GDP quantifies the monetary worth of final goods and services produced in a country over a specific period of time, i.e. those that are purchased by the end user (say a quarter or a year). It is a metric that measures all of the output produced within a country’s borders.
What role does GDP play?
The sum of GDP’s various components (Ai) can be determined. Any change in one of its components has an impact on GDP expansion. The increase of component Ai weighted by its weight in GDP at period t-1 equals the contribution of component Ai to GDP growth between t and t-1.
GDP growth can be broken down into the sum of contributions from its major components: household consumption expenditure, investments, inventory changes, and trade balance.
In basic circumstances, such as aggregates in current prices, a component’s contribution to an aggregate (such as GDP) is equal to the product of that component’s growth rate divided by its weight in the aggregate over the previous period.
The preceding computation applies to annual accounts with the development of the component in chain-linked volume and weight in current prices with chain-linked volumes at the price of the previous year, a concept of volume according to which the national accounts are issued (the case of changes in inventories is specific). Due to the peculiarities of chain-linking, such a calculation only yields an approximation in quartely accounts. Although the approximation is adequate in most cases, the contributions obtained are not additive.
Is the GDP actually useful?
Yes, in a word. Many of the top UK law firms will want a distinction from individuals applying for training contracts based on GDL ratings.
A distinction indicates that you have the intellectual ability and work ethic necessary to succeed at a top law firm or chambers.
While receiving a commendation does not guarantee that you will miss out on possibilities, it is critical to put out as much effort as possible in your GDL result in order to maximize your chances of landing a training contract.
Trying to figure out how to get a distinction on the GDL? To help you improve your GDL marks, read the advice below.
Is GDP beneficial to the economy?
The Gross Domestic Product (GDP) measures both the economy’s entire income and its total expenditure on goods and services. As a result, GDP per person reveals the typical person’s income and expenditure in the economy. Because most people would prefer to have more money and spend it more, GDP per person appears to be a natural measure of the average person’s economic well-being.
However, some people question the accuracy of GDP as a measure of happiness. Senator Robert F. Kennedy, who ran for president in 1968, delivered a powerful condemnation of such economic policies:
does not allow for our children’s health, the quality of their education, or the enjoyment of their play. It excludes the beauty of our poetry, the solidity of our marriages, the wit of our public discourse, and the honesty of our elected officials. It doesn’t take into account our bravery, wisdom, or patriotism. It can tell us everything about America except why we are glad to be Americans, and it can measure everything but that which makes life meaningful.
The truth is that a high GDP does really assist us in leading happy lives. Our children’s health is not measured by GDP, yet countries with higher GDP can afford better healthcare for their children. The quality of their education is not measured by GDP, but countries with higher GDP may afford better educational institutions. The beauty of our poetry is not measured by GDP, but countries with higher GDP can afford to teach more of their inhabitants to read and love poetry. GDP does not take into consideration our intelligence, honesty, courage, knowledge, or patriotism, yet all of these admirable qualities are simpler to cultivate when people are less anxious about being able to purchase basic requirements. In other words, while GDP does not directly measure what makes life valuable, it does measure our ability to access many of the necessary inputs.
However, GDP is not a perfect indicator of happiness. Some factors that contribute to a happy existence are not included in GDP. The first is leisure. Consider what would happen if everyone in the economy suddenly began working every day of the week instead of relaxing on weekends. GDP would rise as more products and services were created. Despite the increase in GDP, we should not assume that everyone would benefit. The loss of leisure time would be countered by the gain from producing and consuming more goods and services.
Because GDP values commodities and services based on market prices, it ignores the value of practically all activity that occurs outside of markets. GDP, in particular, excludes the value of products and services generated in one’s own country. The value of a delicious meal prepared by a chef and sold at her restaurant is included in GDP. When the chef cooks the same meal for her family, however, the value she adds to the raw ingredients is not included in GDP. Child care supplied in daycare centers is also included in GDP, although child care provided by parents at home is not. Volunteer labor also contributes to people’s well-being, but these contributions are not reflected in GDP.
Another factor that GDP ignores is environmental quality. Consider what would happen if the government repealed all environmental rules. Firms might therefore generate goods and services without regard for the pollution they produce, resulting in an increase in GDP. However, happiness would most likely plummet. The gains from increased productivity would be more than outweighed by degradation in air and water quality.
GDP also has no bearing on income distribution. A society with 100 persons earning $50,000 per year has a GDP of $5 million and, predictably, a GDP per person of $50,000. So does a society in which ten people earn $500,000 and the other 90 live in poverty. Few people would consider those two scenarios to be comparable. The GDP per person informs us what occurs to the average person, yet there is a wide range of personal experiences behind the average.
Finally, we might conclude that GDP is a good measure of economic well-being for the majority of purposes but not all. It’s critical to remember what GDP covers and what it excludes.
