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To measure the total production of a country, economists suggest that we should use the values of goods and services rather than their quantities. For example, if 10,000 kg of rice is sold at Rs 20 per kg, the value of rice will be Rs 2,00,000. The value of 5000 mangoes at Rs 15 per mango will be Rs 75,000. Likewise, the value of goods and services in the three sectors are calculated and then added up.
However, we should be careful not to include every good or service that is produced and sold. We should only include the final goods and services, i.e., goods that reach the consumers. For instance, a farmer sells rice to a mill for Rs 20 per kg. The mill processes the rice and sells it to a retailer for Rs 25 per kg. The retailer sells it to a consumer for Rs 30 per kg. Rice is the final good here, and its value is Rs 30 per kg.
Why should we only count final goods and services? Because intermediate goods are used up in producing final goods and services. The value of final goods already includes the value of all the intermediate goods that are used in making them. To count the value of intermediate goods separately is not correct because then we would be counting the same thing more than once. First as rice, then as processed rice, and finally as packaged rice.
The value of final goods and services produced in each sector during a particular year gives the total production of the sector for that year. And the sum of production in the three sectors gives what is called the Gross Domestic Product (GDP) of a country. It is the value of all final goods and services produced within a country during a particular year. GDP shows how big the economy is.
In India, a central government ministry collects information relating to total volume of goods and services and their prices from various government departments of all the Indian states and union territories, and then estimates the GDP.
How is GDP calculated? What does it indicate? (2 marks)
Answer:
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