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MEASURING GDP, GDP GROWTH

RATE, & COMPONENTS OF GDP

MEANING
GDP is measured by taking the quantities of all goods and services produced,
multiplying them by their prices, and summing the total. GDP can
be measured either by the sum of what is purchased in the economy or by what is
produced. Demand can be divided into consumption, investment, government,
exports, and imports.

GDP or Gross Domestic Product is one of the most important ways of showing how
well, or badly, an economy is doing.
It's a measure - or an attempt to measure - all the activity of companies,
governments and individuals in an economy.
GDP allows businesses to judge when to expand and hire more people, and for
government to work out how much to tax and spend.

How is it measured ?
GDP can be measured in three ways:
 Output: The total value of the goods and services produced by all sectors of
the economy - agriculture, manufacturing, energy, construction, the service
sector and government
 Expenditure: The value of goods and services bought by households and by
government, investment in machinery and buildings - this also includes the
value of exports, minus imports
 Income: The value of the income generated, mostly in terms of profits and
wages.

Just because GDP is increasing, it doesn't mean that a citizen's standard of living is
improving.
If a country's population increases, that will push GDP up, because with more
people, money will be spent.
However, the individuals within that country might not be getting richer. They may be
getting poorer on average, even while GDP goes up.
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So the ONS publishes a figure for GDP per head (of population), which can often tell
a different story to the main GDP number.

GDP GROWTH RATE:

India's real GDP (Gross Domestic Product)is estimated to contract by 7.7% in 2020-21, compared to
a growth rate of 4.2% in 2019-20, with Real GVA (Gross Valued added) shrinking by 7.2%, as per
advance estimates released by the National Statistical Office (NSO) on Thursday.

What are its limitations?

GDP growth doesn't tell the whole story.
There are lots of things the statistics might not take into account:
 Hidden economy: Unpaid work isn't captured in official figures, such as caring
for an elderly relative
Inequality: GDP growth doesn't tell us how income is split across a population -
rising GDP could result from the richest getting richer, rather than Just because GDP
is increasing, it doesn't mean that a citizen's standard of living is improving.
If a country's population increases, that will push GDP up, because with more
people, money will be spent.
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However, the individuals within that country might not be getting richer. They may be
getting poorer on average, even while GDP goes up.
So the ONS publishes a figure for GDP per head (of population), which can often tell
a different story to the main GDP number.

 everyone becoming better off

[GRAPH RELATES TO GDP]

An increase in real gross domestic product i.e economic growth, will

cause an increase in average interest rates in an economy.

In contrast, a decrease in real GDP (recession), ceteris paribus, will

cause a decrease in average interest rates in an economy.
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Components of Gross Domestic

Product
Four major components of GDP are:

1. Private Consumption Expenditure

2. Investment Expenditure

3. Government Purchases of Goods and Services

4. Net Exports

01. Private Consumption

Expenditure :
This component measures the money value of consumer goods and
services which are purchased by households and non-profit
institutions for current use during a period of account. These are
classified into consumer durables, semi-durables, non-durables and
services,Broadly, this classification of consumer goods Is based on
the length of time within which consumer goods are used. Private
consumption expenditure includes expenditure on all these
categories of goods and services.
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2. Investment Expenditure :
Investment means additions to the physical stock of capital during a
period of time: Gross Private Domestic Investment shows the
aggregate value in this regard. Investment Includes building of
machinery housing construction, construction of factories and
offices and additions to a firm’s inventories of goods.

Whereas intermediate goods are used up in the process of making

other goods, capital goods (like machinery, building, etc.) get
partially depleted in producing other goods and services. This is
called depreciation of fixed capital goods.

Investment Is further
classified into following
four categories:
(a) Business Fixed
Investment:
It is the amount which business units spend on purchase of newly
produced capital goods like plant and equipment. Gross Business
Fixed Investment is the gross amount spent on newly produced
fixed capital goods. When depreciation is deducted from it, we
obtain Net Business Fixed Investment. It should be kept in mind
that depreciation occurs only in fixed capital goods.

(b) Inventory Investment

(or change in stock):
It is the net change in inventories of final goods awaiting sale of
finished goods, semi-finished goods and raw material. These are
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included because they represent currently produced goods which

are not included in the current sale of final output.

(c) Residential
Construction Investment:
This is the amount spent on construction of flats and residential
houses. The investment is said to be gross when depreciation is not
deducted. Net investment is gross investment minus depreciation.

(d) Public Investment:

This includes capital formation by government in the form of
building of roads, bridges, canals, schools, hospitals, etc. This
investment is called gross when depreciation is not deducted and
net when depreciation has been subtracted.

3. Government Purchases of
Goods and Services :
This component summarises government spending on goods and
services. It includes

(i) purchase of intermediate goods

(ii) wages and salaries paid by the government. All
government purchases are a proxy measure for
government output.

Such government purchases are treated as part of the final product.

Transfer payments which are made by government to households
and firms are not counted as part of GDR This is to avoid double
counting since the consumption or investment by recipients of the
transfer payments is counted in C and I.
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4. Net Exports (X – M):

It shows the difference between domestic spending on foreign goods
and foreign spending on domestic goods (exports). Thus, the
difference between Exports (X) and Imports (M) of a country is
called Net Exports (X- M).

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