2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal

http://mrunal.org/2011/04/economy-3-methods-of-calculating-gdp.html 1/17

Mrunal

Economy / Economy: Miscellaneous & Outdatedarticles | 98 3 years ago

[Economy] 3 Methods of calculating GDP

CSAT क�ल क� सबुह

Got this

question from

mail,

what are these

income,production and expenditure methods in

calulating GDP?how do terms like NNP, NDP,

GNP,GDP,NNPFC,NNPMP DIFFER FROM EACH

OTHER. what is difference between gdp at

constant prices and current prices. its very

confusing

I’ll deal with each question in one post. First, lets

refresh the concepts again.

GDP (Gross Domestic Product) means,

Money value of everything you produce within

your country.

(Domestic=within country).

Everything means products and services.

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2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal

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GNP (Gross National Product) means,

The Money value of everything you produce

within your country PLUS your income from

abroad. Anil Kapoor goes to America, get 5 million

dollar$ to play baddie in Mission Impossible 4,

but sends that money to India = counted in India’s

GNP.

But with same logic, Cricket Coach Gary Kirsten

gets 50 lakh rupees from BCCI, and sends it to his

family in S.Africa, you’ve to deduct it from India’s

GNP. (South Africans will count it in their GNP)

Similarly, Americans will subtract the dollar value

of Anil Kapoor’s remittance to India while

counting their GNP.

So, what’ll be the (stupid) formula?

Gross National production=Money value of

everything produced within India+Incoming

money from outside-Outgoing money to abroad.

Or you can simply say

GNP = GDP + incoming money from abroad –

Outgoing money to abroad.

GDP is calculated by three methods.

Theoretically all three of them should give same

final number, but in reality there will be slight

difference between each of them.

#A: EXPENDITURE METHOD OF COUNTING GDP

How GDP calculated and what is are these

income, production and expenditure

methods.

No change...

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2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal

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Here you count the money spent by everyone.

So How to make a ‘technical’ formula? Ask

yourself, where is the money changing hands?

There are five components of that.

#1: CONSUMPTION BY PRIVATE CITIZENS [C]

like you and me buying (overpriced) daal,

vegetables and milk (courtesy: Sharad Pawar).

I buy your second-hand bike for 15,000 Rupees,

should we including it in the consumer

Expenditure (C) ? Nope. Because the bike Is not

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2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal

http://mrunal.org/2011/04/economy-3-methods-of-calculating-gdp.html 4/17

Second hand products are not counted

When you had bought that bike for Rs.30000, 10

years ago, we had counted that money in that

year’s GDP. So second hand-product sale money

cannot be counted in this year’s GDP.

Now, I buy your second-hand bike from an auto

dealer, (who gets 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 CHANGING

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2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal

http://mrunal.org/2011/04/economy-3-methods-of-calculating-gdp.html 5/17

Each service or product has separate value even if

same currency note is used to purchase it

I gave a note of Rs.1000 to that dealer as part of

his brokerage (dalaali) and he gives the same

Rs.1000 note to the electricity 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

everything produced within India. So brokerage

service is Rs.1000 separately and the electricity

produced is also worth Rs.1000 separately.

Therefore, Even as same 1000 rupee note is given

to 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 unique service separately

to the company. So in that case

Total GDP =Brokerge+Electric bill+peon^’

salary=Rs.3000

#2: Investment [I]

Hallt ick ets up loaded?

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2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal

http://mrunal.org/2011/04/economy-3-methods-of-calculating-gdp.html 6/17

People investing in sharemarket, putting money in

banks etc.

#3: Government spending [G]

Like buying (overpriced) sports equipment from

Kalmaadi’s associates during Common wealth

games. Government paying salary to staff, buying

new tanks and missiles..everything.

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

Money we get from export is added.

You remember that GDP means Money value of

everything we produce within India. So if we

import something, it has to be subtracted,

because it is not produced within India.

So formula (for ease In remembering)

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

Technically correct formula:

#B: Income Method of counting gdp

Here you count everyone’s income. But some

people may be running business in credit

(udhaari), sometimes payments are delayed. So

may not give the ‘full picture’ for the given year.

