Methods of Calculating Gdp

8/16/2019 Methods of Calculating Gdp

1/8


2/8

production and expenditure methods.

GDP is calculated by three methods.

Theoretically all three of them should give same finalnumber, but in reality there will be slight difference betweeneach of them.

#A: EXPENDITURE METHOD OF COUNTING GDP

Here you count the money spent by everyone.

So How to make a ‘technical’ formula? Ask yourself, whereis the money changing hands? There are five components of that.

#1: CONSUMPTION BY PRIVATE CITIZENS [C]

like you and me buying (overpriced) daal, vegetables andmilk (courtesy: Sharad Pawar).

I buy your second-hand bike for 15,000 Rupees, should weincluding it in the consumer Expenditure (C) ? Nope.Because the bike Is not ‘produced again.

When you had bought that bike for Rs.30000, 10 years ago,we had counted that money in that year’s GDP. So secondhand-product sale money cannot be counted in this year’sGDP.

Now, I buy your second-hand bike from an auto dealer, (whogets Rs.1000 Commission) should we include it in the (C)?Hell Yes, because he sold his ‘service’ to me uniquely. Every

time he sells a second hand product, although no new‘product’ is created but new service is delivered by him.

WHAT IF SAME 1000 RUPEE NOTE IS CHANGINGHANDS?


3/8

I gave a note of Rs.1000 to that dealer as part of hisbrokerage (dalaali) and he gives the same Rs.1000 note to theelectricity company for his monthly bill.

Same Rs.1000 note is changing hands so is our GDP=Rs.1000? Nope. GDP is the money value of everythingproduced within India. So brokerage service is Rs.1000separately and the electricity produced is also worth Rs.1000separately. Therefore, Even as same 1000 rupee note is givento both parties.

Total GDP=1000 brokeage+1000 electricity bill=Rs.2000

If electri.co gives that 1000 rupee note to its peon as salary,then again it has to be counted. Because peon sold his uniqueservice separately to the company. So in that case

Total GDP =Brokerge+Electric bill+peon^’ salary=Rs.3000

#2: Investment [I]

People investing in sharemarket, putting money in banks etc.

#3: Government spending [G]

Like buying (overpriced) sports equipment from Kalmaadi’sassociates during Common wealth games. Government

paying salary to staff, buying new tanks andmissiles..everything.

#4, 5 :Export & Import [X & M]

Money we get from export is added.

You remember that GDP means Money value of everythingwe produce within India. So if we import something, it has tobe subtracted, because it is not produced within India.

So formula (for ease In remembering)


4/8

GDP = Consumer+Investor+Governer + (eXporter –iMporter)

Technically correct formula:

GDP(Expenditure)=C+I+G+(X-M)

#B: Income Method of counting gdp

Here you count everyone’s income. But some people may berunning business in credit (udhaari), sometimes paymentsare delayed. So may not give the ‘full picture’ for the givenyear.

#C: Production method of counting gdp

Total money value of everything produced (value added ateach stage)

Farmer produced Wheat and sold 100 kg of it @ 2000 Rs.(Original value)

Flour mill, purchased it, grinded it and sold the flour tobaker @ 2500 Rs. (+500 value added to previous purchase)

Baker made breads, cookies and biscuits and sold the totalproduction @3500 Rs to its final customers. (+1000 valueadded to previous purchase)

what is total ‘GDP’ here?

2000+2500+3500=8000 Rs? Hell no! You’ve to see the valueadded.

So, total money value of this line is: 2000+500+1000=3500.


5/8

Not all of the wheat goes into Baker’s oven. Some of it will goin making beer, some in a normal household for making rotiand so on. You’ve to track the value added in each differentline.

Part 3: [Economy Q] GDP at Factor cost and Market price(GDPFC & GDPMP), NNPFC,NNPMP

GDP at Factor cost means, money value of everythingproduced in India, without counting Government's role in it.i.e. indirect tax and subsidies.

Example#1: Subsidy

1 kg. Urea fertilizer's original-price is 500 Rs.

When it reaches the local supplier, Government is giving10% subsidy. So farmer purchases it @ (500-50)=Rs. 450

GDP @ Factor cost= 500 [i.e. without Government's

involvement]

GDP @ Market price= 450 [with Government's involvement]

Example#2: Tax

Box of 10 Blank DVDs =Rs.100 +10% VAT so final

M.R.P.=Rs.110GDP @ Factor cost=Rs.100 (Real value of those dvds)

GDP@ Market price=Rs.110

How will you calculate GDPMP if GDPFC is given, & viceversa?

GDP@Market price=GDP@ Factor price+Governmentinvolvement


6/8

Now, Government involvement=+Indirect taxes-subsidies

So finally,

GDP@Market price=GDP@Factor cost+Indirect tax-subsidies

Or doing the reverse,

GDP@Factor cost=GDP@market price-Indirecttax+subsidies

GDP @ Factor Cost and Market Price for same Urea andBlank DVDs

As you can see, Factor cost= Original or real value of something.

So at marketprice, even when Government is giving subsidy,the manufacturer still receives the original price. E.g.although farmer pays Rs.450, still manufacturer gets Rs.500

so we 'add' subsidy when converting MP to FC.

Similarly, even when customer pays MRP of DVD is 110, theDVD-manufacturer is still getting 100 Rs. So we 'deduct' theindirect tax(VAT) while converting MP to FC.

Similarly

NNPFC and NNPMP

GNP = everything produced inside India + Anil Kapoor'sincome from Hollywood - Gary Kirsten's remittance toS.Africa

So, what is Net National product @ Factor cost, and@Market price.

Net = Gross minus depreciation.


7/8

So NNP=GNP minus depreciation.

And factor cost, market price, just as explained above..withand without Government intervention.

GDP - Depreciation = NET Domestic Product

GNP- Depreciation = Net National Product (NNP)

Problem with GDP:-

GDP doesn't count negative things associated with marketactivities.

For Example, if you chop down trees to make furniture, &export it, then India's GDP value will increase.

But as you know cutting down trees = bad for environment :but this is negative thing is not counted in GDP. same can beapplied for making medicinal drugs/ chemicals but rivers / atmosphere getting polluted in the process and so on....

GDP is a concept evolved during & after WW2, whensituation was different.

Thus GDP is outdated, and we need to look @ other thingslike Human Development index, etc.

*What is Depreciation ?

When you're making some product (mobile phone)

or providing some service (internet, travelbus etc.)

Then you need to use machines to produce it.

And that machinery has wear and tear cost. (annualMaintenance, service, repair costs)

That cost of repair / maintenance of machinery etc. is called


8/8

Depreciation.

What's the use of Depreciation ?

You'll get income deduction for depreciation.

for Example, Govt. of India provided depreciation of 50%for commercial vehicles purchased on or between January-March 2009

that means suppose you're a businessman with a car worth10 Lakh rs. for your business purpose.

so 50% depreciation value of 10 Lakh. = 5 LaKh Rs.

and for that you don't have to pay tax

e.g. if you were in the 30% tax bracket then you don't haveto pay

5 LaKh X 30 / 100 = 1.5 Lakh Rs. to Govt. as income tax.

Documents

Methods of Calculating Gdp