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.
GDP | Market value all final goods & services produced within country for a given time period |
NDP | GDP – Depreciation |
GDP Deflator | GDP adjusted due to inflation on a base year = Nominal GDP / Real GDP |
Factor Cost | Labor (Wages) + Land (Rent) + Capital (Interest) + Entrepreneurship (Profit) |
Market Price | Factor cost + Taxes – Subsidies |
GDP @ Market Price | GDP @ Factor cost + Taxes – Subsidies |
GNP | GDP + Net Income from abroad |
Net Income abroad | Income of Indians abroad – Income of foreigners in India |
NNP @ Market Price | GNP – Depreciation |
NNP @ Factor Cost | NNP @ MP – Taxes + Subsidies = National income |
Per capita national income | National Income / Total Population |
National Disposable income | NNP @ Market Price + Current account transfers |
GDP Calculation Methods |
||
Income Method | Expenditure Method | Production Method (GVA) |
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
Private Consumption |
|
Investment |
|
Gov. Purchase |
|
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:
Goods
|
Services
|
CSO Reforms 2015 for GDP Calculation – Income Method
Before |
After |
Wages
|
Compensation
|
Profit | Mixed income / OS |
|
|
|
|
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
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.
Product Taxes
|
Product Subsidies
|
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
Agro Coverage |
|
Rural Coverage |
|
Mining/Mfg Coverage |
|
Corporates Coverage |
|
Services Coverage |
|
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.
Before in % | After in % | |
GDP growth 2012-13 | 4.7 | 5.1 |
GDP growth 2013-14 | 5.0 | 6.9 |
Agri sector share in GDP | 17.9 | 18.7 |
Industry sector share in GDP | 26.1 | 31.7 |
Services sector share in GDP | 56.1 | 49.1 |
10 comments
Excellent Post
GDP Deflator Formula is wrong. It is Real GDP / Nominal GDP = GDP Deflator.
Also, GVA at basic prices Formular is wrong → Production Subsidies are written to be added rather than subtracted as they should be. Although, the picture from Mrunal Sir’s PPT clarifies this one.
shares are not counted as part of investment. Mrunal Sir’s mistake repeated. Please correct your content.
i had dbts on mrunal sir ppt so came here to clear it bt it seemed to be just a copy paste..
True 🙁
I appreciate your efforts but I think you should also mention the source ie MRUNAL.org
bingo…i was abt to mention the same comment.all the slides of mrunal sir have been posted here without any value addition.
Great work. Such clear cut and lucid explanation.
Sir, how do you create such beautiful flow charts? I would like to create such flowcharts for my preparation. But I don’t know how.
Sir, why a new car is not considered investment while house is?
its value decreases with time (depreciation)