Why India’s gross domestic product is important


Nov. 27 2014, Updated 8:00 a.m. ET

What’s GDP?

A country’s total value-added output is also known as the gross domestic product (or GDP). It’s commonly used to measure a country’s economic achievement. The GDP growth rate is watched closely. It monitors a country’s economic health and direction. It can also monitor a component industry. As a result, GDP is important.

As we stated earlier, India ranks tenth in terms of nominal GDP. It ranks third when its adjusted by purchasing power parity (or PPP). Before we discuss India’s GDP trend, let’s take a look at the different types of GDP.

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Reporting GDP

GDP can be measured using either constant or current prices. The constant prices are known as real GDP. The current prices are known as nominal GDP. The difference between both of the two measures is the inflation rate. The inflation rate is used to calculate the current prices.

To calculate real GDP, a certain base year’s prices are used. The year is kept constant to study changes in output for all of the subsequent years. For nominal GDP, the prices prevailing in the current year are used. As a result, even if there isn’t a change in output between the two years, but the general price level or inflation increases, then the nominal GDP will register an increase and the real GDP won’t register an increase.

Another distinction that’s important while studying a nation’s output is whether the GDP was calculated at factor cost or at market prices. The difference is that GDP at factor cost adds subsidies to GDP at market prices while subtracting indirect taxes. As a result, higher subsidies provided by the government will increase GDP at factor cost.

In India’s case, when a certain rate of GDP growth is reported by official sources, it usually refers to GDP at factor cost at constant prices. India’s GDP growth has a substantial impact on exchange-traded funds (or ETFs)—like the WisdomTree India Earnings Fund (EPI), the iShares MSCI India ETF (INDA), the iShares S&P India Nifty 50 Index Fund (INDY), the PowerShares India Portfolio (PIN), and the iPath MSCI India Index ETN (INP).

In the next part of this series, we’ll look at India’s historic GDP trend.


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