What is GDP, explained with an idli :-)

GDP is the buzzword currently; let’s look at GDP and its constituents to understand what factors will play crucial role if the GDP is to be revived!! So, What is GDP? Imagine there is an island called ‘ABC’ where only four people reside, a farmer, a grocery seller, an idli-wallah and a fertilizer manufacturer. The farmer sells rice, methi (fenugreek) seeds and urad dal to the grocery man. The grocery man converts rice into flour and sources some other materials like cooking oil from the neighbouring island. The idli-wallah buys this stuff from our grocerier and makes some delicious Idlis which are bought by the farmer for a fair price.

Remember, there is one more person on this island, a fertilizer manufacturer who had sold fertilizer to the farmer. The grocery man sells extra fenugreek to the neighbouring island.

Let us list all the items sold on this island:

It’s time to introduce definition of GDP, which is ‘Market Value of all the finished goods and services produced within the country.’

Can you identify which item can be classified as finished goods in above table.

The rice, fenugreek, urad dal and cooking oil is bought by grocerier and then the idli-wallah, who uses these items to make idli which is for sale, hence these are Intermediate Goods whereas Idli is consumed by farmer, so it is Finished Goods. The Fertilizer is bought by farmer who keeps it, so it is also Finished Goods.

However, remember the Grocery man exports extra Fenugreek seeds. This amount will be added in GDP. Whereas, the cooking oil was imported by him, so we will have to deduct the amount spent by the grocerier for cooking oil.

o finally, The GDP of this island is :Idli Plate (Rs. 100) + Fertilizer (Rs.100) + Fenugreek Export (Rs. 72) – Cooking oil import (Rs. 90) , that is Rs. 182.

That is the formula for GDP then,

If farmer decides to not buy idli and the idliwallah has to discard the idli, GDP of the island will be severely impacted.

We still left out two important components that constitute GDP which are Government Spending and Total Investments. But we can only safely assume our island doesn’t need a Government yet, does it? We also ignored raw materials required for Fertilizer for simplicity.

It’s clear that increase in Consumption is very important for recovery in GDP.

(The author is Data Scientist-Business Analytics, Tata Asset Management )