#C: Production method of counting gdp

Total money value of everything produced (value

added at each stage)

1. Farmer produced Wheat and sold 100 kg of

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

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2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal

http://mrunal.org/2011/04/economy-3-methods-of-calculating-gdp.html 7/17

MRUNAL’S RECOMMENDED BOOKLIST

it @ 2000 Rs. (Original value)

2. Flour mill, purchased it, grinded it and sold

the flour to baker @ 2500 Rs. (+500 value

added to previous purchase)

3. Baker made breads, cookies and biscuits

and sold the total production @3500 Rs to its

final customers. (+1000 value added to

previous purchase)

what is total ‘GDP’ here?

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

the value added.

So, total money value of this line is:

2000+500+1000=3500.

Not all of the wheat goes into Baker’s oven. Some

of it will go in making beer, some in a normal

household for making roti and so on. You’ve to

track the value added in each different line.

To be continued… GDP at nominal price, Market

price, Factor Cost, etc.etc.etc.

Previously in this category

[Economic Survey] Ch13: Demographic

Dividend, Education & Skill Development

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foremen,driver,mechanic(99)

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Secretary,Steno,Translators

Facul ty Jobs

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Warning

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DONOT wait till last date.

DONOT forget/misplace

reg.id, Roll number.

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schemes, National Youth Policy 2014

[Economic Survey] Ch13 P3: Human

Resources- Minorities, SC, ST, PH, Elderly;

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[Economic Survey] Ch13 P4: Rural &

Urban Infrastructure, REITs, Smart Cities,

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[Lecture] Economic survey Chapter 5, 6 &

7: Financial Intermediaries, Balance of

Payment, International Trade

[Lecture] Economic Survey Chapter 1,2,3

& Budget- Taxation, Deficits, Subsidies

MINUS Schemes

Roshani 30/05/2013 at 00:02

Reply

Finally got these GDP and GNP.

jogesh 15/06/2013 at 10:14

Reply

mrunal u r blog is uber useful n i really like the economy

part ….. the way u explain things is remarkable . u make

life easier when it comes to understanding economy…

Praveen 20/06/2013 at 12:28

You said that

GNP = GDP + incoming money from abroad – Outgoing

money to abroad.

2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal

http://mrunal.org/2011/04/economy-3-methods-of-calculating-gdp.html 9/17

Reply

But then again you said GDP(Expenditure)=C+I+G+(X-M)

where x and M are incoming money from abroad and

Outgoing money to abroad, which is contradicting the

statement that GDP and GNP are different except for

imports and exports.

Alok 29/08/2013 at 20:55

Reply

Praveen,

It gets simpler, if you see GDP and GNP in their

own contexts.

1- GDP is estimated value of the total worth of a

country’s production and services, “on its land”,

by “its nationals and foreigners”, calculated over

the course of one year.

However, GNP is estimated value of the total

worth of production and services, “by citizens of

a country”, on “its land or on foreign land”,

calculated over the course on one year

2- Simply saying ‘Anil Kapoor going abroad

working for MI-4′ will not be counted in our GDP

instead, it will be counted in GNP . However,

‘Gary Kirsten gets 50 lakh rupees from BCCI’ will

be counted in our GDP and not in GNP.

Now, a country’s GDP is a good parameter for

analysing the country’s economy locally but for

global analysis and standing of a country you

would require GNP value instead.

Hope, i helped.

Sailesh 21/03/2014 at 00:53

Reply

Thanks for very nice explanation….. little

doubts of mine also removed

Sailesh 21/03/2014 at 00:53

Reply

Thanks for very nice explanation….. little

doubts of mine also clarified

prakash 25/06/2013 at 15:34

2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal

http://mrunal.org/2011/04/economy-3-methods-of-calculating-gdp.html 10/17

Reply

so nice

abhi 29/06/2013 at 23:11

Reply

sir will u analyze the upsc changed syllabus, especially

on world history.& also will u provide some notes(in ur

humorous ad lucid way),on Development processes

and the development industry- the role of NGOs, SHGs,

various groups and associations, donors, charities,

institutional and other stakeholders.eagerly waiting

Harsha 05/07/2013 at 16:45

Reply

For the forthcoming RBI GRADE B exam— For Economy

and Current affairs How many months Backdated

information should i be covering from a exam

perspective for August 2013 Exam

Sumeet 08/07/2013 at 01:09

Reply

This is the best website to understand everything about

the Indian economy.

