Module 1

The overall study of economics is divided into two related, but relatively separate branches--macroeconomics and microeconomics. Macroeconomics is the study of the aggregate economy, or the macro economy. Microeconomics is the study of smaller parts of the economy, or the micro economy.

The branch of economics that studies the entire economy, especially such topics as aggregate production, unemployment, inflation, and business cycles. It can be thought of as the study of the economic forest, as compared to microeconomics, which is study of the economic trees.

The term Macro has been taken from the Latin word Macros which means big. In this way, the study of various economic aggregates is called Macro Economics

A Little History

The modern study of macroeconomics can trace its origins to John Maynard Keynes and his book, The General Theory, which was published in 1936 during the Great Depression. In contrast to the microeconomic theories that pervaded economic thought at the time, Keynes demonstrated that the macroeconomy operated according to a set of principles that are not particularly relevant for microeconomic analysis.A major aspect of macroeconomics is the study of business-cycle fluctuations, which was the predominant economic phenomenon during the Great Depression and which is what prompted Keynes to write The General Theory. While economists before Keynes, including Thomas Malthus and Karl Marx, had studied macroeconomic phenomena, most worked largely within the framework of existing microeconomic notions of supply, demand, and markets. In contrast, Keynes developed principles that applied specifically to the aggregate, macroeconomy, especially the consumption function, the marginal propensity to consume, and the expenditure multiplier.

Subject matter of Macroeconomics

Macro-economic theory is the study of economic aggregates, wherein economic relations between various aggregates of an economy such as total employment, aggregate demand, national income, total savings, total investment etc. arc studied. This study is based on the principle of aggregates wherein aggregates of various units arc expressed as a variable. The determination of level of employment and national income is a part of the subject matter of Macro Economics.

In the words of Shapiro, "Macro Economics deals with functioning of the economy as a whole."

According to Prof. Boulding, "Macro Economics deals not with individual quantities as such but with aggregates of the quantities, not with individual incomes but with the national income, not with the individual prices but with the price level, not with the individual output but with the national output.”

Therefore, as is clear from the above, the following issues/subjects define the scope of Macro Economics:

1. Aggregates of national income and its determination

2. Theories of Income and Employment.

3. Theory of Money and Banking.

4. Fiscal Theory.

5. Balance of Payment

Macroeconomics is the branch of economics. The subject matter of Macroeconomics deals with three aspects of national aggregates including, measurement, stability and growth. Most of the variables of macroeconomics are related with employment/unemployment, price/inflation and national income. By analyzing these indicators the movement of economy is controlled therefore, macroeconomics play a very important role in monitoring an economy.

Unemployment, commonly measured by the average unemployment rate, indicates what portion of the economy's total resources are not being used for production. Inflation, measured by the inflation rate, indicates whether the average level of prices are rising, falling, or remaining stable. Problems related to aggregate production are measured by gross domestic product, especially relative to potential gross domestic product.

Most macroeconomic problems and issues relate to business-cycle instability. Business cycles are irregular fluctuations of overall economic activity, marked by alternating periods of expansion, with increasing production, low unemployment, and rising inflation, followed by contraction, with declining production, high unemployment, and less inflation.

Fiscal policy relates to government spending and revenue collection. For example, when demand is low in the economy, the government can step in and increase its spending to stimulate demand. Or it can lower taxes to increase disposable income for people as well as corporations.

Monetary policy relates to the supply of money, which is controlled via factors such as interest rates and reserve requirements (CRR) for banks. Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with the RBI. If the central bank decides to increase the CRR, the available amount with the banks comes down. The RBI uses the CRR to drain out excessive money from the system.

Scheduled banks are required to maintain with the RBI an average cash balance, the amount of which shall not be less than 4% of the total of the Net Demand and Time Liabilities (NDTL), on a fortnightly basis. For example, to control high inflation, policy-makers (usually an independent central bank) can raise interest rates thereby reducing money supply.

