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	Only final consumption is counted New Car Purchased → Will be counted Existing House → Will be calculated as owner paying “rent” to himself Intermediate consumption is not counted Steel, Rubber used to make product → Will not be counted New house purchased → Will be counted in investment (Not as Private Consumption)
Investment	New house purchased will be counted. Purchase of goods that will be used in future production will be counted. Capital goods, Heavy Machinery, Building, Structure will be counted. Leftover Inventory [Rubber, steel, car] will be counted. Share, Bond, Debenture will be counted.
Gov. Purchase	Salary to employees will be counted. FCI food grain purchase will be counted. Transfer Payments viz. LPG-DBT, Pension, Scholarship, food coupons etc → → gets counted in Private consumption.
Foreign Expenditure	Money earned from export – invested in imports. As invested in imports is already counted in private consumption.

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

ASI – Annual survey of industry
IIP – Index of industrial production
Economic census
NSSO Surveys

Services

CBDT – Central board of direct taxes
CBEC – Central board of excise & customs
CPI-Indexes

CSO Reforms 2015 for GDP Calculation – Income Method

Before	After
Wages Only salary	Compensation Salaries + Social security contribution by employer to Employee
Profit	Mixed income / OS
Only workers / laborers get wages. Entrepreneurs get “profit”. Informal & unorganized family owned Agro, cottage industries were not taken into account.	Hence the concept of Mixed income (MI)/ operating surplus (OS)
Corporates calculate profit easily, but unorganized firms find it difficult to separate profit from wages due to lack of standard accounting.	Profit of corporates is taken into account along with Mixed income or operating surplus as and where applicable.

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

Independent of Production Volume

Stamp Duty

Land revenue

Professional Tax

Production Subsidies

Independent of production volume

Subsidies to Railways

Input subsidies to Farmers, small industries

Administrative subsidies to cooperatives & corporates

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

Calculated on per unit of production
Examples → VAT, EXCISE, Custom, Service Tax

Product Subsidies

Calculated on per unit of Production
Example include:

Food, Petroleum, Fertilizer

Interest subvention to farmers

Subsidies for insurance to households

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	Agro census 2010 included. Livestock census 2012 included. Meat yield and by-product valuation revised. Crop and livestock activities are segregated.
Rural Coverage	Local bodies – effective coverage of their services Informal sector – Latest NSSO survey data included “Effective Labour Input Method” to get data from rural activities without modern accounting system
Mining/Mfg Coverage	Sand extraction measurement updated Before → Establishment approach viz. “production cost”. Now “Enterprise approach” → production cost + cost of selling and marketing. Construction sector accounting updated.
Corporates Coverage	Before → ASI & IIP data but “Sampling method” hence not “complete” picture. Now Companies’ Mfg. and service production from corporate affairs MCA21 online database. Production data of Financial services (share brokers, NBFCs etc.) will be accounted with help of SEBI, PFRDA, IRDA
Services Coverage	Will use service tax collection rates to find growth in health, education etc. Earlier CPI AL, RL, IW data was used Now just CPI will be used (Rural urban combined)

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

abraham villiers says:

11/30/2020 at 4:17 am

Excellent Post

Jay says:

08/26/2020 at 9:27 am

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.

DHEERU says:

07/29/2020 at 5:56 am

shares are not counted as part of investment. Mrunal Sir’s mistake repeated. Please correct your content.

nitesh says:

04/18/2017 at 7:00 am

i had dbts on mrunal sir ppt so came here to clear it bt it seemed to be just a copy paste..

1. Draculla says:
  
  07/07/2020 at 12:16 pm
  
  True 🙁
  
Vinita says:

04/11/2017 at 5:00 pm

I appreciate your efforts but I think you should also mention the source ie MRUNAL.org

1. nitesh says:
  
  04/18/2017 at 6:54 am
  
  bingo…i was abt to mention the same comment.all the slides of mrunal sir have been posted here without any value addition.
  
Manju T says:

12/07/2016 at 7:46 am

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.

Hashir Hussain says:

11/21/2016 at 12:00 pm

Sir, why a new car is not considered investment while house is?

1. ASHUTOSH says:
  
  05/27/2017 at 12:29 am
  
  its value decreases with time (depreciation)