GDP Full Form

GDP: Gross Domestic Product

What is GDP number tells us and how it is calculated GDP means gross domestic product. 

It is the worth of all final goods and services produced within a rustic in annually that's the geographical area of the country now let me break this sentence and explain each term intimately the measurement of GDP involves counting the assembly of many different goods and services smart phones, cars, music, computers ,steel ,college education and every one other new goods and services produced within the current year and summing them into a complete rupee value now GDP counts.

How is GDP calculated?

the good and services produced within the country and hence does not consider the products that the country imports from some other country so a car manufacturer in India and exported to Europe would be included in the GDP but the bottle of wine manufactured in Scotland and imported in India would not be included in the calculation of GDP.

GDP calculations only considers the product that are produced in the year of calculation so if a mobile is produced and sold for rupees 5000 it would be included in the calculation of GDP.

But if someone buys a secondhand mobile that would not be considered while calculating a GDP another important factor in calculation of GDP is that it only includes finished goods and not intermediate goods unless they are capital goods.

 what is difference between finished and intermediate goods

Finished goods are those goods which cannot be sold again and are purchased for their final use for example when a person buys a t-shirt it is considered a finished coat and it's price is included in the calculation of GDP intermediate goods are those goods which are used to make a finish code for example cotton yarn used to make the shirt one bias comes under intermediate goods and it's price is not included in the calculation of GDP now capital goods are goods that are used as intermediate goods to produce a final product but are still included in the calculation of GDP.

For example a tractor is used by farmers for producing a potato a final good but it is still included in the calculation of GDP now hope you understand what is GDP and why and how GDP number tells the size of a country's economy now we will look for various ways to calculate GDP majorly there are two approaches first is income approach.

Income approach starts with the income earned from the production of goods and services under income approach we calculate the income earned by all the factors of production in an economy.

what are the factors of production factor of production are the inputs which goes into producing final product or service they are majorly four factors of production for a business labor capital land and management in this approach we calculate income from each of these factors of production which includes wages got by the labor rent owned by the land return on capital in form of interest as well as business profits earned by management sum of all these incomes constitutes national income and is a way to calculate GDP.

here is the formula of national income net national income is wages plus rent plus interest those profits to make it gross we need to do two adjustments first is a depreciation of capital and second is add net foreign factor income and FF I is income earned by the rest of the world in this country - income earned by the country from the rest of the world so GDP formula under this approach becomes wages plus rent plus interest plus profits plus depreciation plus net foreign factor income this is also called GDP factor.

 GDP market cost so GDP market cost is GDP factor cost plus indirect taxes minus subsidies so in 

 Now we will discuss the second approach of calculating GDP that is expenditure approach this approach is converse of income approach as rather than income it begins with money spent on goods and services for instance consumers spend money to buy various goods and services and businesses spend money as they invest in their business activities by buying machinery for instance and governments also spend money all these activities contribute to the GDP of a country so mathematically GDP is calculated by this approach with this formula GDP is equal to consumption plus investment plus government expenditures plus exports minus imports consumption is.

For example you paid for food gas build car etc investments for example you bought house invested in shares etc government expenditure example government constructed a bridge a road money spent on that exports example a pair of shoes are made in India and then exported to Europe imports for example a dress is made in Spain and is imported to India as discussed earlier too we need to include the exports to other countries in calculation of GDP but we need to subtract the imports from other countries to our country as that is not included as the part of calculation of GDP mostly GDP is calculated with both approaches and calculations are done in such a way that values from both approaches should come almost equivalent calculation of GDP from above methods gives us nominal GDP of the country in next video we will discuss what is the difference between nominal and real GDP.

GDP is definitely one of the most important indicator of country's economy but it may not always give the right picture and there are few drawbacks of this parameter first is GDP calculations doesn't include underground economy or black money barter and cash transactions that take place outside of recorded marketplace are referred to as underground economy or the money is referred to as black money and this is not included in GDP statistics.

These activities are sometimes legal ones that are undertaken so as to avoid taxes and sometimes there are outright illegal acts such as trafficking in illegal drugs second is non-market production are not measured in GDP calculations goods and services produced but not exchanged for money are known as non-market productions these are not measured even though they have value for instance if you grow your own food the value of that food will not be included in GDP.

If you decide to watch TV instead of growing your own food and now have to purchase it then the value of your food will be included in GDP so you understand the concept third drawback could be calculation complexities and different ways of calculating GDP as a concept GDP was introduced when market was manufacturing driven but now with majorly services driven expenditures calculating GDP has become a complex mechanism statisticians.

take many assumptions and factors to calculate complex outputs such as financial services housing services where most of the houses are cell phone government services which are free etc another trickiest part of calculation is adjusting for inflation and finding the GDP defoliator we will talk about this in detail in our next videos changes in quality of the product may not be attributed in the GDP.

calculation this year smartphone might cost more than last year but if so it will also do more it is difficult for statisticians to attribute change in price to change in quality as well due to this inflation impact sometime is overstated this calculation becomes more difficult in services price of haircut may have not just increased due to inflation but also due to better services provided by the barber which is almost impossible to determine by a statistician with all these drawbacks still GDP is the most important parameter to define country's economic.

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