Comparison between Fiscal & Monetary policy

Fiscal policy Monetary policyDefinition Fiscal policy is the use of

government expenditure and revenue collection to influence the economy.

Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.

Principle Manipulating the level of aggregate demand in the economy to achieve economic objectives of price stability, full employment, and economic growth.

Manipulating the supply of money to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment.

Policy-maker Government (e.g. U.S. Congress, Treasury Secretary)

Central Bank

Policy Tools Taxes; amount of government spending

Interest rates; reserve requirements; currency peg; discount window; quantitative easing; open market operations; signaling

GDP (or Gross Domestic Product) and GNP (Gross National Product) both measure the size and strength of the economy but their definition, calculation and applications are different from each other.

GDP Definition

GDP stands for Gross Domestic Product, the total worth estimated in currency values of a nation’s production in a given year, including service sector, research, and development. That translates to a sum of all industrial production, work, sales, business and service sector activity in the country. Usually this is calculated over a period of one year, but there may be analysis of short and long term trends to be used for economic forecast. Gross Domestic Product can also be calculated on a per capita (or per person) basis to give a relative example of the economic development of nations.

GNP Definition

GNP stands for Gross National Product. In general terms, GNP means the total of all business production and service sector industry in a country plus its gain on overseas investment. In some cases GNP will also be calculated by subtracting the capital gains of foreign nationals or companies earned domestically. Through GNP an accurate portrait of a nation’s yearly economy can be analyzed and studied for trends since GNP calculates the total income of all the nationals of a country. This gives a far

more realistic picture than the income of foreign nationals in the country as it is more reliable and permanent in nature. Gross National Product can also be calculated on a per capita basis to demonstrate the consumer buying power of an individual from a particular country, and an estimate of average wealth, wages, and ownership distribution in a society.

GDP GNPStands for Gross Domestic Product Gross National Product

Definition An estimated value of the total worth of a country’s production and services, within its boundary, by its nationals and foreigners, calculated over the course on one year.

An 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.

Formula for Calculation

GDP = consumption + investment + (government spending) + (exports − imports).

GNP = GDP + NR (Net income inflow from assets abroad or Net Income Receipts) - NP (Net payment outflow to foreign assets).

Uses Business, Economic Forecasting. Business, Economic Forecasting.

Application (Context in which these terms are used)

To see the strength of a country’s local economy.

To see how the nationals of a country are doing economically.

Layman Usage Total value of products & Services produced within the territorial boundary of a country.

Total value of Goods and Services produced by all nationals of a country (whether within or outside the country).

Country with Highest Per Capita (US$)

Qatar $ 100889 (2012) IMF list Qatar $87670

Country with Lowest Per Capita (US$)

Congo $ 365 Congo $ 370

India $ 3843 USA $ 51704 India 3840

Country with Highest (Cumulative)

USA ($13.06 Trillion in 2006). USA (~ $11.5 Trillion in 2005).

How GDP is calculated

GDP of a country is defined as the total market value of all final goods and services produced within a country in a given period of time (usually a calendar year). It is also considered the sum of value added at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time.

The most common approach to measuring and understanding GDP is the expenditure method:

GDP = consumption + investment + (government spending) + (exports – imports), or,

GDP = C + I + G + (X-M)How GNP is calculated

GNP is basically the GDP of the country plus income earned from overseas investments by residents, minus income earned within the domestic economy by overseas residents. GNP is focused on who owns the production regardless of where the production takes place. GNP calculates the value of output produced by the people (nationals) of the region.

The more different GDP and GNP are, the more the country is involved in international trade and finances. A great example of this would be Japan.

There are various ways of calculating GNP numbers. The expenditure approach determines aggregate demand, or Gross National Expenditure, by summing consumption, investment, government expenditure and net exports. The income approach and the closely related output approach sum wages, rents,interest, profits, non income charges, and net foreign factor income earned. The three methods yield the same result because total expenditures on goods and services (GNE) is equal to the value of goods and services produced (GNP) which is equal to the total income paid to the factors that produced the goods and services (GNI).

