Explained: What is GDP and why it matters

News:Recently,due to a decline in India’s Gross Domestic Product(GDP) growth rate,the ruling party has questioned the merit of the basic variable used to map economic growth that is, the GDP.


Origin of GDP and GNP:

  • The modern-day definitions of GDP and GNP can be traced back to Simon Kuznets who was entrusted with the task of creating National Accounts in 1933 by the then US President Franklin D Roosevelt.
  • The final report called National Income(1929-32) was presented to the US Congress in January 1934.
  • However, the origins of GDP as a concept date far back.The man credited with inventing the concept is William Petty (1623-1687),an Englishman who was a professor of anatomy at Brasenose College.

About GDP:

  • Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.
  • It includes all private and public consumption, government outlays, investments, private inventories, paid-in construction costs and the foreign balance of trade (exports are added, imports are subtracted).
  • The GDP is calculated using this standard formula which is C + I + G + (X-M).
  • However,the GDP is slightly different from the other commonly used statistic for national income the Gross National Product(GNP).

About GNP:

  • The Gross National Product (GNP) measures the monetary value of all goods and services by the people and companies of a country regardless of where this value was created.
  • It is the total value of all final goods and services produced within a nation in a particular year, plus income earned by its citizens (including income of those located abroad) minus income of non-residents located in that country.
  • The formula to calculate the components of GNP is C + I + G + (X-M) + Z.

Significance of GDP:

  • The Gross Domestic Product(GDP) as a measure sums up more information about an economy than any other variable.For instance, countries with higher GDPs have citizens with higher incomes and better standards of living.
  • However,one can point out variations and suggest that a country ranked 1 in GDP is ranked 9 in GDP per capita but these divergences would be relatively small when data is seen at a global level.
  • Hence,it helps not to depend overly on just the GDP of a country but it is also not a good idea to disregard it as a measure.