Gross Domestic Product:

Introduction:

The concept of GDP was first developed by Simon Kuznets for

a US Congress report in 1934. GDP became the main tool for

measuring a country's economy from the year 1944

Gross domestic product (GDP) is defined as "an aggregate

measure of production equal to the sum of the gross values

added of all resident institutional units engaged in

production (plus any taxes, and minus any subsidies, on

products not included in the value of their outputs)."

Gross domestic product (GDP) is the monetary value of

all the finished goods and services produced within a

country's borders in a specific time period.

Gross domestic product (GDP) is one the

primary indicators used to gauge the health of a

country's economy.

GDP estimates are commonly used to measure of the

economic output of a whole country or region, but can also

measure the relative contribution of an industry sector.

GDP estimates is also used to calculate the growth of

the economy from year to year (and recently from quarter to

quarter) and helps in determining country's standard of

living.

GDP growth rate helps indicate the success or failure

of economic policy and to determine whether an economy is 'in

recession' or not.

GDP is usually calculated on an annual basis. It

includes all of private and public consumption, government

outlays, investments and exports less imports that occur

within a defined territory.

GDP = C + G + I + NX

where:

"C" is equal to all private consumption, or consumer spending,

in a nation's economy

"G" is the sum of government spending

"I" is the sum of all the country's businesses spending on

capital

"NX" is the nation's total net exports, calculated as total

exports minus total imports. (NX = Exports - Imports)

Determining or measuring GDP:

Measuring GDP is complicated, GDP can be determined in

three ways

Production or output or value added approach

Income approach

Expenditure approach

i. Production or output or value added approach:

Production approach is the measure of total production

or output in the economy. Under this approach GDP is the total

value of products and services are produce and rendered during

an year.

GDP = Monetary (market) Value of all goods and services

produced during an year

Total GDP is the sum of gross value added by institutional

units that are resident in the economy (in different economic

activities) plus taxes on products and import (VAT, excise tax

and customs duties) less subsidies on products.

Calculation:

Total output (goods and services) by types of activities in

market prices (-) intermediary consumption for generating

goods and services = GDP at market prices (+) taxes on

products and import (-) subsidies on products = Total GDP at

market prices.

ii. Income approach:

GDP = Sum of income of all firms and individuals

engaged in production of any goods or services

This method measures GDP by adding incomes that firms pay

households for factors of production they hire - wages for

labour, interest for capital, rent for land and profits for

entrepreneurship.

If GDP is calculated by this method then it sometimes called

as 'Gross Domestic Income'(GDI) or GDP(I).

Incomes divided into five categories,

Wages, salaries, and supplementary labour income

Corporate profits

Interest and miscellaneous investment income

Farmers' incomes

Income from non-farm unincorporated businesses

GDP = compensation of employees + gross operating surplus + gross

mixed income+ taxes less subsidies on production and imports

GDP = COE + GOS + GMI + TP & M – SP & M

The sum of COE, GOS and GMI is called total factor income. he

factor income is also expressed as

Total factor income = employee compensation + corporate

profits + proprietor's income + rental income + net interest

or

GDP= R+I+P+SA+W

where,

R :Rents

I :interests

P :Profits

SA : statistical adjustments (corporate income taxes,

dividends, undistributed corporate profits)

W : wages.

iii. Expenditure approach:

GDP = Sum of expenditure from all firms and individuals on

consumption of any goods or services

This is the third way to estimate GDP. GDP estimates from

expenditure approach is almost similar to GDP estimates from

income approach.

If GDP is calculated by this method then its known as GDP(Y).

GDP (Y) is the sum of consumption (C), investment

(I), government spending (G) and net exports (X – M).

Y = C + I + G + (X − M)

Where,

C is Private consumption from households (for eg: goods and

services such as food, clothes, laundry etc)

I is Investment from firms to increase productive capacity(for

eg: purchasing machines, office buildings etc).This also

includes unsold goods in the inventory of firms

G is Spending from Government (for eg: to build hospitals,

schools, infrastructure etc)

(X-M) is Spending from foreign consumers on goods and services

produced within our country. This is calculated by measuring

net exports (subtracting the value of imports from the value

of exports of goods and services)

GDP (Y) is also calculated in the form of sum of final

consumption expenditure (FCE), gross capital formation (GCF),

and net exports (X – M).

Y = FCE + GCF+ (X − M)

This method works on the presumption that all the goods and

services that the country is producing is consumed

amongst these four groups of people. So if one adds up the

total expenses by each of these groups, the total GDP can be

measured.

Nominal GDP:

The determination of actual gross domestic

product without taking

into account other factors or variables such as inflation.

