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Indian Economy – Mains Question 01

1. What is the Gross Domestic Product (GDP)? How is the GDP calculation useful in an economy?
Also, discuss some limitations of the calculation of GDP. (10 marks, 150 words)

Approach:
 Introduction: Mention the definition of the GDP and a short brief about its importance.
 Body: Discuss the uses of the GDP and mention the limitations of the GDP calculation.
 Conclusion: Give suggestions about the scope and improvements in GDP methodology.
Answer:
Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and
services produced within a country's borders in a specific time period. It is one of the most widely used
indicators of economic performance.
Significance of the GDP Calculation in an Economy:
 Value of Goods and Services: GDP represents the value of all goods and services produced over a
specific time period within a country's borders. GDP is used to measure the country's health by
comparing the current GDP against past numbers. If the number is growing, then the economy has
become more productive. If the number is shrinking, then the economy has become less productive.
 Growth Indicator: Economists use GDP to determine whether an economy is growing or
experiencing a recession.
 Investment Decision: Investors use GDP to make investment decisions - a bad economy often means
lower earnings and stock prices.
 Policy Formulation: GDP is calculated on an annual basis, therefore it helps the political policy
formulation, economic policy formulation, and industrial policy formulation to compare the current
year's GDP with the previous year.
Limitations of the Calculation of GDP:
 Welfare concept ignored: GDP does not capture welfare or human well-being. GDP may not be a
strong basis to predict economic growth in times of high uncertainty.
 Non-Market Activity: GDP excludes non-market activity. More importantly, it does not count the
value of goods that are not finished. GDP only includes the finished goods.
 Sustainability of Growth: GDP growth doesn't necessarily indicate whether economic growth is
sustainable over the long term. It doesn't consider whether growth is depleting natural resources,
causing environmental degradation, or leading to the accumulation of unsustainable levels of debt.
 New Transaction: It only records the value of new transactions mainly.

Gross Domestic Product is a very important indicator of economic growth; however, it is not inclusive as it
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should be, therefore some changes are required so that it could include the holistic development of the
country. The recent concept of Green GDP, which is an indicator of growth that takes into account the
environmental factors along with standard GDP is a step towards development.

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