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GDP: A Bird’s-Eye View

In 2023, India reported a GDP (i.e., Gross Domestic Product) of $3.75 trillion, making India the 5th largest economy in the world (Source: Forbes). This was a recorded growth rate of 7% for the Indian economy (Source: World Bank).

The number is huge, 7% is great, and 5th place on a global scale ain’t too shabby (😎)! But – you won’t really know what this means for our economy against global benchmarks without first understanding GDP a little better!

What is GDP?

Most textbooks define the Gross Domestic Product or GDP as the total value of all final goods and services that are produced in a country – in a fixed period of time, and within the borders of that country. It is typically indicative of how well the economy of any country is doing. 

Let’s understand this at a micro level before we can look at what this means for the country – 

Consider a pizza place that needs to evaluate its monetary performance in a year. The restaurant owner will have to account for four key things – 

  1. Sales from Customers (Consumption) – The money made when people come to the restaurant and order pizzas. 
  2. Investment in Your Restaurant (Investment) – Buying a new oven, hiring more staff, and expanding the restaurant space; are all investments in the pizza place.
  3. Government Taxes and Support (Government Spending) – The taxes and licensing fees for the pizza place, and also any government grants given to the restaurant.
  4. Money from Outside (Exports – Imports) – Exports can be out-of-towners ordering this pizza, and imports can mean the ingredients the restaurant is procuring.

The amount you get at the end of these calculations will leave you with the GDP of this pizza place. It will allow the restaurant owner to determine how his business has performed in a specific period.

Similarly, a country’s GDP is also incumbent on all its revenue (income) and expenses.

GDP

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!

 

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