What is GDP? How is India’s GDP calculated?

Gross domestic product (GDP) is the single standard indicator used across the globe to indicate the health of a nation's economy: one single number that represents the monetary value of all the finished goods and services produced within a country's borders in a specific period. Gross domestic product may be easy to define but it is complex to calculate, and different countries employ different methods.

What is GDP? How is India’s GDP calculated?: Gross Domestic Product GDP is considered as a measure of economic progress of a country. Simply explained, this rate or volume is the total monetary value of the transaction of products produced and services provided during a given period.

Importance of GDP (Gross Domestic Product)

Citizens, economists, politicians, investors and entrepreneurs are affected by GDP results in one way or another. When there is no expected growth in the overall economic progress or when there is a setback or there are indications of uncertainty in the growth rate, the government can invest financial resources in an appropriate way or readjust and give the necessary stimulus to focus on economic recovery. That is why governments are convinced of GDP as a valuable compass or measure of progress. Based on the rate of GDP, businesses are forced to expand or limit their production or services.

Methodology followed for data collection for Indian GDP

The method of calculating the GDP rate in India has a long history. The Central Statistics Office (CSO), a subsidiary of the Ministry of Statistics and Programs of the Central Government, is responsible for calculating India’s GDP.

This department is engaged in the important work of data collection, compilation and maintenance of statistical records. In addition to its other functions, it is engaged in the compilation of various indices by surveying industries and industries from time to time.

Calculates other statistics including GDP with the help of Industrial Product Index, Wholesale Price Index etc. This organization coordinates with various organizations and departments of all the state governments, Union Territories and the Central Government and collects information. For example, the Department of Industrial Policy and Promotion, a subsidiary body of the Ministry of Commerce and Industry, collects information related to industrial output through the Industrial Statistics Unit.

Method of calculating GDP rate

To estimate GDP, each country considers the income generated from the various types of natural resources available to it and the manufacturing and service sectors. Likewise, here is a bird’s eye view of a small attempt to explain the approach our country follows.

There are four main methods followed to calculate GDP in India namely:

  1. Factor cost- based on overall economic activities
  2. Market prices- based on costs
  3. Nominal GDP- based on current market rate
  4. Real GDP – adjusted with rate of inflation.

The results of all the above four will be published separately.

The rate of factor GDP is found based on the average growth/change of various sectors over a specific period of time. For example, the GDP rate per cent. +7 means that the total average economic growth rate of products and services in all sectors is %. It means +7 percent.

Why is GDP calculation important for any country’s growth?

What is GDP? How is India's GDP calculated?
What is GDP? How is India’s GDP calculated?

Gross domestic product (GDP) is an important metric for any country. It helps measure the total monetary value of goods and services flowing through an economy over a particular period of time. In times of crisis, like the coronavirus pandemic, the GDP, along with other economic data points, is an indicator of the Indian economy’s health.

What is GDP and the ways to calculate it?

This includes not only goods and services that were produced by domestic firms, but also the output generated by foreign companies in India as a result of foreign direct investment (FDI). As long as output is generated within a country’s borders, the government will count it towards the GDP.

There are three ways to calculate a country’s gross domestic product. And, in theory, no matter what method you use — the end result should be the same value.

As their respective names suggest, the expenditure method calculates GDP according to how much money was spent and the income method uses the amount of money earned.

The Gross Value Added (GVA) method or the factor cost method measures GDP by calculating value addition that was generated by each sector of the economy as it moves through the supply chain.

How does India calculate GDP?

To assess India’s productivity, the GDP is calculated using the factor cost method across eight industries and the expenditure method is used to analyse how different areas of the economy are performing.

There are four parts to the expenditure method. Private consumption includes things like buying a car or eating out. Only final consumption is taken into account.

An existing house, one where the owner is technically paying rent to himself, will count towards private consumption. However, buying a new house will be counted towards the second part of the formula as an investment.

This is because a new house will be looked at as a good that will be used in future production. The same goes for other buildings, heavy machinery, and leftover scraps.

The third aspect of the expenditure method is government purchases. This includes salary to employees, direct benefit transfer (DBT) payments, pensions, subsidies and other ways that the government spends its money for the public good.

However, not all goods within a country are homemade. Some are bought from other countries. So when calculating foreign expenditure — the value of imports needs to be subtracted from the value of exports. Imports are already accounted for within the first part of the expenditure method, private consumption.

What is the factor cost method of calculating GDP?

The GVA figure of India’s economy is arrived at by calculating the net change in value for each sector over a designated time period.

The eight industry sectors that India takes into account are:

  1. Agriculture, forestry, and fishing
  2. Mining and quarrying
  3. Manufacturing
  4. Electricity, gas and water supply
  5. Construction
  6. Trade, hotels, transport, and communication
  7. Financing, insurance, real estate, and business services
  8. Community, social and personal services

The GDP number from the two methods may not be an exact match but the level of discrepancy should be minimal.

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