GROSS DOMESTIC PRODUCT (GDP )

DEFINITION

2. Gross Domestic Product at Factor Prices.

Gross Domestic Product at Factor Costs can be defined as “ the aggregate of factor incomes earned by factors of production owned by residents some of which may be located abroad.”

The Gross Domestic of a country can be defined/calculated in two ways;

1. Gross Domestic Product at Market Prices Gross Domestic Product at Market Prices can be defined as “ the total

value at market prices of outputs of all goods and services during a specified period, usually a year”

Net National Product (NNP)

Net National Product is the value of net output in an economy during the period of one year . It is the net value of final goods and services which are produced during the period of one year . To calculate the net national product , we deduct depreciation from the Gross National Product. Net National Product is also called National Income.

The Indian Economy is divided into 13 sectors classified under three

broad headings as under

AgricultureForestryFishery

PRIMARY SECTOR consisting of :

SECONDARY SECTOR

consisting of:

MiningManufacturingConstructionGas and Water Supply

TradeTransportStorageCommunicationsBankingInsuranceReal EstateCommunity & Personal Services

TERTIARY SECTOR

consisting of :

COMPONENTS OF INDIA’S GDP

CALCULATING GDP

The expenditure approach The income approach

Adding up the amount spent on all final goods & services during a given period

Adding up the income i.e. wages, rents, interest and profit received by all factors of production in producing final goods

The expenditure approach

The expenditure approach calculates GDP by adding together four components of expenditure

Constituent groups in an economy

--Households --Firms --Government --Rest of the world

Correspondingly there are four categories of expenditure

(1) Personal consumption expenditure ( C )

(2) Gross private domestic investment ( I )

(3) Government purchases ( G )

(4) Net exports (X )

GDP = C + I + G + X

1) Personal consumption expenditure

(2) Gross private domestic investment

(3) Government purchases

(4) Net exports

… non durable goods … durable goods … services

Residential

Non- Residential

Expenditure for new houses, apartment buildings

Expenditure by firms for machines, tools, plants

Business inventories

Goods that firms produce now but sell later

Purchases of newly produced goods & services by Central/State/Local governments

Wages & salaries of government workers

Net exports are total exports minus total imports. It can be positive or negative

The income approach

GDP is then arrived at, by adding together these four components of the earnings.

In equation form :

The income approach to calculating GDP looks at GDP in terms of who receives it as income and not who purchases it.

(1) National income ( N )

(2) Depreciation ( D )

(3) Indirect taxes minus subsidies ( T )

(4) Net factor payments to the rest of the world (F )

GDP = N + D + T + F

The income approach breaks down GDP into four components, namely :

1) National income

(2) Depreciation

(3) Indirect taxes minus subsidies

(4) Net factor payments to the rest of the world

… Compensation of employees … Proprietor’s income … Corporate … Net interest … Rental incomeSince national income includes corporate profits

after the depreciation has been deducted, so depreciation must be added back

Net exports are total exports minus total imports. It can be positive or negative

Income earned by factors of production

In calculating the final sales on the expenditure side, indirect taxes such as sales tax, custom duty, and license are included. Because these taxes are counted on the expenditure side, they most be added on the income side

SIGNIFICANCE OF GDP AND NNP TO GROWTH

GDP indicates the performance of an economy during one year and over the period of many years and thus helps in calculation of the actual rate of economic growth.

Performance of an economy

NNP They tells us about the economic welfare enjoyed by the people.. We can know the per capita income by dividing the by the population This data indicates the level of consumption of various goods and services . a higher per capita income means a higher level of consumption and people enjoy more economic welfare.

Economic welfare enjoyed by the people. Comparisons between economies

GDP of different countries helps in comparisons between various economies of the world and helps in understand the changes taking place in the various economies.

Within an economy, inter-sectoral comparisons can be made with the help of these statistics. If we can analyse the national income sector wise, we can know the share of the different sectors like agriculture manufacturing and services.

Inter-sectoral comparisons

When economic plans are prepared, for the allocation of resources and for mobilization of resources it is necessary to know about the GDP and NNP. With the help of this data, we can know about the rate of consumption savings and investment. With the help of this data it we can fix the targets of production consumption, investment, employment, etc.

Help in economic planning.

National Income account reflects structural changes in the economy. Changes in the composition of National Income are bound to create structural changes in a growing economy.

Reflects structural changes in the economy

National income estimates over a period of many years enable us to evaluate the planning. They provide important data on per capita income, per capita consumption , rate of growth of domestic savings, capital formation , the contribution to various sectors of the economic development . An upward trend in all these indicates the success of planning.

Help in evaluation of plans

National income estimates are also important in the formation of the budget. The amount of taxation and the money that can be got from the public is to be determined keeping in view the national income figures . Public expenditure is to be adjusted keeping in view the per capita income or changes in per capita income.

Important for formulation of budget

9) They also indicate how the income or wealth is distributed among the various classes . Thus we can know whether national income is equally distributed or not. National income estimates on the distribution of income by size reveal the production of income by various income groups and provide a basis for the study of income distribution . a dy of income distribution . a ies of such data indicates the changes in income distribution.

Indicates income & wealth distribution among classes

GDP AT FACTOR COST

YEAR GDP(RS.CRORES)

1950-51 1,47,477

1960-61 2,06,121

1970-71 2,96,903

1980-81 4,01,162

1990-91 6,93,051

2003-04 25,19,785