GDP figure that does not account for inflation can be misleadi

ng because GDP will appear higher than  it actually is. So,

the nominal GDP is to be adjusted according to inflation rate.

Real GDP:

Real GDP is the Gross domestic product after accounting for

inflation. Comparing real GDP from year to year shows the

amount an economy has grown or shrunk and how this actually

affects the economy because they show the buying power of

money has been affected. Real GDP is used to compare GDP from

year to year. The factor used to convert nominal GDP to real

GDP is known as GDP deflator. The GDP deflator measures

changes in the prices of all domestically produced goods and

services in an economy including investment goods and

government services, as well as household consumption goods.

Real GDP is the one indicator that says the most about the

health of the economy and the advance release will almost

always move markets.

GDP deflator = Nominal GDP/ Real GDP* 100

GDP growth rate:

It tells you exactly how fast a country's economy is

growing. Most countries use real GDP to remove the effect of

inflation.

Constant-GDP figures allow us to calculate a GDP

growth rate, which indicates how much a country's production

has increased (or decreased, if the growth rate is negative)

compared to the previous year.

Real GDP growth rate for year n = [(Real GDP in year n) −

(Real GDP in year n − 1)] / (Real GDP in year n − 1)

Population growth effects the GDP growth rate in the manner

that if a country's GDP doubled over a certain period, but its

population tripled, the increase in GDP may not mean that the

standard of living increased for the country's residents; the

average person in the country is producing less than they were

before. Per-capita GDP is a measure to account for population

growth.

Per capita GDP:

GDP per person that is total GDP is divided by total

population of the country. If you want to compare GDP between

countries, keep in mind some countries have a large economic

output because they have so many people. To get a more

accurate picture, it's helpful to use GDP per capita. It shows

the real productivity of the population. its also used to

determine the standard of living of the country.

GDP comparison between countries:

The countries in the world compare their GDP by converting

their currency value according to either current currency

exchange rate or purchase power parity exchange rate.

Current GDP growth rate of India is 2.10% and GDP annual

growth rate is 4.60% and GDP growth worth is 1876.80 billion

dollars and GDP Per capita is 1165.00.

Gross National product:

Gross national product (GNP) is the market value of all

the products and services produced in one year by labour and

property supplied by the citizens of a country.

GNP is the total value of

all final goods and services produced within a nation in a

particular year, plus income earned by its citizens (including

income of those located abroad), minus income of non residents

in the country, i.e., GDP, plus any income earned by residents

from overseas investments, minus income earned within the

domestic economy by overseas residents.

GNP is one measure of the economic condition of a

country, under the assumption that a higher GNP leads to a

higher quality of living, all other things being equal. While

GDP is the total value of goods and services produced in the

country, GNP also takes into account the value of goods and

services offered by Indian companies outside the boundaries of

the country. Adding the income of a country’s nationals from

abroad and subtracting the income of foreign nationals in that

country results in ‘Net Income from Abroad’.

GNP = GDP + Net Income from Abroad

If Net Income from Abroad is positive, then GNP > GDP

otherwise GDP > GNP

Current Gross National Product is 99965.15 INR billion.

Net Domestic Product:

Net domestic product (NDP) represents the net book

value of all goods and services produced within a nation's

geographic borders over a specified period of time.

NDP is the annual measure economic output of a nation

that is adjusted to account for depreciation. Net domestic

product accounts for capital that has been consumed over the

year in the form of housing, vehicle, or machinery

deterioration. The depreciation accounted for is often

referred to as capital consumption allowance and represents

the amount needed in order to replace those depreciated

assets.

If the country is not able to replace the capital stock

lost through depreciation, then GDP will fall. In addition, a

growing gap between GDP and NDP indicates increasing

obsolescence of capital goods, while a narrowing gap means

that the condition of capital stock in the country is

improving. It reduces the value of capital that is why it is

separated from GDP to get NDP.

NDP= GDP - Depreciation

Similarly,

NDP = Consumption + Government Expenditures + investments+Exports - Imports - depreciation

Net National Product:

Net National Product is the monetary value of finished

goods and services produced by a country's citizens, whether

overseas or resident, in the time period being measured (i.e.,

the gross national product, or GNP) minus the amount of GNP

required to purchase new goods to maintain existing stock

(i.e., depreciation).

Depreciation (also known as consumption of fixed

capital) measures the amount of GNP that must be spent on new

capital goods to maintain the existing physical capital stock.

NNP = GNP - Depreciation, that means

NNP = Market value of Finished Goods + Market Value of

Finished Services - Depreciation

Alternatively, Net National Product (NNP) can be calculated as

total payroll compensation + net indirect tax on current

production + operating surpluses.

