GROSS DOMESTIC PRODUCT

Definition

• GDP refers to the market value of final goods and services produced in an economy in a given period of time.

NOMINAL Vs REAL GDP

• Value of the final goods is measured by the price of the final good = P * Q.– Above relationship says that the GDP can

grow with no change in Q. – Hence P should be kept constant while

measuring GDP. (Real GDP)

Calculation of Real & Nominal GDP

Goods / Services

P0 Q0 P1 Q1

X1 2 40 3 60

X2 8 90 10 150

X3 80 100 90 110

X4 70 120 80 130

Calculation of GDP:• GDP for Base Year = 40*2 + 90*8 +

100*80 + 120 * 70 = 17200

Nominal GDP: (No Constants)• GDP = 60*3 + 150*10 + 110*90 + 130*80

= 21980

Real GDP: (Price constant)• GDP = 60*2 + 150*8 + 110*80 +130 *70

= 19220

Growth in Nominal GDP:

Growth GDPn = 21980-17200/17200*100 = 27.79%

Growth in Real GDP:

Growth GDPr= 19220-17200/17200*100 = 11.74%

Deflator:

GDP Deflator = GDPn/GDPr * 100

= 21980/19220 * 100 = 114.36 = 14.36%

GDP & GNP

• GDP refers to the value of final goods and services produced within the country. It does not matter if the producers of these goods and services are residents or non-residents.(INFOSYS in U.S)

• GNP refers to the goods and services produced by the country’s residents. It does not matter in which part of the world the production is taking place, the producers should be Indian residents. (IBM in India)

GDP Measurement

Expenditure Method

• Measures the expenditure or total spending on domestically produced final goods and services in an economy.

Four Components needed:

1. Consumption Goods: (C) Expenditure on consumption goods

like food, clothing etc (Consumer Non-Durables) and Air conditioners, TV’s, Cars etc (Consumer Durables). Services like haircut, laundry and host of other services.

2. Investment Goods: (I)Includes addition to stock of capital

like machinery, equipments etc and investment in services like consultancy services and financial services etc.

3. Government Expenditure : (G)Expenditure on final goods and

investment goods by the government is taken into consideration.

4. Imports & Exports: (X-M)Expenditure on goods during

exports and imports.

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

Output Method

• This method adds up the value, expressed in market prices, of all goods and services produced in the economy.

Eg: A (Produces raw material) 1000

Value added = 1000

B (Uses raw material to produce a product) 1500

Value added = 500

C (Retailer sells the product) 2000

Value added = 500

Income Method

• Factors of production:– Payment for land, say rent (r)– Payment for labor, say wages (w)– Payment for capital, interest (i)– Payment for organization, profit (p)

AN EXAMPLE

Stage of

Production

Sales

Receipts

Cost of

Intermediate

Products

Value Added Factor Incomes

WHEAT 24 0 24 r + w + i + p

FLOUR 33 24 9 r + w + i + p

DOUGH 60 33 27 r + w + i + p

BREAD 90 60 30 r + w + i + p

TOTAL 207 117 90

Using Expenditure method: GDP = Sum of sales receipts – Sum of costs

of intermediate products

=207 – 117 = 90

Using Output Method:GDP = Sum of the value added at each step.

= 90

Using Income Method:

GDP = 90 = r + w + i + p

FACTS

According to the data released for the year

2006-2007, India's GDP grew at an

impressive 9.2 per cent. The share of

different sectors of the economy in India's

GDP is as follows:

Agriculture - 18.5 %,

Industry - 26.4 % and

Services - 55.1 %

Conclusion

• In reality, because of different data sources and estimation errors involved, the GDP arrived at through the three different methods give similar but not identical results. Some adjustments, usually, are carried out to arrive at a common measure.

• Though the end result of all the three methods is a common measure of GDP for the economy. Each method has specific use depending on the purpose of analysis of GDP data.

References

• LINKS– http://www.economywatch.com/world_economy/world-economic

-indicators/world-gdp.html

– http://www.economicswebinstitute.org/glossary/gdp.htm

– http://www.econedlink.org/lessons/index.cfm?lesson=EM225&page=teacher

– http://www.cftech.com/BrainBank/FINANCE/GDP.html

• BOOKS:– Macro Economic Policy. By, Shyamal Roy.