Question

Define and explain GDP. What are its major components? What is included and excluded from GDP? Why do we care about GDP?

Answer 1

GDP is the market value of final goods and services produced within the domestic territory of a country during an year. Components of GDP are Consumption expenditure, investment spending, government expenditure and net exports.

a) Private Final Consumption Expenditure: It refers to expenditure on final goods and services by the individuals, households, and non-profit private institutions serving society. It includes: consumer services, consumer non durable goods and consumer durable goods.

b) Government final consumption expenditure (G): It refers to expenditure on final goods and services by the Government like expenditure on purchase of goods for consumption by the defence personnel.

c) Investment expenditure (I): It refers to expenditure on final goods and services by the producers. Example: expenditure by the farmers on the purchase of tractors or thrashers. It includes fixed investment and inventory investment.

d) Net exports refers to the difference between exports and imports during an accounting year.

Expenditure on second hand goods is not to be included. Because, value of second hand goods has already been accounted during the year of their production.

Expenditure on shares and bonds, transfer payments are not to be included in total expenditure, as these are mere paper claims and are not related to the production of final goods and services.

Imputed value of expenditure on goods produced for self consumption should be taken into account.

GDP tells about position of a country in world.