Gross Domestic Product (GDP):

In simple terms, Gross Domestic Product often known as Gross Domestic Income
(GDI) is the market value of every final item (including products/services) produced within a
nation in a time span of one year.

Gross Domestic Product is widely used to check economic health and living standard of
a country. GDP is generally computed on yearly basis. It comprises of investments, net
exports, government outlays and other public and private consumptions taking place within a
particular region.

GDP = C + G + I + NX

Where,

C = All consumer spending or private consumption in a country’s economy.

G = Total government spending.

I = Total spending on capital by businesses across the nation.

NX = Nation’s total net export which is the difference of total exports and total imports (i.e.,
NX = TE – TI).

Components of GDP:

The components of GDP are as follows:

1. Consumption: Consumption is the largest component of GDP because it is the

spending on products and services by households. It can be divided into durables and
non-durables.
- Durables: Durables are the products which offer consumption services over time,
such as cars, refrigerators or televisions.
- Non-Durables: Non-durables are simply the regular consumption products such
as beverages, petrol; and/or services like medical care, haircuts.
2. Investment: Investment is the sum total of spending done by households and
spending done by companies. It involves the households spending on housing and
companies spending on plant, machineries, inventories and equipments. Under
 situations of economic strength, investment grows rapidly, while in situations of
economic weakness, investment often drops off. Investment can be further classified
into three categories:
- Business Fixed Investment: Business fixed investment comprises of new
equipments, commercial buildings and factories.
- Residential: It includes new housing and related facilities.
- Inventories: It includes parts/components required for completing a product or
parts/co mponents which are not manufactured.
3. Government Purchases: Government purchases refer to the spending of local, state
and Federal governments on new product/services. These government purchases
largely include building highways, roads, and bridges by the state governments,
spending of local governments on education facilities and police forces, and military
purcases including weapons, aircraft, soldier welfare services, etc. Government
purchases have been gradually decreasing as a percentage of GDP during the post-war
period which is quite conflicting to popular belief.
4. Net Exports: The difference between total exports and total imports gives out net
exports. As GDP is defined as the output of the domestic economy, imports are thus
subtracted while calculating net exports. Export refers to the goods and services
which are produced in a nation and sold to foreign nationals. On the other hand,
imports are all the goods and services produced by another nation and sold to firms
and customers of other country. In case, imports surpass exports, then the net exports
can be negative.

Measuring GDP:

Various important approaches used for measuring GDP are explained as follows:

1. Expenditure Approach: This approach of calculating GDP considers it as the total

amount of final goods purchased by households, firms, government and foreign
nations. This formula of estimating GDP is undoubtedly the most significant
computation method in economics and other theoretical economic models are
extrapolations of this method. Under this approach, GDP is computed by combining
four probable types of expenditures.
 These expenditures act as the components of GDP which can be represented
through the following mathematical expression:
GDP = Consumption + Investment + Government Purchases.
2. Income Approach: Income approach is another approach which is most widely used
for measuring GDP of a nation. Under this approach, the total amount of net income
earned by different economic factors is considered. This basically defines GDP as
national income or the total of all income generated in a specific area over a given
period of time.
Thus, according to income approach, GDP can be expressed as:
GDP = Employee’s reimbursements + Rent + Interest + Proprietor’s Income +
Corporate Profits + Indirect business taxes + Depreciation + Net foreign factor
income.
3. Value Added Approach: According to this approach, the following formula is used
to compute GDP:
GDP = Value of sales of final goods – Purchase of intermediate goods for
producing final goods.

GDP Growth Rate:

The value of GDP by itself is not very interesting. What is interesting is the annual
growth rate, or year-to-year percentage change, in the value of GDP. To calculate the
percentage change in a statistic, such as GDP, one needs to know the value of the statistic at
two dates in time. Suppose that the value of GDP last year was Y L and the value of GDP in
the current year is YC. Then, the percentage change, or growth rate, of GDP is given by.

[YC – YL / YL] x 100%

A positive growth rate of GDP implies that the economy is expanding, while a negative
growth rate of GDP implies that the economy is contracting. An expanding economy is said
to be in a boom. While a contracting economy is said to be in a recession.
BUSSINESS CYCLE:

‘Business cycle’ or ‘Trade cycle’ is a term that describes economic activity variations
occuring in an almost regular time series in all the capitalist societies. Various indicators like
volume of employment, price-level, output and income demonstrates the amount of economic
activity in a community. The graph portrays like a wave when these indicators are plotted on
it. Thus, it is a regular phenomenon of rising and falling of the economic activity, where each
and every movement of rise and fall taken collectively describes a “Trade Cycle” or a
“Business Cycle”.

