example, if the GDP was 100 in the third quarter of
the previous year and the third quarter of the current year, GDP is 105. Then
the GDP rate will be 5%. The GDP has some limitations too. It is very difficult
to add the data of informal sectors; maximum sectors in India, Pakistan and
Bangladesh are unorganized. The second problem in this is the Shell Companies
which don't produce the goods and services. Shell Companies are established
just for money laundering and saving taxes, and shell companies are also
counted in the GDP because the government benefits from adding these companies.
They add them and doesn't take any legal action against them. A report says
that 30% of companies in Pakistan and 36% of the companies in India are shell
companies. It means that they are just showing taxes and doing money
laundering, and in actuality, they are not producing any goods or services.
Even then, their data is counted in the GDP. Every government does these kinds
of tricks to increase the data of their GDP.
GDP and Unemployment
If GDP increases, then unemployment will decrease. Governments do not show the correct GDP data; this is why in Pakistan and India, the rate of GDP is increasing while the unemployment rate is also increasing.
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Keywords
GDP, GDP of
Pakistan, GDP of India, Gross Domestic Product, Gross Domestic Product
explained, Real GDP, Nominal GDP, Unemployment and GDP, Base Year in GDP,