What Is GDP? (Gross Domestic Product)

Before explaining the concept I would like to share a fact that, “According to the survey conducted Standard and Poor ,76% of Indian adults lack basic financial literacy and they don’t understand the basic key financial concepts.”

That’s the reason I choose to write on this topic.

Coming back to the concept, What is GDP?

In layman’s language GDP is the monetary value of all finished goods and services produced in a country over a period of time.

“According to the World Bank, Gross Domestic Product is define, As the measure of the total output of goods and services for final use occurring within the domestic territory of a given country regardless of the allocation to domestic and foreign claims.”

GDP is commonly used as an indicator of the economic health of a country.

The most common approach to measuring and quantifying GDP is the expenditure method:

GDP = Consumption ( C ) + Gross Investment ( I ) + Government spending ( G ) + ( Exports (X) — Imports (M) ) Or

GDP = C + I + G + (X-M)

Little History:

The idea of gross domestic product came into existence after the Great Depression and World War II. GDP was first developed by Simon Kuznets for a United States Congress report in 1934. His idea was to calculate all economic production by individuals, companies and the government in a single measure. According to him, GDP would rise in good times and fall during any crisis.

Types of GDP:

Nominal: Price levels for the year in which GDP is measured, states GDP in terms of current value of goods and services.

Real: GDP adjusted for changes in prices, estimate of GDP if prices were to remain constant.

Effects on Economy:

High GDP creates more job opportunities in the economy, but when GDP fall the unemployment rate rises which results in low production rate and at the same time inflation rate increases.

The concept of GDP was first put forward by the American Economist and statistician Simon Kuznets in 1934 for United States Congress report. He introduced the idea of calculating all economic production by individuals, companies and governments in a single measure.

Thus, an increase in GDP illustrates the overall progress made by the country people.

Simple equation is — “ High Growth = High Capital Formation = High Investment = High Income “
(OR)
High/Low Income — — -> High/Low Demand — — → High/Low Production — — — -> High/Low Income (Self explanatory)