Deciphering the GDP code

India Oct 03, 2020

If you happen to be a regular on social media or with the news, you may have come across the “-23% GDP” plastered headlines at least once recently. A negative 23% plunge in India’s quarterly GDP was revealed, and the fact that it’s bad news is a given. But in order to know what this actually means for us , let’s decode what is exactly  meant by a country’s GDP.

GDP stands for Gross Domestic Product. In simple words, if you were to add all the products and services, made in a year domestically in terms of money , you would get what is called the GDP. Basically, GDP shows our productivity within national borders and uses money as a measuring scale for the same.

When we say GDP accounts for domestic production, the immediate question that arises is the extent of what comes under “domestic”. When we say domestic, we mean everything produced within the country’s borders, irrespective of the origin of those production units. For example, if an American company has a manufacturing unit in India, the products manufactured will come under India’s GDP. The GDP  also excludes all imports made by the country.

Speaking in strict sense of the formula used to calculate GDP, production is divided into four types, namely,1) Individual consumption, 2) All investments made in the country ,3) Overall expenditure done by the government and 4) everything that is exported. All these values are what is known as the “final value”. It means that the value at the end of the production is counted instead of counting the prices of each individual material that goes into it. For example, in the production of a pen, we will count the final value of the pen instead of the plastic, ink and other materials separately. This ensures no overlapping as the cost of a pen naturally includes costs of material and labor.

Despite the definition, GDP consciously excludes many products and services produced in the country.  To make it sound less erroneous, GDP excludes all products that are NOT used to generate an income. So, the homemade cake you baked for your friend won’t be counted in the GDP, but the cake you bought from your neighborhood bakery is very much a part of the GDP.

Having said that, sometimes despite income being generated, some transactions evade being accounted. These include illegal employments and black- market exchanges. Some less shady, legal things include selling your second-hand commodities.

The GDP can be calculated using 3 different methods- Production approach, Expenditure approach and Income approach. Production approach involves adding values of each product leading up to the final good. Expenditure approach calculates money spent by the final consumers. Income approach involves adding the incomes of everyone working to produce these goods and services. GDP is usually calculated quarterly and then all quarterly GDPs are observed to get the yearly GDP.

It is quite obvious that under “Products and Services” incorporated into the GDP, all and sundry sectors are included. Some sectors contribute in whopping proportions while some , not so much. India’s GDP constitutes largely of the Service sector, at around 53%. It is followed by the Industrial sector at about 29%. The Agricultural and Allied Activities Sector constitute the rest at around 18%. The dwindling of any sector within a GDP is a cause of concern ,since in a country like India, all sectors employ large amount of labor and deteriorating production places them at a financially risky position.

Contribution of various sectors to India's GDP as per the Economic Survey 2019-2020

One of the most prominent signs of a healthy economy is a high GDP. A high GDP indicates that most sectors are showing high productivity which also shows that there is a good employment rate in the country. There is a smooth flow of money in the market and hence the economy is doing well.

The recent pandemic has ravaged economies and alarmingly dropped GDPs. Our national -23% quarterly count shows extreme unproductivity, however, the onus to restore this lies as much on the citizens as the government. A few generous steps on our part, supporting local businesses and making mindful investments, will go a long way in steadily helping our economy leap back up on its feet.

This article has been written by Shriya Chavan for The Paradigm

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