NNP is a measure of how much a country can consume in a

given period. Note that NNP measures output regardless of

where that production takes place (in other words, it includes

the value of goods and services that American companies

produce, supply or create abroad). Previously NNP is used as

the key identity in national accounting, later its replaced by

GNP and GDP.

Balance of Payment (BoP):

Balance of Payment (BoP) of a country is defined as the

statement of all economic transactions between the residents

of a country and the rest of the world in a particular period

(over a quarter of a year or more commonly over a year ).

These transactions are made by individuals firms and

government bodies. The balance of payments, also known as

balance of international payments, encompasses all

transactions between a country’s residents and its non

residents involving goods, services and income; financial

claims on and liabilities to the rest of the world; and

transfers such as gifts. BOP is calculated in order to

determine how much money is going in and out of a country. BOP

includes transactions that are payments made for the

country's exports and imports of goods, services, financial

capital, and financial transfers.

If a country has received money, this is known as a

credit, and if a country has paid or given money, the

transaction is counted as a debit. Theoretically, the BOP

should be zero, meaning that assets (credits) and liabilities

(debits) should balance, but in practice this is rarely the

case.

The balance payments divided into three main categories

they are

i. Current account

ii. Capital account

iii. Financial account

i. Current account:

The current account is an important indicator about an

economy's health. The current account records goods, services,

income and current transfers of a country for a particular

period. The current account is used to mark the inflow and

outflow of goods and services into a country. Earnings on

investments, both public and private, are also put into the

current account. The balance of the current account tells us

if a country has a deficit or a surplus.

The components of Current account are goods, services,

incomes and current transfers.

"Current account balance(CAB) = X - M + NY +

NCT"

Where

X = Export of goods and services

M = Import of goods and services

NY = Net income abroad

NCT = Net current transfers

ii. Capital account:

A national account that shows the net change in asset

ownership for a nation. The capital account is the net result

of public and private international investments flowing in and

out of a country.

A surplus in the capital account means money is flowing

into the country, a deficit in the capital account means money

is flowing out of the country. The capital account includes

foreign direct investment (FDI), portfolio and other

investments, plus changes in the reserve account.

"Capital account = Foreign direct investment + Portfolio

management + Other investment + Reserve account"

iii. Financial account:

In the financial account, international monetary flows

related to investment in business, real estate, bonds and

stocks are documented. Also included are government-owned

assets such as foreign reserves, gold, special drawing

rights (SDRs) held with the International Monetary Fund (IMF),

private assets held abroad and direct foreign investment.

Assets owned by foreigners, private and official, are also

recorded in the financial account.

Current account deficit:

Current account records all transactions in goods and

services i.e., imports and exports of the country along with

net income, such as interest and dividends, as well as

transfers, such as foreign aid. Current account deficit occurs

when imports are more than exports i.e., it shows negative

balance in Current account. current account deficit, which

indicates that it is a net borrower.

Developed countries, such as the United States, often

run current account deficits, while emerging economies often

run current account surpluses. Countries that are very poor

tend to run current account deficits.

A country can reduce its current account deficit by

increasing the value of its exports relative to the value of

imports. It can place restrictions on imports, such as tariffs

or quotas, or it can emphasize policies that promote exports,

such as import substitution industrialization or policies that

improve domestic companies' global competitiveness.

The country can also use monetary policy to improve the

domestic currency’s valuation relative to other currencies

through devaluation, since this makes a country’s exports less

expensive.

India recorded a Current Account deficit of 1.20 USD

Billion in the first quarter of 2014, it amounts 0.2% of GDP.

Current account surplus:

Current account records all transactions in goods and

services i.e., imports and exports of the country along with

net income, such as interest and dividends, as well as

transfers, such as foreign aid. Current account surplus occurs

when there is more exports than imports.

A current account surplus indicates that a nation is a

net lender to the rest of the world and has a positive trade

balance. A current account surplus increases a nation’s net

assets by the amount of the surplus.

Nations with large and consistent current account

surpluses are typically exporters of manufactured products or

energy. With manufactured products, these export-oriented

nations either follow a policy of mass-market production –

like China – or have a reputation for top quality, like

Germany, Japan and Switzerland.

Top 10 Current account surplus countries are Germany,

China, Saudi Arabia, Russia, Japan, Netherlands, Norway,

Kuwait, Switzerland, Qatar. These current account surpluses

are used to finance current account deficits in other nations.

Consumer Price Index(CPI):

A consumer price index (CPI) measures changes in the

price level of a market basket of consumer goods and services

purchased by households. The CPI is calculated by taking price

changes for each item in the predetermined basket of goods and

averaging them; the goods are weighted according to their

importance.

