Macro Moves

GDP Made Easy: A Beginner's Handbook

Created on 30 Nov 2023

Wraps up in 4 Min

Read by 2.5k people

Updated on 02 Dec 2023

Gross Domestic Product (GDP): Meaning, Calculation, Importance

Hey, did you hear? India's economy did really well from July to September. The country's overall economic output, known as Gross Domestic Product (GDP), went up by 7.6%. That's a sign of a strong and positive economic performance, showing growth and expansion. Good news for India! 

But are you familiar with the answers to these questions?

➡️ What precisely is GDP?
➡️ What is Real GDP?
➡️ How is GDP calculated?
➡️ Is GDP considered a reliable and effective measure?
➡️ What is the meaning behind these news headlines?

If not, fear not, as we'll delve into all of this in the upcoming discussion. Let's start by understanding...

What is GDP?

GDP, which stands for Gross Domestic Product, is like the economic heartbeat of our country. It's the total of all the goods and services made, sold, and buzzing within India over a year.

Think of it as a vast canvas that captures the brushstrokes of every business, every farmer's hard work, and every service rendered. It's not just a number; it's a living, breathing portrayal of our nation's economic vitality. 

More specifically, GDP represents the total value of the country's production during the period and consists of the purchases of domestically produced goods and services by individuals, businesses, foreigners, and government entities. It is an all-inclusive measure of economic activity, as it encompasses every sector of the economy. 

Moving on to…

What is Real GDP?

Real GDP is like the real deal of a country's economic performance. It's basically the total value of all goods and services produced. But here's the twist- it's adjusted for inflation. Why? Well, this adjustment helps us compare apples to apples when looking at different time periods.

So, instead of just seeing if the overall economic output has gone up, real GDP lets us figure out if it's because we're producing more stuff or just because prices decided to do a little dance. It’s more like cutting through the inflation noise to get a clearer picture of whether the economy is growing or taking a breather.

When we're sizing up an economy, the first question usually is, "Has the value of the output gone up because more is being produced or simply because prices have increased?" That's where Real GDP steps in, giving us a solid answer and playing referee between quantity and price changes in the economic arena.

Coming to…

How is GDP calculated?

Let's break down the GDP calculation- it's a triple treat! You can choose your favourite approach because, guess what, they all lead to the same result. 

First, we have the Production Approach, which calculates GDP by summing up the value of all goods and services produced in the country.

Then, there's the Expenditure Approach: this calculates GDP by summing all expenditures made in the economy, including consumption, investment, government spending, and net exports (exports minus imports).

Lastly, we've got the Income Approach: this calculates GDP by summing all incomes earned by individuals and businesses, including wages, profits, and taxes minus subsidies.

If these three methods are still a bit fuzzy, don't worry – I'll simplify it using the example of chai. ☕

Calculating GDP = Preparing the perfect chai. 🤌
Let’s say we have three different ways to prepare it- and no matter which method you choose, the taste is always spot-on. 

So, in the production approach, think of it as adding up the "flavour boost" at every step, from boiling to pouring. Each stage contributes its unique taste to the final chai.

Then comes the  Expenditure Approach. Imagine peeking into everyone's cupboards and totalling up the shopping list for the ultimate chai-making spree. So, I would say it is like keeping tabs on what everyone's adding to their chai cart. 

And the Income Approach- it's the total earning for everyone in the chai-making crew. 

I'm hoping it's making more sense for you now, right?

If you want to read about Why the Indian GDP Growth Rate is Declining? then click on the link.

Is GDP a Good Measure of Economic Well-being?

GDP is like the economic scorecard, measuring both how much money everyone makes and how much they spend. So, when we look at GDP per person, it gives us an idea about the average income and spending of folks in the country. That makes sense, right? After all, most of us want to earn more and treat ourselves a bit.

Now, when we calculate GDP, it's like putting a price tag on everything- the goods we buy, the services we enjoy- basically, everything we spend on. But here's the catch: it only counts things happening in the official market. So, your grandma's special biryani recipe or that helpful gesture from your neighbour doesn't make the cut.

Now, let's talk about why GDP matters. 

Picture this: more than two-thirds of the U.S. economy is driven by regular folks like you and me buying things. That's consumer spending, and it's a big deal. When people feel good about the economy, they're out there spending money. But if confidence takes a hit- maybe due to uncertainty or tough times, spending slows down, affecting businesses and jobs.

And guess what else influences GDP? Business investments and government spending. When businesses invest, it's like they're gearing up for a stronger economy, creating jobs and all. And when the government steps in during tough times, spending money is like a superhero move to boost the economy.

The Bottom Line

So, there you have it- the lowdown on GDP in our economic adventure. It's like the background music to India's story, capturing the hustle of chaiwalas, coders, and farmers on our lively streets. 

Whether it's production, spending, or income, GDP is the tune that brings it all together. With those promising headlines about growth, it's like our economic playlist is set to get even better. 

Here's to what's coming next – every time GDP goes up, it's like a high-five to our awesome nation's energy and success. Cheers to what lies ahead!

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Sakshi Dhakre

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Sakshi is an adventurous spirit who enjoys both the intellectual stimulation of Finance and the sensory experiences of good food and nature’s beauty. She has a passion for delving into complex financial topics and distilling them down into easy-to-understand insights. When she's not poring over financial reports, you might find her exploring a new corner of the city, trying out new restaurants and cuisines or admiring the beauty of the night sky.

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