What is GDP?

• It is the final value of goods and services produced in a country during an accounting year.
• It includes
  • Private Consumption: The value of all goods and services purchased for consumption by households. (that is, Private Final Consumption Expenditure or PFCE).
  • Gross Investment: The total value of all capital investments made in the economy by business firms and the Government.
  • Government Expenditure: the value of all goods and services purchased for consumption by the government such as salaries of government employees etc.
  • Net of Exports and Imports: Net effect of exports (what foreigners spent on our goods) and imports (what Indians spent on foreign goods) [Net Exports or NX].

Calculation of GDP

• It can be calculated by three methods i.e. Income method, Expenditure methos and Production method or Value-added method.
  • Income Method: It measures GDP by adding up all the factor incomes earned by individuals and firms in the economy, such as compensation of employees: wages and salaries, Operating Surplus: profits, interest and rent and royalty.
  • Expenditure Method: This method calculates GDP by adding up all expenditures of the economy on goods and services. (PFCE + GFCE + Gross Investment + X-M)
  • Production Method: This method estimates GDP by adding up gross value of all final goods and services produced by various sectors during a certain period in an economy.