Gross Domestic Product (GDP)

Gross Domestic Product (GDP)

The total value of all the final goods and services produced within a country or region in a given
time period.

• Three Methods of calculating GDP:
• Output/Product Value method = (Total output) * (Market Price).
• Income method = Sum of all the incomes earned by the factors of production.
  Expenditure method = C + I + G + (X-M)
• C = Consumption by households
• I = Investment by firms and households
• G = Government spending on goods and services
• X = Exports of goods and services
• M = Imports of goods and services

Company A——-₹500—— Company B———-₹1000——- Buyer

labour-₹100——————- labour-₹200———————– Houses

profit-₹400 ——————–profit-₹300

Production method

value of goods produced= final goods*market price = 1*1000 =₹1000

Income method

total of factor incomes = wages+profits = ₹300+₹700= ₹1000

Expenditure method

total expenditure done on goods and services = ₹1000

New method of measurement – GDP (Production Method)
The base year was updated from 2004-2005 to 2011-12 (the implications of this
change will be explained under GDP deflator)

• The data source was changed from ASI to MCA21 ASI – Annual Survey of
  Industries MCA – Ministry of Corporate Affairs
• The valuation method was switched from Factor Cost to Market Price.
• GVA (Gross Value Added) methodology was adopted.

Factor Cost (FC) And Market Price(MP)

Factor costs are the total costs of production incurred by the producer of a good.

• Market price is the amount of money that the buyer pays to purchase a good.
• Example – suppose a producer spends ₹ 100 on the factors of production (land, labour,
  capital, entrepreneurship) to produce a good. This is the factor cost of the good.
• Market price = factor cost + indirect taxes – subsidies

Gross Value Added

Value addition – The increase in the value of a good or service as a result of the production
process. Value addition occurs when a unit of raw material or service is transformed into an
intermediate or final product that can be used in the production chain.

	Mining	Steel	Utensil
Intermidiate Goods	00	10	30
Market Prices	10	30	50
Value Added	10	20	20

Other important concepts
Production taxes and production subsidies are not related to the quantity of goods produced.
They are either paid or received by the producers.

• Production taxes – examples are land revenues, stamps and registration fees, and
  professional tax, etc.
• Production subsidies – examples are subsidies for Railways transportation, input subsidies for
  farmers, subsidies for small industries, subsidies for companies, etc. Product taxes or subsidies
  are based on the amount of goods produced. They are either paid or received by the buyers
  or sellers of the goods.
• Product taxes – examples are excise tax, sales tax, service tax, and import and export duties,
  etc.
• Product subsidies – examples are petroleum and fertilizer subsidies, interest subsidies for
  farmers, etc.

Basic Price (BP) – is the net amount that the producer gets from the buyer for a unit
of a good or service that is produced as output. It is calculated by subtracting any
tax due from the gross amount and adding any subsidy received

GDP Calculation
GVA at BP = GVA at FC + (Production taxes – Production Subsidies)
GDP at MP = GVA at BP + (Product Taxes – Product Subsidies)

Some of the items that are not included

• Unpaid domestic work.
• Illegal or unreported income.
• Payments that do not involve production of goods or services.
• Second-hand goods that are sold again.

Per Capita Income – Issues

• It is a simple average that may not reflect the income distribution.
• It does not show the relative performance of different sectors of the
  economy.
• It does not account for the impact of government spending on the quality
  of life.
• It does not compare the real purchasing power of individuals across
  countries. (This requires PPP, which will be discussed in International Trade)