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GDP: Understanding the Key Measure of Economic Health

We often hear the terms ‘GDP’, ‘National Income’ in our day to day lives; in newspapers when the World Bank or a National Bank predicts a nation’s GDP and its growth rate for the next quarter or year; when Economists, policy makers and politicians debate how to increase the nations GDP and which policies would increase the national income of a nation. 

The GDP, National Income are also used as an indicator to measure the standard of living of people in a country, to identify whether a nation is developed or developing, to compare the progress between different countries or regions.

What is GDP

So, what is this GDP and why is it such an important part of Macroeconomic study?

For centuries, policymakers, kings, politicians, economists and researchers have tried to find how to raise the income of a nation over a period of time. 

In every nation, production of goods and services takes place. A variety of goods and services can be produced ranging from production of food grains to cloth to metals etc. These goods and services indicate the level of economic activity in a nation. If we find the monetary value of these goods and services produced in a nation in a given time period, we get what is known as ‘Gross Domestic Product’ (GDP). 

Let’s take an example, suppose in an economy five chairs are being produced to be sold to the consumers. The Price of each of these chairs in the market is say Rs 100. This Price represents the monetary value of the chairs. So, the GDP of this economy is the monetary value of all the goods and services produced within this economy i.e 5 x 100 = Rs 500. Obviously as the production of different goods and services in the economy increases, the GDP of that economy increases. 

Therefore, ‘Gross Domestic Product’ or GDP is the monetary value of all the final Goods and Services produced within a country during a period of time. The period of time is generally a year, but it can also be a quarter.  All the goods and services produced within the domestic territory of the nation are included.

GDP  is a single number which represents the level of economic activity in a nation over a period of time. So, for example when we say that the GDP of India is Rs. 1,57,60,363 crore in 2021-22, it shows that during the year 2021-22, goods and services worth Rs.1,57,60,363 crore were produced. It represents the level of growth in the country during that year. GDP is the most commonly used indicator of economic growth in a nation. An increase in GDP over a period of time represent an increase in growth.   A growth represents an increase in the standard of living.

Why do we take the monetary value of Goods and Services?

The ‘GDP’ is measured in monetary terms because a variety of goods and services produced in a nation are in different units of measurement, like cloth in meters, wheat in tonnes etc. It will become very difficult to add up these goods and services which are in different units to get the total economic activity taking place in an economy. 

So, to bring these different units on the same scale of measurement, we find their monetary value as it is possible to convert all goods and services into their money value. The money value of goods and services is the price at which these goods and services are sold in the market to the consumers.

Key Points

  • Gross Domestic Product or GDP is the monetary value of all the final Goods and Services produced within a country during a period of time. The period of time is generally a year, but it can also be a quarter.
  •  All the goods and services produced within the domestic territory of the nation are included.
  • The money value of goods and services is the price at which these goods and services are sold in the market to the consumers.
  • The GDP is measured in monetary terms as a variety of goods and services produced in a nation being in different units of measurement, their monetary brings these different units on the same scale of measurement

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