GDP stands for Gross Domestic Product. It is the total value of all the goods and services produced in a country during a given period of time, usually a year. It measures the size and performance of a country's economy.
For example, if India produces 100 cars, 200 bikes, and 300 shirts in a year, and each car costs ₹10 lakh, each bike costs ₹50,000, and each shirt costs ₹500, then the GDP of India for that year is:
GDP = 100 * 10,00,000 + 200 * 50,000 + 300 * 500GDP = 11,01,50,000
This is a simplified example that only considers three products. In reality, there are millions of different products and services that are produced and consumed in a country.
Economic significance
GDP is an important indicator of a country's economic health and well-being. It shows how much a country produces and consumes in a year. It also reflects the standard of living and the quality of life of the people in a country.
A higher GDP means that a country is producing and consuming more goods and services. This implies that the people have more income and more choices to spend on their needs and wants. A higher GDP also means that a country has more resources and capabilities to invest in its development and growth.
A lower GDP means that a country is producing and consuming less goods and services. This implies that the people have less income and fewer choices to spend on their needs and wants. A lower GDP also means that a country has fewer resources and capabilities to invest in its development and growth.
Calculation and Measurement
There are three main methods to calculate GDP: the production approach, the income approach, and the expenditure approach. Each method gives the same result, but uses different data sources and perspectives.
- The production approach measures GDP by adding up the value added by all the producers in a country. Value added is the difference between the value of output (sales) and the value of input (costs) of a producer. For example, if a car manufacturer buys steel for ₹5 lakh and sells cars for ₹15 lakh, then its value added is ₹10 lakh.
- The income approach measures GDP by adding up all the incomes earned by all the factors of production in a country. Factors of production are the resources used to produce goods and services, such as land, labor, capital, and entrepreneurship. For example, if a car manufacturer pays ₹3 lakh to workers (labor), ₹2 lakh to landowners (land), ₹4 lakh to banks (capital), and keeps ₹1 lakh as profit (entrepreneurship), then its income is ₹10 lakh.
- The expenditure approach measures GDP by adding up all the spending on final goods and services in a country. Final goods and services are those that are not used as inputs for further production, but are consumed by the end users. For example, if a car buyer spends ₹15 lakh to buy a car from a car manufacturer, then its expenditure is ₹15 lakh.
The formula for GDP using the expenditure approach is:
GDP = C + I + G + (X - M)
where C is consumption (spending by households), I is investment (spending by businesses), G is government spending (spending by the government), X is exports (sales to other countries), and M is imports (purchases from other countries).
Good, average, and low GDP value
There is no definitive answer to what constitutes a good, average, or low GDP value. Different countries have different levels of GDP depending on their population size, natural resources, human capital, technology, institutions, policies, and other factors. Therefore, it is more meaningful to compare GDP across countries using some common metrics, such as:
- GDP per capita: This is the GDP divided by the population of a country. It gives an idea of how much income each person in a country has on average. A higher GDP per capita means that each person has more income to spend on their needs and wants.
- GDP growth rate: This is the percentage change in GDP from one period to another. It shows how fast or slow a country's economy is growing or shrinking over time. A positive GDP growth rate means that a country's economy is expanding, while a negative GDP growth rate means that a country's economy is contracting.
- GDP share: This is the percentage of world GDP that a country contributes. It shows how big or small a country's economy is relative to the global economy. A higher GDP share means that a country has more economic influence and power in the world.
According to the World Bank, the GDP of India in 2020 was $2.66 trillion. This was a decrease from $2.87 trillion in 2019, due to the COVID-19 pandemic. In 2021, India's GDP is predicted to be $2.95 trillion and $3.25 trillion in 2022. India is the fifth largest economy in the world, after the US, China, Japan, and Germany.
The GDP per capita of India in 2020 was $1,940. This was lower than the world average of $10,835. India ranks 139th out of 189 countries in terms of GDP per capita.
The GDP growth rate of India in 2020 was -7.3%. This was the lowest in its history, due to the lockdowns and disruptions caused by the COVID-19 pandemic. India's economy contracted by 24.4% in the first quarter of 2020-21 and by 7.4% in the second quarter. However, it recovered by 0.5% in the third quarter and by 1.6% in the fourth quarter. In 2021, India's GDP growth rate is expected to rebound by 9.5% and by 8.5% in 2022.
The GDP share of India in 2020 was 3.3%. This was slightly lower than its share of 3.5% in 2019. India accounts for about one-sixth of the world population, but only one-thirtieth of the world economy.
Importance for traders and investors
GDP is an important indicator for traders and investors who want to understand the economic trends and opportunities in a country. Traders and investors use GDP data to:
- Assess the economic performance and potential of a country
- Compare the economic strengths and weaknesses of different countries
- Identify the sectors and industries that are growing or declining in a country
- Forecast the future demand and supply of goods and services in a country
- Evaluate the risks and returns of investing in a country
For example, if a trader or investor sees that India's GDP is growing faster than other countries, they may infer that India has a strong and dynamic economy that offers attractive prospects for investment. They may also look at which sectors and industries are contributing to India's GDP growth, such as agriculture, manufacturing, services, etc., and decide which ones to invest in.
On the other hand, if a trader or investor sees that India's GDP is shrinking or slowing down, they may infer that India has a weak and stagnant economy that poses challenges for investment. They may also look at which sectors and industries are dragging down India's GDP growth, such as mining, construction, trade, etc., and decide which ones to avoid or sell.
Stock market reaction to GDP
GDP values are announced by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI) of the Government of India. The NSO releases quarterly estimates of GDP every three months, usually at the end of February, May, August, and November. The NSO also releases annual estimates of GDP every year, usually at the end of January.
The Indian stock market reacts to GDP values depending on how they match or differ from the expectations of traders and investors. If GDP values are higher than expected, it means that the economy is doing better than anticipated, which boosts the confidence and optimism of traders and investors. This leads to an increase in the demand and prices of stocks, especially those related to the sectors and industries that are driving GDP growth.
If GDP values are lower than expected, it means that the economy is doing worse than anticipated, which lowers the confidence and pessimism of traders and investors. This leads to a decrease in the demand and prices of stocks, especially those related to the sectors and industries that are hampering GDP growth.
For example, on May 31, 2021, when the NSO announced that India's GDP grew by 1.6% in Q4 of 2020-21, beating the expectations of around 1%, the Indian stock market reacted positively. The BSE Sensex rose by 514 points or 1%, while the NSE Nifty rose by 157 points or 1%, on June 1, 2021.
On August 31, 2021, when the NSO announced that India's GDP grew by 20.1% in Q1 of 2021-22 , meeting the expectations of around 20%, the Indian stock market reacted neutrally. The BSE Sensex fell by 66 points or 0.1%, while the NSE Nifty rose by 15 points or 0.1%, on September 1, 2021