Expenditure Approach to calculating GNP:GNP = GDP + NR (Net income from assets abroad (Net Income Receipts)).

Applications of GDP and GNP numbers

GDP and GNP figures are both calculated on a per capita basis to give a portrait of a country's economic development. GDP (or Gross Domestic Product) may be compared directly with GNP (or Gross National Product), to see the relationship between a country's export business and local economy. A region's GDP is one of the ways of measuring the size of its local economy whereas the GNP measures the overall economic strength of a country. These figures can also be used to analyze the distribution of wealth throughout a society, or the average purchasing power of an individual in the country etc.

Increase in exports of a country will lead to increase in both GDP and GNP of the country. Correspondingly, increase in imports will decrease GDP and GNP. However, sometimes increase in exports might only lead to increase in GDP and not GNP. The exact relationship will depend on the nationality status of the company doing the export or import. E.g. if Microsoft Corporation has a 100% owned subsidiary in India, and that office exports US$2 Billion worth of services out of India, then US$2

Billion will be added to the GDP of India. However, it will not be added to the GNP figure since the export is done by a US company and not an Indian company.

Criticism

GDP is perhaps the most widely used metric to measure the health of economies. But some economists have argued that GDP is a flawed metric because it does not measure the economic well being of society. For example, it's possible that GDP is going up but median income going down and poverty rate increasing. GDP also does not measure environmental impact of growth, nor sustainability. Other important metrics include health of the population, infant mortality rates, and malnutrition rates, none of which are captured by GDP

Definition of 'Balance Of Payments (BOP)'

A statement that summarizes an economy’s transactions with the rest of the world for a specified time period. The balance of payments, also known as balance of international payments, encompasses all transactions between a country’s residents and its nonresidents involving goods, services and income; financial claims on and liabilities to the rest of the world; and transfers such as gifts. The balance of payments classifies these transactions in two accounts – the current account and the capital account. The current account includes transactions in goods, services, investment income and current transfers, while the capital account mainly includes transactions in financial instruments. An economy’s balance of payments transactions and international investment position (IIP) together constitute its set of international accounts.

Despite its name, the “balance of payments” data is not concerned with actual payments made and received by an economy, but rather with transactions. Since many international transactions included in the balance of payments do not involve the payment of money, this figure may differ significantly from net payments made to foreign entities over a period of time.

Does the “balance of payments” actually balance? In theory, a current account deficit would have to be financed by a net inflow in the capital and financial account, while a current account surplus should correspond to an outflow in the capital and financial account for a net figure of zero. In actual practice, however, the fact that data are compiled from multiple sources gives rise to some degree of measurement error.

Balance of payments and international investment position data are critical in formulating national and international economic policy. Certain aspects of the balance of payments data, such as payment imbalances and foreign direct investment, are key issues that a nation’s economic policies seek to address.

Economic policies are often targeted at specific objectives that, in turn, impact the balance of payments. For example, a country may adopt policies specifically designed to attract foreign investment in a particular sector. Another nation may attempt to keep its currency at an artificially depressed level to stimulate exports and build up its currency reserves. The impact of these policies is ultimately captured in the balance of payments data.

The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period of time. Usually, the BOP is calculated every quarter and every calendar year. All trades conducted by both the private and public sectors are accounted for in the BOP in order to determine how much money is going in and out of a country. 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. Thus, the BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming.

The Balance of Payments DividedThe BOP is divided into three main categories: the current account, the capital account and the financial account. Within these three categories are sub-divisions, each of which accounts for a different type of international monetary transaction.

The Current AccountThe 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.

Within the current account are credits and debits on the trade of merchandise, which includes goods such as raw materials and manufactured goods that are bought, sold or given away (possibly in the form of aid). Services refer to receipts from tourism, transportation (like the levy that must be paid in Egypt when a ship passes through the Suez Canal), engineering, business service fees (from lawyers or management consulting, for example) and royalties from patents and copyrights. When combined, goods and services together make up a country's balance of trade (BOT). The BOT is typically the biggest bulk of a country's balance of payments as it makes up total imports and exports. If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it exports more than it imports.

