3.1 Introduction

The state of the economy of a country is characterised by several indicators such as GDP, consumer price index (CPI), balance of payments (BOP), money stock, government expenditure, savings and investment, interest rate, and so on. Such indicators represent different aspects of an economy. For example, BOP captures international transaction of goods and services as also cross-border capital flows. CPI is a proxy for general prices. Amongst all these, GDP is the most important indicator and popularly used as a barometer to measure the size of economic activity in a country. It captures the sum of market values of all final goods and services produced in a country during a particular period such as a year or a quarter. Standard macroeconomics textbooks provide details about the concept and measurement of such indicators.

GDP is treated as a proxy for the total amount of income generated in an economy. Owners of capital and land, suppliers of raw materials and other factors of production such as workers, entrepreneurs, and so on, earn their income by participating in the production of goods and services. The total revenue earned from the sale of goods and services produced is distributed amongst these stakeholders. For producing more output, higher number of workers, larger amount of capital and raw material, and so on, are required. Accordingly, more output entails generation of more aggregate income for all the stakeholders who participated in the production process.