goutham 22/07/2013 at 09:20

Reply

sir doubt…!! which method is currently used by our

country..?

and which method is more easy to calculate..?

aravind 24/07/2013 at 08:24

Reply

nice one sir ji

sanjaya 25/07/2013 at 16:03

Reply

hey thanks a lot u have explain it in such a way by

including instances a lay man will be get it clearly……be

continue

Arvind 31/07/2013 at 12:01

Reply

finally i learnt to calculate GNP…

kishan 06/08/2013 at 19:31

2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal

http://mrunal.org/2011/04/economy-3-methods-of-calculating-gdp.html 11/17

Reply

Sir, Your article is very useful and informative. thank you

NILADRI GARAI 12/08/2013 at 00:56

Reply

The concept given in NIOS ECONOMICS START UP

MATERIAL L-11.3 MEANING OF NATIONAL’ is

contradicting with the concept given here although this

concept matches with NEW NCERT CLASS XII

MACROECONOMICS 2.3.chapter 2.3 named ‘some

economic identities’ page 23).

Amanda 12/08/2013 at 19:54

Reply

I really like your blog, it makes me easy for me to learn.

I’ve been confuse a little.

puneeth 20/08/2013 at 22:06

Reply

i really like your blog, it makes me easy for me to learn.

I’ve been confuse a little.

saket shandilya 23/08/2013 at 23:33

Reply

we say gdp is 4.8 percent… now 4.8 percent of what????

Alok 31/08/2013 at 10:17

Reply

Thats not gdp .. thats actually GDP growth rate

calculated annually YoY(Year over Year) or

quarterly QoQ(Quarter over Quarter)

durgesh kumar singh 12/09/2013 at 16:14

Reply

mrunal sir a lots of thanks to teach in such a easiest way

,the fundamentals of gdp nd calculation of it.

Sridhar 18/09/2013 at 11:08

Reply

Mrunal Great work, your content on GDP helped me lot

to understand the concept. want you to continue the

GDP chapter further for depth understanding.

Thanks

Pankaj 20/09/2013 at 17:57

2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal

http://mrunal.org/2011/04/economy-3-methods-of-calculating-gdp.html 12/17

Reply

Why GDP is shown as our growth rate axept NNPfc?????

ADARSH SINGH 27/09/2013 at 13:00

Reply

GDP NDP GNP etc etc:-these all we calculating to see

the economic condition of country in different way.

New thing is to learn here is that the most of the

countries are following same method to calculate

GDP,NDP,GNP……do u want to know why ????? bcz

most of the country has taken copyright for this

calculation from UN(United nation) country.thats the

reason allmmost all countries are following same

method.

Now a days this cocept (GDP,NDP,GNP) are adepting by

company also…yes.they call this GVA,NVA & EVA.

There are very interesting and value added thing for

those who are doing Finance,Marketing ..

tenc 27/09/2013 at 16:00

Reply

Thank you Murnal Sir.you explaining economy in

simplest way,which look complex when i read books and

Surf internet,because lot of things are dumped there.

ashish 27/09/2013 at 23:24

Reply

sir! i want to clear my doubt ..you have quoted “15000″

wont be calculated in GDP because it is a second hand

product…. but the seller who got that amount after

selling ….can use this money in the development of

other unique service or product.. by this “15000″ will be

included in GDP..

Dee 11/10/2013 at 05:13

Yes, even I am stucked here.If broker’s 1000

service charge is counted in GDP because it will

eventualy be translated in to different service

(ultimately summing upto 3000 in GDP), then

why the second-hand bike sold at 15000 is not

considered. The seller can use the 15000 in

paying to same electricity company and thus the

money changes hands..

Please Sir, clarify .

2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal

http://mrunal.org/2011/04/economy-3-methods-of-calculating-gdp.html 13/17

Reply

suneet 08/12/2013 at 07:39

Reply

Hi DEE

did u find any answer on this . i am also

stuck here.

should there be some criteria like

GDP=domestic(investment –

disinvestment).

