Growth of GDP

Growth of GDP

The gross domestic product (GDP) growth rate measures how fast the economy is growing. It does this by comparing a quarter of the country’s gross domestic product to the previous quarter. GDP measures the economic output of a nation.

The GDP growth rate is driven by the four components of GDP. The primary driver of GDP growth is personal consumption, which includes the critical sector of retail sales. The second component is business investment, including construction and inventory levels. Government spending is the third driver of growth, with its largest categories being Social Security benefits, defense spending, and Medicare benefits.The government often increases this component of spending to jump-start the economy during a recession.   Finally, the fourth component is net trade.

The GDP growth rate is the most important indicator of economic health. It changes during the four phases of the business cycle: peak, contraction, trough, and expansion.  When the economy is expanding, the GDP growth rate is positive. If it’s growing, so will businesses, jobs, and personal income. But if it expands beyond 3%-4%, then it could hit the peak. At that point, the bubble bursts and economic growth stalls.

If it’s contracting, then businesses will hold off investing in new purchases. They’ll delay hiring new employees until they are confident the economy will improve. Those delays further depress the economy. Without jobs, consumers have less money to spend.

India’s growth rate

The Indian economy expanded 4.7% in Q4 2019. It follows an upwardly revised 5.1% expansion in Q3 (4.5% earlier reported). It is the weakest growth rate since Q1 2013 considering the upward revision for the previous quarter. On the expenditure side, faster declines were seen for gross fixed capital formation (-5.2% vs -4.1% in Q3), exports (-5.5% vs -2.1%) and imports (-11.2% vs -9.3%) while private consumption growth accelerated (5.9% vs 5.6%). On the production side, gross value added expanded 4.5%, compared to 4.8% in Q3. The output for utilities (-0.7% vs 3.9% in Q3) and manufacturing (-0.2% vs -0.4%) contracted and construction slowed sharply (0.3% vs 2.9%). On the other hand, faster increases were seen for finance and real estate (7.3% vs 7.1%); the farm sector (3.5% vs 3.1%); trade, hotels, transport and communication (5.9% vs 5.8%); and mining and quarrying (3.2% vs 0.2%).

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