What is the Gross Domestic Product, or GDP?
GDP is the total value of goods and services produced by the economy over a period of time, normally a year. The measure excludes the goods and services that go into production of other goods, or intermediate goods. This is to prevent double counting as value of intermediate goods is already included in the final good or service. It is a gross measure in that value of capital goods that goes into replacement is not netted out. It is a 'domestic' measure as it does not include income from abroad.
What is the significance of GDP and its growth?
The absolute GDP of a country and its growth is one of the important indicators used to assess the health of an economy. While absolute GDP gives an idea of the size and the relative importance of a country in the global economy, its growth gives an indication of its future progress. The measure, however, suffers from a number of shortcomings. The creator of the GDP, Simon Kuznets, had also pointed out the flaws while presenting it to the US congress. "The welfare of a nation can scarcely be inferred from a measurement of national income" he had said.
What are the key shortcomings of the measure?
GDP measures only the overall income generation in the economy. It does not tell us to whom the income accrues and where it is spent. A poor distribution can mask islands of under development. For instance, agriculture has an 18% share in India's GDP, but the sector supports more than 60% of the people, implying that per person share of the national income is very low for a vast majority.
It also misses out on goods and services which are not traded — such as household work, natural resources and leisure. It is also a quantitative measure that makes no distinction for the quality of national income. For instance, environmentally harmful mining could boost national income but at a huge cost to the society at large.
What other measures can make GDP number more meaningful?
A per capita measure of GDP, or the absolute level of GDP divided by the population of a country, pitches the number in relation to the people. This number gives us a sense of what everybody would be earning if the income were distributed equally. Of course, in real situation the income will be unequally distributed. India is among the biggest economies, but low per capita GDP rightly pitches it among the poorer nations. Measures such as Human Development Indicator can also give a qualitative dimension to GDP.
