best ias books

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

6 Comments

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

  2. 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.

  3. 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.

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

    • its value decreases with time (depreciation)

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>