According to Keynes, “A trade cycle is composed of periods of good trade characterise

by rising prices and low unemployment percentages altering with periods of bad trait
characterised by falling prices and high unemployment percentages”.

Features of Business Cycle:

1. Recurring Fluctuations: Business cycles are represented by variations which occur

regularly in an unhindered pattern. This states that the repetition of expansion and
contraction does not have a uniform or regular period.
2. Period of Business cycle is no Longer than a year: The period of completion of a
particular business cycle is around 3 to 4 years. But, in some cases the duration of the
business cycle is either shorter or longer than that of the duration of a normal business
cycle. Those causes that are associated directly or indirectly with the physical season
and are due to seasonal fluctuations in economic activity taking place within the
period of one calender year makes it distinctly different. Usually, the period of
business cycle is not less than one year.
3. Presence of the Alternating forces of expansion and contraction: The
interchangeable forces of prosperity and depression in an economy that are in-built in
the system represent a business cycle. The force of expansion phase thrust the
economy to a high level of activity over a period of time. Initially the force is of low
intensity but finally regained by a counter force which results in contraction, ending
up the process with depression.
4. Phenomenon of the Crisis: According to keynes, business cycle is characterised by
the event of crisis. It means that the peak and trough are uneven as the expansion pase
of the business cycle ends up suddenly and depression slows down gradually.
 5. Synchronic: Existence of business cycle is contemporary. They have an enfolding
attribute of causing any changes in an individual industry or sector.
6. Consumption of Non-durable goods and services: A significant features of
business cycle is the consumption of non-durable goods and services which is least
affected by alternate phases of business cycle. Past data of business cycle clearly
states that there is a great balance in the consumption of non-durable goods.
7. Inventories of Goods: Inventories of goods and services are largely affected by
successive expansion and contraction. As depression sets in, inventories boom ahead
the required level resulting in the decrease of production of goods.
8. Profits Fluctuate more than any other type of income: Income from profit varies
more in terms of income accruing from other sources. Uncertain situations that prevail
during the occurrence of business cycle making it difficult for businessmen to predict
the future economic conditions.
9. International in Character: The important aspect of business cycle is that, they are
international in nature. As one country experiences the onset of business cycle, it
extends to other countries too due to business relations between them.

Phases of Business Cycle:

1. Prosperity or Expansion: In this phase, there exist an optimistic feeling between

businessmen and industrialists that is represented by enhanced production, high
capital investment in fundamental industries. Bank credit expansion, high prices and
 high profit. Boom exists more than the normal expansion of aggregate activities in an
economy. The level of economic activity rises which is not being the nature of ‘X’
increases at cost of ‘Y’; the whole system escalates. The entrepreneurs are motivated
in general to expand their activities and invest more resources in the process of
production. The whole process being initiated by these stimulants is named as
‘starters’ or ‘originating forces’.
When this process gets impetus, economic variations like output, employment,
investment, consumption, profits and prices soar collectively.
2. Boom or Peak: Prosperity attains the highest level and then the recession of the
economic activity from the peak phase, that is generally represented by retardation in
the rate of expansion resulting in slowing of the growth and then reaching the peak.
3. Recession: The beginning of recession means that boom is over signifying liquidation
in stock markets, burden in the banking system, clearance of some bank loans, fall in
prices, acute decline in the demand for capital equipment and abandonment of new
projects by the norms characterised by recession. As these signals are observed by
entrepreneurs they become suspicious about the future, that results in the fall of
psychological factors along with real economic factors pertaining to excess
investment, reduced liquidity, escalated costs leading to steep fall in prices indicates
the period of recession.
4. Depression: Depression is the protective period where business activities in the
country are below normal. Sharp decline in production, mass employment, low
employment, declining prices, reduction in profits and wages, credit reduction high
rate of business failures, creating an atmosphere of total negativity and hopelessness.
Deadlock in the construction activities. However, the consumer goods industry is not
much affected during depression.
5. Trough: The period of acute stress and despair in the economy describes Trough.
This phase of economy experiences downward or downturn shift as the economic
activities are retarded and ultimately come to a halt. Then once again these activities
record an upward swing in the economy.
6. Recovery: When the lowest point of depression has attained the gradual increase in
business activity is restored. Where the entrepreneur feels positive for the existing
economic situation resulting in improvement in business activities. Every economic
activity like industrial production, volume of employment gathers pace. Prices and
profits raise slowly, wages increase, banks expand their credit base as well as starting
of new investment in capital goods industry. Pessimistic environment is succeeded by
an atmosphere of hope.