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GDP & GDP Calculation

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

GDP Calculation Income Method

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

Types of industries

  • 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

 

CSO Reforms GDP Calculation

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

 

GVA at Basic Price

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

 

GDP of India


 

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
India Yearbook English India Yearbook Hindi Economic Survey 2017

2 Comments

  1. 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.

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

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