Economic Fundae - GDP

Good Accounting turns data into information!

This article is aimed at people trying to understand the basics of national accounting.

GDP:Gross Domestic Product is the value of all the goods and services produced in the country within a given period. This includes all the goods and services produced in the geographical boundaries of the country irrespective of who produces. The other slight variant is the GNP which include receipts from abroad made as factor payments to domestically owned factor production. For example, part of India's GDP corresponds to the profits made by Hyundai Motors from its Indian operations. But these are part of the Korea's GNP because they are income of Korean-owned capital.

Although the difference is not significant in countries like U.S. it certainly is important where most of the countries labor is abroad working for a multinational company.

The fundamental national accounting equation will be as

Y= C + I + G + NX

Consumption spending by household sector, includes spending on anything under the sky. The only exception being the investment which people make in durable goods.

Then the government purchases are the government spending on the goods and services. Think of anything which government spends like laying roads, providing higher education etc. Again the only exception being the transfer payments. The transfer payments are those which does not get a service in return to government spending. This is logical as they are not a part of any of the current production.

The letter I in the equation refers to the Gross private domestic investment. In simple words, investment is associated with the business sector's adding to the physical stock of capital, which in turn will increase the economy's ability to produce output in the future.

The last term is the Net Exports, the difference between the exports and imports. They are to account for domestic spending on foreign goods and foreign spending on domestic goods. Confused, well we just finished the accounting of the entire nation. There is more than one reason to be confused, like most of our politicians.

Governments budget deficit is often a term we hear particularly in a country like India. This essentially means the difference between the government expenditures and the taxes received. Remember to include transfer payments as a part of government expenditures (which is slightly different from the government purchases)

Quick Fact:

GDP of India: (2007-08): 41,25,725 Crores of Rupees

Without further delay we will introduce you to other macroeconomic variables which are inflation, currency exchange rates, interest rates, monetary system and the business cycles.