What if the GDP is low?
When GDP falls, the economy shrinks, which is terrible news for businesses and people. A recession is defined as a drop in GDP for two quarters in a row, which can result in pay freezes and job losses.
Is a higher or lower GDP preferable?
Gross domestic product (GDP) has traditionally been used by economists to gauge economic success. If GDP is increasing, the economy is doing well and the country is progressing. On the other side, if GDP declines, the economy may be in jeopardy, and the country may be losing ground.
What is the best way to explain GDP to a child?
The gross domestic product, or GDP, is a metric used to assess a country’s economic health. It refers to the entire value of goods and services produced in a country over a given time period, usually a year. The gross domestic product (GDP) is the most widely used indicator of output and economic activity in the world.
Each country’s GDP data is prepared and published on a regular basis. Furthermore, international agencies like the World Bank and the International Monetary Fund publish and retain historical GDP data for many nations on a regular basis. The Bureau of Economic Analysis of the US Department of Commerce publishes GDP data quarterly in the United States.
An economy is regarded to be in expansion when it grows at a positive rate for several quarters in a row (also called economic boom). The economy is generally regarded to be in a recession when it experiences two or more consecutive quarters of negative GDP growth (also called economic bust). GDP per capita (also known as GDP per person) is a measure of a country’s living standard. In economic terms, a country with a greater GDP per capita is considered to be better off than one with a lower level.
Gross domestic product (GDP) is different from gross national product (GNP), which comprises all goods and services generated by a country’s citizens, whether they are produced in the country or outside. GDP replaced GNP as the primary indicator of economic activity in the United States in 1991. GDP was more consistent with the government’s other measurements of economic output and employment because it only covered domestic production. (Also see economics.)
What effect does GDP have on the stock market?
A country’s GDP measures both its economic growth and its residents’ purchasing power. As a result, the growth of India’s GDP will affect the success of your investment portfolio. We’ll learn what GDP is, how it’s calculated, and how a change in GDP affects your financial portfolio in this post. Let’s start with the fundamentals.
What is GDP?
A country’s GDP, or Gross Domestic Product, is the total value of products and services generated over a given time period. GDP statistics is calculated in India for each financial year, which runs from April 1 to March 31. The information is published on a quarterly and annual basis.
GDP statistics is a measure of a country’s economic health. A high rate of GDP growth suggests that the economy is growing and doing well. A negative GDP growth rate, on the other hand, implies that the economy has contracted and is not in good shape.
To address the expanding needs of the enormous population in a developing economy like India, a high GDP growth rate is essential. We can do so by investing heavily in infrastructure such as roads, railways, healthcare, and education, among other things.
How is GDP calculated in India?
The National Accounts Division (NAD), which is part of the Central Statistical Office in India, compiles and prepares GDP data (CSO). The GDP statistics is released by the CSO, which is part of the Ministry of Statistics and Program Implementation (MoSPI).
Expenditure method
The expenditure-based method shows how the Indian economy’s various sectors are performing.
- The amount spent by households on goods and services is referred to as private consumption.
- The term “gross investment” refers to the amount of money spent on capital goods by the private sector.
- Government spending refers to how much money the government spends on things like paying employees’ salaries, pensions, subsidies, and running social programs, among other things.
Value Addition Method
India also uses the Gross Value Addition (GVA) Method or Value Addition Method to calculate GDP. As it goes through the supply chain, each sector of the economy adds value. The GVA approach calculates GDP by taking into consideration the following eight sectors:
The nominal GDP is calculated first when computing GDP. After that, it’s adjusted for inflation, and the real GDP is calculated.
India’s GDP in the last few quarters
India’s quarterly GDP data for the last three years is depicted in the figure above. Positive increase was seen in the first quarter of 2020. Following that, COVID-19 struck, resulting in two quarters of negative growth. The Indian economy recovered from the pandemic’s effects in the fourth quarter of 2020, growing at a rate of 1.6 percent.
India’s GDP growth over the last decade
From 2012 to 2016, India’s GDP grew at a faster rate every year, as shown in the graph above. However, beginning in 2017, growth began to decline until 2019. COVID-19’s impact at the start of 2020 exacerbated the situation.
How a change in GDP affects your investment portfolio
Stock markets are directly associated with a country’s GDP, according to the general rule. India is no different. Because markets and GDP are intimately interrelated, your investment portfolio is also directly correlated with GDP.
- The stock markets will be energized by a positive shift in the GDP (a higher GDP growth number), and the market will rise as a result. If the stock market rises, it will have a beneficial impact on your investment portfolio.
- A negative change in the GDP (a lower GDP growth statistic or a GDP contraction) will undoubtedly cause the financial markets to react negatively. As a result, the stock market will fall. If the stock market falls, it will have a negative influence on your investment portfolio.
