Gross Domestic Product

Understanding the Concept of GDP

The money value of all the final goods and services produced in the domestic territory of a country in a year’s time is called the Gross Domestic Product.
The domestic territory includes the political boundary as well as terrestrial waters, ships and aircrafts operated by the residents of the country, fishing vessels, oil and natural gas rigs which may be located outside the country, embassies and consulates of the country located abroad.
We take an Example:
We suppose that at the unit price of Rs. 100 a country A produces 500 units of goods and at the unit prices of Rs. 50 it produces 300 units of services. We denote unit price as P and units as G for goods and S for services.

GDP= P (G) + P(S)

GDP=100×500 +50×300

GDP=Rs. 65000

Now, we should now that GDP can be estimated at the current prices and constant prices.

  • When GDP is estimated on the prevalent prices it is called GDP at Current prices.
  • When it is estimated on the basis of some fixed prices prevalent at a particular point of time, this is called GDP at constant prices.

Let’s understand with this example:

We imagine that India produces only 3 good & services viz. A, B & C. We also imagine that the output of these commodities does not change for last 10 years. The unit prices change and we take data of 2000-01 & 2009-10.
The following table represents this, kindly go through the simple calculations.

Commodity Output in 2000-01 Unit Price in 2000-01 Output in 2009-10 Unit price in 2009-10 GDP at Current Prices 2000-01 GDP at constant Prices 2000-10
(a) (b) (c) (d) (e) (d)x(e) (b)x(c)
A 1000 5 1000 10 10000 5000
B 2000 10 2000 15 30000 20000
C 3000 15 3000 20 60000 45000
GDP 100,000 70,000

In the above example we see, the there is no increased in the outputs, but the GDP is changed.

So, to be able to estimate the real increase in the domestic product, it should always be estimated at constant prices.

GDP at Current prices is called GDP at Market Prices or GDP(MP)

GDP at Factor Cost: GDP (FC)

The above example is just a simple calculation. In reality the GDP (MP) is not accurate. This is because, Market value of the Goods and services is always higher than the total cost of production, because the market prices include the Indirect taxes. So to arrive at a more accurate figure we need to decrease the Indirect taxes from the GDP (MP)

On the other hand, the government provides subsidies to the producers of goods and services such as agricultural producers. This must be added to the GDP(MP) to arrive at a more accurate figure.

The GDP at factor cost is nothing but an attempt to reach at a more realistic value of the GDP and it is represented by GDP (FC)

So,

GDP (FC) = GDP (MP) – Indirect Taxes + Subsidies

List of Topics : Economic Survey 2010-11

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Comments

  • Anonymous
    Reply

    An excellent way to explain the economic terminologies to a layman…good job!!!

  • Anonymous
    Reply

    All these days I am searching for such an explanation,,,,,,

    Today I satisfied with this simple explanation of GDP

    Thank You Very Much Sir…..

  • Anonymous
    Reply

    I want to give a piece of information for readers

    Presently , in India
    GDP at constant prices calculated at the base year 2004-05

    Thank You GKToday…

  • satish
    Reply

    Really a excellent way to define GDP.
    Thanks to gktoday to help to provide simple and absolute knowledge about other topics.