GDP, GNP, GVA and National Income

 

Gross Domestic Production(GDP)- Production within a definite region by anyone(for 1 year period) 

Gross National Production(GNP)- Production by nationals(Citizens) of a country at anywhere(for one year period) 

GNP= GDP+ Net Factored Income Abroad

Net Factor Income from abroad = income earned by Indian resident in foreign countries – Income earned by foreign resident in India.

Terms of Trade(TOT)- Represent the ratio between a country's export prices and its import prices. A TOT over 100% or that shows improvement over time can be a positive economic indicator as it can mean that export prices have risen as import prices have held steady or declined.

GDP Calculation- 

There are various ways to calculate GDP including expenditure and income method. The formula for GDP calculation through expenditure method is as follows

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

C→ Consumer spending,      I → business investment

G → government spending,        (X-M) → net exports

GDP Nominal vs Real

Nominal GDP → GDP calculation at current market price

Real GDP → GDP calculation after adjusting for inflation

Let's A country X produced 10 cars(Price- 1 million each) in year 2020(nominal GDP= 10 million) 

 and 

X produced 10 cars(Price- 2 million each) in year 2021(nominal GDP= 20 million) 

The nominal GDP of 2021 will be twice of year 2020, but real GDP of 2020 and 2021 is same(as in both year the country produced the same number of cars). 

GDP base year(India)- 2011-12

GDP Deflator

GDP deflator measure the inflation level in a economy. 

GDP Deflator= GDP(@Current Price)/GDP(@Constant Price)

GDP vs GVA

GDP → monetary value of all finished goods and services(Includes tax and subsidies) 

GVA → net value addition in production process

Gross Value Addition(GVA)-

It is mainly used to calculate the value addition of firms. 

GVA(@factor cost) = value of finished product- value of intermediary goods

GVA(@factor cost)= GVP(@basic price) - [Production taxes- Production subsidies]

GVA(@basic price)= GVP(@factor cost) + [Production taxes- Production subsidies]

GVP(@basic price)- what producer will receive before the product is sold. It is calculated by including production taxes and production subsidies in GVA(@factor cost). 

GVP(@basic price) is used in United Nations System of National Accounts(SNA). 

Factor cost represent cost involved by different factors of production. 

Basic price is including production taxes and production subsidies in factor cost. 

GDP(@Market cost)= GVA(@basic price)+ [indirect taxes- subsidies]

GVA(@basic price)= GDP(@Market cost) - [indirect taxes- subsidies]

Purchasing Manager Index(PMI)- 

Survey based measure to predict present and future production level. It is released on monthly basis by IHS Markit(Private entity). 

Separate PMI for manufacturing and service sector. 

PMI> 50(production expension as compared to previous months) 

PMI< 50(production contraction as compared to previous months) 

National Income- 

NNP(net national production)- 

NNP= GNP- Depreciation(used up capital) 

Two ways to calculate NNP- 

1. At market price(including tax & subsidies) 

2. At factor cost(excluding tax & subsidies) 

NNP(@factor cost)= NNP(@market price)- (indirect tax- subsidies) 

National income = NNP(@factor cost)

Personal Income= National income- undistributed profit- social security payments- corporate taransfer payments(Govt+ business) + net intrest paid by Govt

Personal Disposable Income= Personal income- Direct taxes

National Income Calculation- 

Simon Kuznets described three methods for national income calculation

1. Product method- by calculating GDP(net value of final goods and services) 

2. Income method- total net income earned by people

3. Consumption method(Expenditure method)- spent income+ saved income

In these three methods, the correct data is available for Product method and income method for some sectors. 

In India the estimation of national income is done by calculating income of different sectors. 

For 6 sectors- product method

For 7 sectors- income method

National income= product method(6 sectors) +  income method(7 sectors) 

GDP Calculation in India-

Prior to 2015- GVA(@factor cost) + Income method(Wages based- Wages+ Interest+ Profit+ Rent) with base year 2004-05.

Databse- IIP databse

Post 2015- GDP(@market price) + Income method(Compensation based, inclusion of social securities- Compensation+ consumption of fixed capital+ Mixed income/operating surplus) with base year 2011-12.

Databse- MCA-21 databse

Kuznets Curve- 

Income inequality first increase with rise in national income and then start decreasing. 

 

Ginni Coefficient-

Statistical measure of income distribution across population. 

Ginni coefficient → 1(Maximum Inequality) 

Ginni coefficient → 0(Complete equality- same income) 

Perfect Equality Line- Ideal condition, Income is equally distributed among population(Ginni Coefficient= 0) 

Lorenz Curve- Real Condition

A= Area between perfect equality line and Lorenz Curve

B= Area between Lorenz curve and % of population axis. 

Ginni coefficient= A/(A+B) 

When Lorenz curve will overlap with perfect equality line, in that case A=0 => (Ginni coefficient will be zero i.e. perfect equality) 

National Income in India-

1868- Dadabhai Naoroji estimated national income in his book “Poverty and Unbritish Rule”.

1949- National Income Committee(NIC) was formed under the chairmanship of Prof. P. C. Mahalanobis(member- D. R. Gudgil, V. K. Rao) 

1950- National sample survey office(NSSO) was established on the recommendations of NIC committee to collect sample data

1967- the task of calculating national income was given to central statistics office(CSO) assisted by NSSO

2019- Merger of (NSSO+ CSO) and renamed as National Statistical office(NSO)

CSO→ NSO

Business Cycle- 

Cyclic fluctuations of a business in 4 different mode- Recession, Depression, Recovery and Expansion

In macroeconomics, at aggregate level it shows GDP fluctuation of a country. 

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