Let’s take a look at an example to understand the GDP formula on a macro level –

GDP = C + I + G + (X-M)

Here – 

1. C = Consumption – The spending by households on goods and services. It includes things like food, clothing, housing, and healthcare.
2. I = Investments – Spending by businesses on capital goods like machinery, equipment, and construction, as well as spending on research and development. It also includes residential investments like buying new homes.
3. G = Government Spending – The government’s expenditures on public goods and services such as infrastructure, education, and defense.
4. X = Exports – You know what this is!
5. M = Imports – And you know this too!

The GDP of a country adds up all the economic activities within a country’s borders to give a measure of the overall economic performance and size of that country’s economy. Think of it like a report card that helps economists and policymakers understand how well a country’s economy is doing.

So, when we say India’s GDP was $3.75 trillion, we mean that the consumption, investment, government spending, and exports (minus imports) in India were collectively valued at $3.75 trillion. To understand how the country attained such a huge GDP this past year, you need to know a bit more about the elements that influence a nation’s GDP.

Factors Influencing GDP

Consumption, investment, government spending, exports, and imports obviously influence the GDP. The higher these factors are valued (minus the imports!), the higher the GDP of a country will be.

Understanding these factors is pretty simple – did we really need another subheading for this?

Well, yes. While these five factors are easy to understand, we want you to also know about three important underlying factors that influence these five – ergo, the three underlying factors that ultimately influence the GDP. Let’s see what these are, and how they might have contributed to India’s staggering GDP this past year (or how they might affect its GDP going forward) –

1. Labor Force & Productivity – The size and efficiency of the workforce and worker productivity. The higher the productivity, the higher the earnings, the higher the GDP – that’s the general implication. Over 50% of the Indian GDP in the last year has been a result of the work in the service sector in India (Source: PIB), and this sector continues to be promising with more and more jobs coming up in the space.
2. Natural Resources – The availability and management of natural resources, like oil, minerals, and agricultural land, can impact a country’s GDP. Today agriculture and its supporting industries in the primary sector are contributing to around 17-18% of India’s GDP (Source: The Hindu).
3. Technological Advancements – Innovations and technological progress can enhance the productivity and economic growth of any country. The Information & Technology (IT) sector of India is booming – and it is growing at a rate of 7-9% per annum! In fact, this sector is projected to continue influencing the GDP of India, since the Indian Government has set a goal of making technology 20-25% of the country’s GDP by 2025 (Source: The Hindu).

In addition to these three factors that have a very clear and tangible impact on a country’s GDP, factors like inflation, economic and political policies, and even global economic conditions have a role to play. Remember, the higher the GDP of a country, the larger its economy is considered to be.

Today, India’s economy is being boosted due to growth in sectors like IT, services, agriculture, and manufacturing. The domestic Indian market is benefiting from its young market (you!) of buyers, a growing middle class (the savers and investors!), and innovation in technology being facilitated in our country.

India’s global GDP ranking is a testament to how the country is growing, and the fact that a steady (if not increasing!) growth rate is projected for the country’s GDP in the coming years is an indication of just how much the economy is poised to grow in the future!