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April 04, 2017 @ 01:15 PM

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April 04, 2017 @ 01:15 PM

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K. J. Somaiya Institute of Management Studies and Research, Mumbai

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What is GDP and how does it matter?

MBA Aspirants are expected to know the health of country’s economy.GDP is often indicated as one of the crucial factor. This general awareness article on GDP  will help you in WAT/Essay/GD and PI also.
 
Read:  What is GDP and how does it matter?
 
Gross Domestic Product, popularly known as GDP, refers to the market value of all recognized goods and services produced in a country within a specific time period. Many economists and policy makers talk about GDP because it helps them to gauge the health of a country’s economy. Usually, GDP is compared to the previous quarters or years to understand how the country has been performing over a period of time.
 
GDP can be calculated in three ways and all the three ways, in principle, should give the same result. The first way is the production approach; the second is the income approach; and the third is the expenditure approach. 
 
The most direct of the three ways is the production approach, which combines the outputs of every class of enterprise to come to the total. In the income approach, it is assumed that the total income of productive factors (the producers) is equal to the value of their products, and hence, the GDP is determined by combining the incomes of all the producers in a country. Lastly, in the expenditure approach, the assumption is that all the products in a country must be purchased by the people in that country; therefore, the value of all the products produced in a country should be equal to people’s total expenditure. 
 
Generally, the GDP of a country is calculated through the expenditure method and the equation for the calculation of GDP is as follows: GDP = Consumption + Investment + Government Spending + Net Exports. 
 
So, in the calculation of the GDP, we understand the level of consumption among the citizens of a country, the government’s expenditure, and more importantly, the export and import values of a country. The next export value is linked to the strength of the currency in a country – so, if a country is exporting more than what it imports, the demand for the currency of that country will be high and this increases the value of the currency. 
 
On the other hand, if a country imports more than what it is exporting, the demand for the currency will be low and this reduces the value of the currency. Hence, the GDP helps in understanding each and every component that is responsible for improving the health of a country’s economy. 
 
GDP per capita helps one to understand the standard of living in a particular country. Here, the GDP is divided by the number of people in a particular country. This is helpful while comparing the performance of two countries or more. Reports claim that the GDP of India was worth Rs 113 trillion (US$ 1.8 trillion) in 2012, slightly lower than the figure in 2011 – Rs 115 trillion (US$ 1.87 trillion).
 
This shows that the rate of production has decreased. In fact, reports claim that India’s growth rate hit a decade-low of 5% in 2012-2013. These values show that the health of the Indian economy is in danger and that unless India begins to attract investors and increase the rate of production in the country, the economy will be in a dire state. 
 
The GDP, which is the total value of all the goods and services produced in a country, is extremely important not only for economists, policy makers and government officials but also for the citizens of the entire country because it helps one to understand how the country is performing.
 
The GDP helps the government to understand the drawbacks of its policies and come up with more effective policies in the long run. All in all, the GDP is an important indicator of a country’s economic performance and it is only through the examination of the GDP and its components that one is able to prescribe the medicine for an ailing economy.
 
  
 
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