There is a positive association between India’s GDP growth and the NIFTY 50 Index, as shown in the graph above:
- India’s GDP expanded at an annual pace of roughly 8% from 2004 to 2008. During this time, the NIFTY 50 Index climbed from 2000 to 4000 points. During this time, your investment portfolio should have done well.
- The subprime mortgage crisis hit the United States in 2008-2009, with global ramifications. During this time, India’s GDP growth slowed from 8% to roughly 3%, and the NIFTY 50 Index dropped from highs of 4000 to lows of 3000. During this time, it would have had a detrimental influence on your financial portfolio.
- Between 2009 and 2011, the GDP recovered, and the NIFTY 50 Index did as well. Your financial portfolio would have rebounded as well.
- GDP growth slowed between 2011 and 2013, owing to reasons such as high crude oil prices, high inflation, and the European debt crisis, among others. During this time, the NIFTY 50 Index also saw a correction. Your investment portfolio would have suffered as well.
- The GDP increased significantly from 2013 to 2018, surpassing 8% for the second time. During this time, the NIFTY 50 Index performed admirably. During this time, your investment portfolio would have produced impressive gains.
- In recent years, the direct association between GDP growth and the NIFTY 50 Index appears to have weakened. In truth, there is a significant gap between the two. So, despite the fact that GDP growth has slowed, your investment portfolio has produced excellent results.
Divergence between GDP growth and stock markets
The relationship between GDP growth and stock markets is usually direct, as shown in the graph above, but this is not always the case. The Nifty 50 Index and GDP growth headed in different directions in 2019, and this trend persisted in 2020 and 2021. The following things may contribute to such a scenario:
Stock markets that are always looking ahead: Stock markets are always looking ahead. So, even if GDP growth is currently modest, the stock markets are anticipating strong GDP growth in the future and are trading at higher levels as a result.
High liquidity: In the previous year and a half, central banks and governments around the world, including India, have implemented various stimulus initiatives to mitigate the impact of COVID-19. People have received cash as a result of this. The majority of this money has been placed in the stock markets, which has resulted in greater stock market trading levels.
Other than stock, there aren’t many investing options: To counteract the pandemic’s effects and jump-start the economy, the RBI slashed interest rates dramatically. As a result, banks’ fixed deposit rates have dropped to multi-year lows. When the pandemic hit, gold spiked, but it has since adjusted and remained static. As a result, except from stock, Indian individual investors have few other investing options. As a result, most investors have put their money into stocks, causing the NIFTY 50 Index to rise.
Foreign fund flows: In the recent year, foreign institutional investors (FIIs) have invested massive sums of money in Indian stock markets, in addition to Indian ordinary investors. The NIFTY 50 Index has also risen as a result of this.
Better company profitability: The pandemic has impacted the whole Indian corporate sector. The unlisted economy, SMEs, MSMEs, and the informal economy continue to suffer. Large publicly traded corporations, on the other hand, have been able to weather the storm much more quickly and effectively. As a result, huge publicly traded firms’ profits have increased, and their stock values have increased, causing the NIFTY 50 Index to rise.
Divergence between GDP growth and stock markets is temporary
We’ve seen how the GDP growth rate and stock market performance can diverge. This type of divergence, however, is just transitory and will be corrected at some point. Either the GDP growth rate will rebound and the Indian economy will return to its previous high growth rate, or the stock market will correct in tandem with the low GDP growth rate in the future.
India’s GDP growth rate has a better chance of increasing than the stock market falling. Still, only time will tell what will transpire. What appears likely is that, over time, the pace of GDP growth and the stock market will re-establish a direct relationship.
Last words
You would be getting strong returns on your investment portfolio right now, even if GDP growth is sluggish. However, this may not last long, therefore let’s hope India’s GDP growth picks up rapidly so that our current investment returns remain stable and grow in the future. In the long run, proper asset allocation will ensure that your investment portfolio earns the best possible returns, even if GDP growth is sluggish. When the equity markets are performing poorly, the debt and gold sections of your investing portfolio can provide good returns. As a result, ensure that you have a suitable asset allocation between equity, gold, debt, and other assets, so that you can continue to achieve optimal returns regardless of GDP growth.
In simple terms, what is GDP?
This article is part of Statistics for Beginners, a section of Statistics Described where statistical indicators and ideas are explained in a straightforward manner to make the world of statistics a little easier for pupils, students, and anybody else interested in statistics.
The most generally used measure of an economy’s size is gross domestic product (GDP). GDP can be calculated for a single country, a region (such as Tuscany in Italy or Burgundy in France), or a collection of countries (such as the European Union) (EU). The Gross Domestic Product (GDP) is the sum of all value added in a given economy. The value added is the difference between the value of the goods and services produced and the value of the goods and services required to produce them, also known as intermediate consumption. More about that in the following article.
How can GDP be increased?