The prices of goods and services fluctuate over time,

but when prices change too much and too quickly, the effects

can shock an economy. The Consumer Price Index (CPI), the

principle gauge of the prices of goods and services, indicates

whether the economy is

experiencing inflation, deflation or stagflation.

Consumer price index is also known as Cost of living

index.

Uses of Consumer Price Index:

The CPI is often used to adjust consumer income

payments for changes in the currency's value and to adjust

other economic series. Social Security ties the CPI to income

eligibility levels; the income tax structure relies on the CPI

to make adjustments that avoid inflation-induced increases in

tax rates and finally, employers use the CPI to make wage

adjustments that keep up with the cost of living. Data series

on retail sales, hourly and weekly earnings and the national

income and product accounts are all tied to the CPI to

translate the related indexes into inflation-free terms. 

The CPI is probably the most important and widely

watched economic indicator, and it's the best known measure

for determining cost of living changes--which, as history

shows us, can be detrimental if they are large and rapid. The

CPI is used to adjust wages, retirement benefits, tax brackets

and other important economic indicators. It can tell investors

some things about what may happen in the financial markets,

which share both direct and indirect relationships with

consumer prices. By knowing the state of consumer prices,

investors can make appropriate investment decisions and

protect themselves by using investment products.

Calculation of Consumer Price Index(CPI) :

For single item:

Current item price ($) = (base year price) * (Current CPI) /

(Base year CPI) or

CPI2 / CPI1 = Price2 / Price1

Alternatively, the CPI can be performed as CPI = updated

cost / base period cost * 100

"updated cost" is the price of an item at a given year.

For multiple items:

where the  s sum to 1 or 100.

Consumer price index for July 2014 is 143.7

Percentage of variation over the year is 8.0%.

Wholesale price index:

Wholesale price index that measures and tracks the

changes in price of goods in the stages before the retail

level. Some countries use WPI changes as a central measure

of inflation. Previously India also used WPI as a measure of

inflation but now India is using CPI as a measure of

inflation.

The Indian WPI figure was released weekly on every

Thursday. But since 2009 it has been made monthly. The

Wholesale Price Index focuses on the price of goods traded

between corporations, rather than goods bought by consumers.

WPI  is published by the Office of Economic Adviser,

Ministry of Commerce and Industry.  WPI captures price

movements in a most comprehensive way.   It is widely used by

Government, banks, industry and business circles.   Important

monetary and fiscal policy changes are linked to WPI

movements.

Calculation of wholesale price index:

The wholesale price index (WPI) is based on the

wholesale price of a few relevant commodities of over 240

commodities available. The commodities chosen for the

calculation are based on their importance in the region and

the point of time the WPI is employed. The indicator tracks

the price movement of each commodity individually. Based on

this individual movement, the WPI is determined through the

averaging principle. The following methods are used to compute

the WPI:

Laspeyres Formula 

It is the weighted arithmetic mean based on the fixed value-

based weights for the base period.

Ten-Day Price Index

Under this method, “sample prices” with high intra-month

fluctuations are selected and surveyed every ten days through

phone. Utilizing the data retrieved by this procedure and with

the assumption that other non-surveyed “sample prices” remain

unchanged, a “ten-day price index” is compiled and released.

Formula for calculating WPI is

(Price of commodity for current year - Price of commodity for

base year) / price of commodity for base year * 100.

Current WPI as on July 2014 is 184.6.

Percentage variation over year is 5.2%.

Index of industrial production:

The first official attempt to compute the IIP was made

much earlier than even the recommendations on the subject at

the international level. The Office of the Economic Advisor,

Ministry of Commerce and Industry made the first attempt of

compilation and release of IIP with base year 1937, covering

15 important industries, accounting for more than 90% of the

total production of the selected industries. The all-India IIP

is being released as a monthly series since 1950. With the

inception of the Central Statistical Organization in 1951, the

responsibility for compilation and publication of IIP was

vested with this office.

Index of Industrial Production details the growth of

industrial sectors such as mining, electricity and

manufacturing in the economy. IIP is one of the prime

indicators of economic development and short term economic

analysis and measures the trends in the behaviour of

industrial production over a period of time with reference to

a chosen base year. Present base year for IIP is 2004-05.

USES:

1. IIP is used by the planners, the state and the

central government at different levels for different policy

decisions and other purposes.

2. IIP used by state government for preparation state

income estimates of manufacturing sector.

3. The monthly IIP helps to use it as a reference

series in the compilation of cyclical indicators which helps

to predict the future turning points in business cycle.

4. Investors can use IIP of various industries to

examine the growth in the respective industries.

Calculation of IIP is

where I is the index, Ri is the production relative of the ith

item for the month in question and Wi is the weight allotted

to it.