GDP or Gross Domestic Product is the most commonly used measure for the size of an economy . In simple terms, GDP is the measure of the country’s economic output in a year . The GDP growth rate measures how fast the economy is growing. It does this by comparing the country’s gross domestic product in one quarter with that in the previous one, and with the same quarter of the previous year.
The GDP growth rate is driven by GDP’s four components. The main driver is personal consumption, which includes retail sales. The second component is business investment, including construction and inventory levels. The third is government spending as in defence spending, and medicare benefits. The fourth is net trade i.e Export minus Import.
When the economy of a country expands, businesses , jobs and personal incomes tend to grow and thus the GDP of the country . If the economy contracts, then businesses hold off investing in new purchases. They delay hiring new employees until they are confident that the economy will improve. Without jobs, consumers have less money to spend and thus GDP rate turns negative . When the GDP growth rate turns negative, the country’s economy is said to be in a state of recession.
Components of GDP :-
- Consumption , as in a car sold by Maruti Suzuki in India , A Godrej refrigerator made and sold in India, Mangoes from Malihabad consumed in India are some of the examples.
- Banking , insurance and educational services .
- Business investments like putting up a new factory in the country , Buying lands for expansions .
- Government spending like defence and medical expenses , construction of roads and bridges and other development projects
- Exports of goods as in tiles , refrigerators , clothes and mangoes made and produced in India to other countries.
Non – Components of GDP :-
- Sales of goods that were produced outside . Suppose a French Wine sold in US , would be the part of French GDP.
- Used or illegal products.
What is the Formula to calculate GDP?
G=C+I+G+NX , where G is GDP , C is Consumption , I is Investment , G is Government spending and NX is Net Exports.
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