GDP Measurement: Civil Services Mentor Magazine - April - 2015

GDP Measurement

The gross domestic product (GDP) is one the most important and most watched indicators for looking into countries economic health. It measures the total value of finished products nd services produced during a time period which is usually a year. There are three components in GDP figure Agriculture, Industry and Services. The share of the agriculture and allied sectors in GDP has been consistently declining. During the eight years between 1999-2000 and 2007-08, the share of agriculture and allied sectors in GDP declined by 6.4 percentage points, while that of industry and services increased by 1.9 and 4.4 percentage points respectively. At present share of agriculture, industry and services in the economy is around 14, 26 and 60 percent respectively. GDP growth rate is increase in value of finished products and services in percentage terms as compare to base year. If GDP growth rate is positive it is good for the health of the economy. There are three methods which are used for the measurement of GDP:

  • The Income Approach
  • The Expenditure Approach
  • The Production Approach

In income approach income of everyone is added during a defined time period to reach the GDP figure. It is calulated by is calculated by adding up total compensation to employees, gross profits for incorporated and non incorporated firms, and taxes less any subsidies. In the Expenditure Approach every money spent is used for the calculation of GDP. Formula for the calculation of GDP through expenditure method is:

GDP (Expenditure)= Consumption+ Investment+ Government Spending+ Export- Import

In the production approach total money value of everything produced at every stage will be taken into account. The economic growth rate provides insight into the general direction and magnitude of growth for the overall economy. As per previous method ofmeasuring GDP and Growth rate of GDP, Indian economy sinked from average of 8.3 percent between 2003-04 and 2011-12 to 4.6 percent for 2012-14, China declined from 6.8 percent to 4.9 percent in this period. Slowdown in Manufacturing is muchmore deeper with growth of 0.2% only in between 2012-14. Crisis in global economy, Structural constraints and inflationary pressures, resulted in this slowdown. As one can imagine, economic production and growth, what GDP represents, has a large impact on nearly everyone within that economy. RBI changes its monetary policy based on the GDP figures. Stock markets and employment generation is totally linked with the GDP figures.

GDP is calculated with respect to a base year this help in eliminating the effect of the inflation and and base is provide against which the performance can be measured. Base year is changed from time to time in order to make GDP more realistic for present scenario. India has recently made few changes for the measurement of GDP:

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