GDP & GDP Calculation

Points to Ponder in This Article – Just understand the meaning of different terms related to GDP, NDP etc. & what is the effect of base year in GDP calculation. The GDP calculation methods have become redundant over the years & hence just give it a reading but no use of taking it to heart.

Gross domestic product is the best way to measure a country’s economy. GDP is the total value of everything produced by all the people and companies in the country. It doesn’t matter if they are citizens or foreign-owned companies. If they are located within the country’s boundaries, the government counts their production as GDP.

Income Method → Based on factor cost → WIPR

• Factor cost = Labor (Wages) + Capital (Interest) + Entrepreneurship (Profit) + Land (Rent)
• GDP @ Current Market Price = GDP @ Factor cost + Taxes – Subsidies
• GDP @ Current Market Price when adjusted for inflation → GDP @ Constant market prices

Expenditure Method → Private Consumption + Investment + Government + Foreign Expenditure

• GDP will be calculated as → C + I + G + (X – M)
• Where C → Private Consumption; I → Investment; G → Purchase; X-M → Foreign Expenditure

Production Method: Gross Value Added (GVA)

• GDP = Total value added at each stage or
• GDP = Total Value of Sale – Cost of intermediate goods

GDP doesn’t cover following

• Underground Economy
• Non-Marketed Activities (Mom cooking food for home)
• Barter Exchanges (Rice given for oranges)
• Negative Externality (Acid rain)
• Opportunity cost lost (kids not going to school which could have made difference in future – Human Dev)- (HDI)
• Income Inequality (Gini Coefficient)

CSO GDP calculation till 2015

• Until now CSO used to do GDP Calculation at factor cost by

• Income Method (WIPR)
• Production Method : Gross Value Added (GVA)

• Categorized industries into three parts viz

• CSO utilizes data from the following:

CSO Reforms 2015 for GDP Calculation – Income Method

Consumption of fixed capital (CFC)

• System of National Accounts (SNA) → Collaboration among UN, World Bank, IMF, OECD and European commission.
• If capital asset not used than they fall under the category of intermediate goods
• When production begin & final goods are generated → Calculate CFC accordingly

GVA at Basic Price

• Sector wise estimate of Gross value added (GVA) will now be given at basic prices instead of factor cost.
• GVA at Basic Price → GVA at factor cost + Production taxes + Production subsidies

Official GDP of India will now be calculated as

• GVA (Basic price) → CE + OS/MI + CFC + Production taxes – Production subsidies
• Sum of GVA at basic price + Product taxes + Product subsidies → GDP at market price
• GDP of India → GDP at market price adjusted for inflation.

CSO – GDP Reforms done

• GDP @ Factor cost will not be official GDP of India
• GDP @ (Constant) Market price will be official GDP India’s GDP
• Base year for GDP calculation changed from 2004 → 2012.
• Use of internationally valid System of National Accounts (SNA) 2008
• Classified economic activities & their account keeping accordingly.

Impact of CSO-GDP Reforms

What is Base year Price?

• Represents price of a normal year (Medium term rate of prices – trend rate or average of some year)
• No major Social, Political or natural disasters to surge or down the prices.

Base year price revision

• From 2004-05 to 2011-2012, majorly to –

• Production in consumption basket changing over period of time.
• GDP assessment on contemporary moving of prices.

Impact of revision of base year from 2004-05 to 2011-2012

• GDP growth figure of 7.4% for 2014-15
• Some of the service industry items are now classified as manufacturing industry.