Introduction
Gross Domestic Product (GDP) is one of the most important concept in Economics. This concept is such a popular concept that even laymen people also use it in their conversation even without knowing its exact meaning. However, for a student of economics, definition of GDP is a must know thing. They must know the technical meaning of GDP in form of definition of GDP. Here, we are providing you a very simple definition of GDP along with other related concepts like Nominal GDP and Real GDP.
Definition of GDP
Gross Domestic Product (GDP) is the total monetary value of all final goods and services produced within domestic territory of a country by all residents in an accounting year.
It is one of the eight concepts used in national income accounting like GNP, NNP etc. Being a gross concept, it includes consumption of fixed capital (Depreciation). Moreover, being a domestic concept, it includes production done by the all people living within domestic territory of the country irrespective of their residential status of the people. Production may be done by residents of the country or by the non-residents.
Types of GDP
GDP can be calculated in two ways. We can either calculate it as per prices of the current year or of the base year. So, this gives as two types of GDP as follows:-
Nominal GDP:
When amount of final goods and services produced in a year is calculated at the current year prices, then we get Nominal GDP. It means when we calculate GPD on current prices, that GDP is called Nominal GDP. We can understand the calculation of nominal GDP by following example:
Suppose, a country produces only one type of good i.e Good-X. Total amount of Good-X produced in 2021 is 100 units, and the current year price of Good-X is Rs. 50/- per unit. Then Nominal GDP of the country is Rs. 5000 (100 x 50 = 5000).
An important note:
Nominal GDP does not take into account impact of inflation. Moreover, an increase in nominal GDP over a period of time may or may not indicate increase in actual production of goods and services.
Real GDP:
When amount of final goods and services produced in a year is calculated at the price of some previous year, then we get Real GDP. The previous year taken for calculation of real GDP is called Base Year. We can understand the calculation of real GDP by following example:
Suppose, a country produces only one type of good i.e Good-X. Total amount of Good-X produced in 2021 is 100 units, and the price of base year i.e. 2011 for Good-X was Rs. 30. Then Real GDP for the year 2021 is Rs. 3000/-(100 x 30 = 3000).
An important note:
Calculation of GDP by the use of base year prices adjusts the impact of inflation. An increase in real GDP over a period of time definitely indicates an increase in the actual production of goods and services in a country.
FAQs
Q. Prices of which types of goods and services included in GDP?
Ans: Only the Price of final goods and services is included in GDP.
Q. Are accounting year and calendar year identical.
Ans: They may or may not be same. In some countries, accounting year is same as the calendar year (From January 01 to December 31). However, some countries like India have adopted a different duration for accounting year. In India, accounting year starts from April 01 and ends on March 31.
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