The world’s largest economies: what GDP means and where

"India is the world's fifth-largest economy" or "India will soon be the third-largest economy" — we often hear news like this. But how is the size of an economy measured, and why do these rankings keep changing? This article explains it in simple words.

What is GDP?

Gross Domestic Product (GDP) is the total market value of all the goods and services produced within a country's borders in a year — from the crops in the fields to factory goods and the services of doctors and teachers. The world's economies are usually compared by GDP.

Two ways to compare: nominal and PPP

Nominal GDP: each country's GDP is converted into US dollars at the market exchange rate. When the news says "the fifth- or fourth-largest economy", it is mostly talking about this measure.
Purchasing power parity (PPP): this looks at how much the same amount of money can buy in each country. Most goods and services in India are cheaper than in the United States, so by PPP India's economy looks much bigger — on this measure India ranks third, after China and the United States.

The largest economies (nominal GDP)

According to International Monetary Fund (IMF) data, the United States has long been first in nominal GDP and China second. After them comes a group of Germany, Japan and India, with small gaps between them — so changes in the dollar exchange rate and in growth rates keep moving their ranks up and down. Thanks to fast growth in recent years, India has climbed within this group, and IMF projections suggest that India could become the third-largest economy in the coming years. For the exact latest position, see the IMF's "World Economic Outlook" report, which comes out twice a year.

Did you know? In 2014 India was around tenth in the world by nominal GDP; within a decade it reached the top five economies.

A big economy versus a rich country

A big economy does not always mean that its people are richer. For that we look at per capita income — total GDP divided by the population. India's population is very large, so although its total GDP is big, its per capita income is still well below that of many developed countries. Small countries such as Luxembourg, Singapore and Switzerland stay at the top for per capita income.

What are India's strengths?

The services sector: IT, software, banking and telecommunications make up the largest part of India's GDP.
A young population: the large number of people of working age is called the "demographic dividend".
Digital infrastructure: UPI, Aadhaar and digital payments have made transactions faster and cheaper.
A big home market: more than 140 crore (1.4 billion) consumers are a big opportunity for any industry.

Remember for the exam

India's GDP figures are released by the National Statistics Office of the Ministry of Statistics (MoSPI).
India's financial year runs from 1 April to 31 March.
GDP estimates for the whole world are published by the IMF and the World Bank.

The world’s largest economies: what GDP means and where India stands