What is GDP, how is it measured and why does it matter?
Many of us hear the term GDP more often in news and other analysis. GDP is an important tool to measure how an economy is doing. However, how many of us understand what GDP is, How is it measured, and why it is matters or important? This article will try to explain all of these questions. Let us delve into the topic now.
What is GDP and who Publishes GDP data?
Gross domestic product (GDP) is the total value of all finished goods and services made within a country during a specific period, normally one year.
GDP data is published quarterly in India. The Central Statistical Organisation (CSO), Ministry of Statistics and Programme Implementation, publishes the GDP data.
How is it measured?
According to the National Accounts Statistics Manual, Central Statistics Organisation, there are three approaches to Measuring the GDP. They are i) Production Approach; ii) Income Approach and iii) Expenditure Approach.
i) The Production Approach:
The production approach measures the sum of gross value added of all final economic activities within the countries plus indirect taxes minus subsidies on goods & services.
Gross value added means the difference between output and intermediate consumption.
ii) Income Approach:
The income approach is the sum of compensation of employees, operating surplus and gross mixed income plus taxes net of subsidies on production.
iii) Expenditure Approach
The expenditure approach of GDP shows the final demand (of Goods & Services or use of goods & services) of the output. The components of the expenditure approach are i) Government Final Consumption Expenditure (GFCE), ii) Private Final Consumption Expenditure (PFCE), iii) Gross Fixed Capital Formation (GFCF), iv) Change in Stocks (CIS), and (v) Net Export of Goods & Services.
The Production approach GDP is regarded as a more accurate estimate in the National Accounts Statistics (NAS) of India. NAS also clearly shows the differences between the production and the expenditure approach of GDP.
What is the Current GDP?
According to CSO’s Estimates in May 2024, the Real GDP is to grow (annually) by 8% in Fiscal Year (FY) 2023-24 as compared to 7.0% in FY2022-23. Nominal GDP has witnessed a growth of 9.6% in FY 2023-24 in comparison to 14.2% in FY 2022-23.
For the Fourth Quarter, the Real GDP has been estimated to grow by 7.8% for the FY2023-24.
Why does it matter – How does GDP affect me?
When GDP is increasing steadily then it shows the economy is doing well, which also means revenue is increasing and people are spending more. It also means that the Government has more money to spend on capital expenditure including human capital.
When the economy shrinks, that is GDP decreases, and then the economy/ country goes into recession. This means less revenue and spending will become less. During such times Government will cut its public spending and will try to increase its revenue by increasing taxes.
What is a recession?
The Standard economic definition is when GDP falls for two consecutive quarters (or say in a row) then it is known as a recession. This will lead to job losses and freezes in income/ pay.
Why are the GDP figures often revised?
Mostly the initial or first estimates of GDP are complied with proxies or incomplete data based on high-frequency indicators. There may be many discrepancies in these data as well as estimates. So, over time with data availability, these discrepancies are expected to be removed and the revised estimates show the state of the economy.
How many Estimates of Annual GDP are released by CSO?
The CSO releases six estimates of Annual GDP for any given year, throughout approximately three years (to be more precise 2 years and 10 months). The first estimate (or initial projections) are known as the Advanced Estimates (or) Provisional Estimates. Over time, these initial estimates are revised and released as First (1st), Second (2nd), and Third (3rd) Revised Estimates (RE).
However, this year 29th February 2024, the NSA stated in its press release that “…Further, it has been decided to consider the SRE as Final Estimates. Accordingly, the practice of bringing out TRE would be discontinued henceforth. Therefore, TRE of 2020-21 and SRE of 2021-22 are Final Estimates for the respective years”
This means there will be no more Third Revised Estimates and the Second Revised Estimates, henceforth, should be considered as Final Estimates.
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