- AD stands for aggregate demand (consumer spending, investment levels, government spending, exports-imports)
- AS stands for aggregate supply (Productive capacity, the efficiency of economy, labour productivity)
To increase economic growth
1. An increase in total demand
- Lower interest rates lower borrowing costs and boost consumer spending and investment.
- Increased real wages when nominal salaries rise faster than inflation, consumers have more money to spend.
- Depreciation reduces the cost of exports while raising the cost of imports, increasing domestic demand.
- Growing wealth, such as rising house values, encourages people to spend more (since they are more confident and can refinance their home).
This represents a rise in total supply (productive capacity). This can happen as a result of:
- In the nineteenth century, new technologies such as steam power and telegrams aided productivity. In the twenty-first century, the internet, artificial intelligence, and computers are all helping to boost productivity.
- Workers become more productive when new management approaches, such as better industrial relations, are introduced.
- Increased net migration, with a particular emphasis on workers with in-demand skills (e.g. builders, fruit pickers)
- Infrastructure improvements, greater education spending, and other public-sector investments are examples of public-sector investment.
To what extent can the government increase economic growth?
A government can use demand-side and supply-side policies to try to influence the rate of economic growth.
- Cutting taxes to raise disposable income and encourage spending is known as expansionary fiscal policy. Lower taxes, on the other hand, will increase the budget deficit and lead to more borrowing. When there is a drop in consumer expenditure, an expansionary fiscal policy is most appropriate.
- Cutting interest rates can promote domestic demand. Expansionary monetary policy (currently usually set by an independent Central Bank).
- Stability. The government’s primary job is to maintain economic and political stability, which allows for normal economic activity to occur. Uncertainty and political polarization can deter investment and growth.
- Infrastructure investment, such as new roads, railway lines, and broadband internet, boosts productivity and lowers traffic congestion.
Factors beyond the government’s influence
- It is difficult for the government to influence the rate of technical innovation because it tends to come from the private sector.
- The private sector is in charge of labor relations and employee motivation. At best, the government has a minimal impact on employee morale and motivation.
- Entrepreneurs are primarily self-motivated when it comes to starting a firm. Government restrictions and tax rates can have an impact on a business owner’s willingness to take risks.
- The amount of money saved has an impact on growth (e.g. see Harrod-Domar model) Higher savings enable higher investment, yet influencing savings might be difficult for the government.
- Willingness to put forth the effort. The vanquished countries of Germany and Japan had fast economic development in the postwar period, indicating a desire to rebuild after the war. The UK economy was less dynamic, which could be due to different views toward employment and a willingness to try new things.
- Any economy is influenced significantly by global growth. It is extremely difficult for a single economy to avoid the costs of a global recession. The credit crunch of 2009, for example, had a detrimental impact on economic development in OECD countries.
In 2009, the United States, France, and the United Kingdom all went into recession. The greater recovery in the United States, on the other hand, could be attributed to different governmental measures. 2009/10 fiscal policy was expansionary, and monetary policy was looser.
Governments frequently overestimate their ability to boost productivity growth. Without government intervention, the private sector drives the majority of technological advancement. Supply-side measures can help boost efficiency to some level, but how much they can boost growth rates is questionable.
For example, after the 1980s supply-side measures, the government looked for a supply-side miracle that would allow for a significantly quicker pace of economic growth. The Lawson boom of the 1980s, however, proved unsustainable, and the UK’s growth rate stayed relatively constant at roughly 2.5 percent. Supply-side initiatives, at the very least, will take a long time to implement; for example, improving labor productivity through education and training will take many years.
There is far more scope for the government to increase growth rates in developing economies with significant infrastructure failures and a lack of basic amenities.
The potential for higher growth rates is greatly increased by providing basic levels of education and infrastructure.
The private sector is responsible for the majority of productivity increases. With a few exceptions, private companies are responsible for the majority of technical advancements. The great majority of productivity gains in the UK is due to new technologies developed by the private sector. I doubt the government’s ability to invest in new technologies to enhance productivity growth at this rate. (Though it is possible especially in times of conflict)
Economic growth in the UK
The UK economy has risen at a rate of 2.5 percent each year on average since 1945. Most economists believe that the UK’s productive capacity can grow at a rate of roughly 2.5 percent per year on average. The underlying trend rate is also known as the ‘trend rate of growth.’
Even when the government pursued supply-side reforms, they were largely ineffective in changing the long-run trend rate. (For example, in the 1980s, supply-side policies had minimal effect on the long-run trend rate.)
The graph below demonstrates how, since 2008, actual GDP has fallen below the trend rate. Because of the recession and a considerable drop in aggregate demand, this happened.
- Improved private-sector technology that allows for increased labor productivity (e.g. development of computers enables greater productivity)
- Infrastructure investment, such as the construction of new roads and train lines. The government is mostly responsible for this.