Madhukar 05/01/2014 at 16:04

Reply

You are right

Madhukar 05/01/2014 at 16:03

Reply

you arre dee

manoj 04/02/2014 at 14:29

Reply

that 15000 is not calculated as he

bought that bike in past at 30000. (No

new Item or service produced.)

that 1000 rs has been added in GDP as

he receives that amount due to some

services(New) provided.

sonwane karuna 25/10/2013 at 13:50

Reply

This site is one of the best source for economics nd also

all the subjects for us. thanks to publish it.

sonwane karuna 25/10/2013 at 13:52

Reply

so nice nd helpful.

Prabhat 05/11/2013 at 23:38

Reply

good .

shilpa 06/11/2013 at 19:50

Being an economics teacher, I still found the content

much more informative and easier. Appreciate your

effort, keep it up.

2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal

http://mrunal.org/2011/04/economy-3-methods-of-calculating-gdp.html 14/17

Reply

harneet singh 21/11/2013 at 21:31

Reply

sir i m having a sense ov satisfaction after reading

dis…… i m preparing fr civil service…………… its so

lucidly explained…….how 2 contact you in case i have 2

ask smthng…..

Chaitanya 02/12/2013 at 23:47

Reply

Really very good explanation

suneet 08/12/2013 at 07:21

Reply

Sir,

suppose goods worth 10 millon are produced. but sold

are 8 million worth . what will be GPD? 10 million or 8

million . please give the logic behind it as well.

gerrard@ynwa 29/06/2014 at 18:57

Reply

it will be wort 10 million. as initailly its the 10

million worth of production added in the

econoly . dont bother bout that diminished sale.

answer would be 10m.

vinamra 09/12/2013 at 12:50

Reply

sir , u have given an example in GDP counting

production method, in that wheat is produced by

farmer and going to different sectors like bakers , flours

etc out of his total production he is giving to another

sector then how can we count agriculture sector

individually and how can we say agriculture sector

diminishing though it is sharing with other like sugar

cane , milk , wheat etc

Madhukar 05/01/2014 at 16:17

Yes you are right but when produce wheat its

value added in GDP. But when it goes to flour

producer, he has to processed it so that

additional cost cost is added. likewise if bakers

make bread what cost he incurred in is added i

final GDP not entire wheat, flour and bread price

2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal

http://mrunal.org/2011/04/economy-3-methods-of-calculating-gdp.html 15/17

Reply

We say agriculture sector demising because

year on year production of food garin is not

increasing a s we targeting. it means if we

produced 250 MT of food grains last year, in this

year we managed to produce only 255 MT. there

only 2% increase i food grain production.

ansonjerrin@gmail.com 19/02/2014 at 10:19

Reply

Amazing Blog. You have made the understanding very

easy.

Em gonna share it on FB :)

thank you for simplyifing GDP & GNP

Aymen 23/02/2014 at 20:31

Reply

hey im from Pakistan i must say ur blog is

awesome.really very helping ;)

Pavan 26/02/2014 at 15:10

Reply

Dear Mrunal,

This comment is regarding the example titled “WHAT IF

SAME 1000 RUPEE NOTE IS CHANGING HANDS?”

Here , although Rs 1000 is being paid to the peon by the

electricity company , since it is included in the cost the

company charges to the customers ( which here

incidentally is Rs 1000 only!), shouldn’t it be dropped

from final GDP calculation ?

i.e shouldn’t the final GDP be Rs 1000 ( brokerage) + Rs

1000 (Final good + service – electricity production +

supply) = Rs 2000 going by value addition method ?

because, comparing and contrasting this with the Baker

example reveals that we are not adding the wages the

Baker must be paying to his assistants if any !

lake chaitanya 12/04/2014 at 21:54

Reply

hi mrunal .. previous articles of economy not opening

what shall i do?

caustic576 16/04/2014 at 23:44

Crucial difference to note here:

2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal

http://mrunal.org/2011/04/economy-3-methods-of-calculating-gdp.html 16/17

‹ परुानी कम��स 1 2

Reply

In Expenditure approach, under “Investment” portion-

“Investments in stock market” are not ALWAYS to be

accounted for GDP calculation. Investment in the

primary market (IPOs) is ONLY to be considered;

investment in buying shares off of another holder in the

secondary market is to be excluded (no net addition to

the value in the economy).

@Mrunal can correct me if I’m wrong.

shweta 20/07/2014 at 22:10

Reply

helpful blog..thanks

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2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal

http://mrunal.org/2011/04/economy-3-methods-of-calculating-gdp.html 17/17

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