Receipts from income-generating assets such as stocks (in the form of dividends) are also recorded in the current account. The last component of the current account is unilateral transfers. These are credits that are mostly worker's remittances, which are salaries sent back into the home country of a national working abroad, as well as foreign aid that is directly received.

The Capital AccountThe capital account is where all international capital transfers are recorded. This refers to the acquisition or disposal of non-financial assets (for example, a physical asset such as land) and non-produced assets, which are needed for production but have not been produced, like a mine used for the extraction of diamonds.

The capital account is broken down into the monetary flows branching from debt forgiveness, the transfer of goods, and financial assets by migrants leaving or entering a country, the transfer of ownership on fixed assets (assets such as equipment used in the production process to generate income), the transfer of funds received to the sale or acquisition of fixed assets, gift and inheritance taxes, death levies and, finally, uninsured damage to fixed assets.

The Financial AccountIn 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.

The Balancing ActThe current account should be balanced against the combined-capital and financial accounts; however, as mentioned above, this rarely happens. We should also note that, with fluctuating exchange rates, the change in the value of money can add to BOP discrepancies. When there is a deficit in the current account, which is a balance of trade deficit, the difference can be borrowed or funded by the capital account.

If a country has a fixed asset abroad, this borrowed amount is marked as a capital account outflow. However, the sale of that fixed asset would be considered a current account inflow (earnings from investments). The current account deficit would thus be funded. When a country has a current account deficit that is financed by the capital account, the country is actually foregoing capital assets for more goods and services. If a country is borrowing money to fund its current account deficit, this would appear as an inflow of foreign capital in the BOP.

Liberalizing the AccountsThe rise of global financial transactions and trade in the late-20th century spurred BOP and macroeconomic liberalization in many developing nations. With the advent of the emerging market economic boom - in which capital flows into these markets tripled from USD$50 million to $150 million from the late 1980s until the Asian crisis - developing countries were urged to lift restrictions on capital and financial-account transactions in order to take advantage of these capital inflows. Many of these countries had restrictive macroeconomic policies, by which regulations prevented foreign ownership of financial and non-financial assets. The regulations also limited the transfer of funds abroad.

With capital and financial account liberalization, capital markets began to grow, not only allowing a more transparent and sophisticated market for investors, but also giving rise to foreign direct investment (FDI). For example, investments in the form of a new power station would bring a country greater exposure to new technologies and efficiency, eventually increasing the nation's overall GDP by allowing for greater volumes of production. Liberalization can also facilitate less risk by allowing greater diversification in various markets.

Definition of 'Current Account Deficit'

A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services it exports. The current account also includes net income, such as interest and dividends, as well as transfers, such as foreign aid, though these components tend to make up a smaller percentage of the current account than exports and imports. The current account is a calculation of a country’s foreign transactions, and along with the capital account is a component of a country’s balance of trade.

A current account deficit represents a negative net sales abroad. 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.

While a current account deficit can be considered akin to a country living “outside of its means," having a current account deficit is not inherently bad. If a country uses external debt to finance investments that have a higher return than the interest rate on the debt, it can remain solvent while running a current account deficit. If a country is unlikely to cover current debt levels with future revenue streams, it may become insolvent.

India’s current account gap sharply to $5.2 billion, or 1.2 percent of GDP, in the July-September 2013 quarter of this fiscal. The current account deficit (CAD), the difference between outflow and inflow of foreign exchange, was $21 billion, or 5 percent of the GDP, in the second quarter of last fiscal.

India imported an estimated 835 tonnes of gold in 2012-13, a key reason for the record current account deficit (CAD) of $88.2 billion, or 4.8 percent of GDP. During the first quarter of the current fiscal, CAD widened to $21.8 billion or 4.9 percent of GDP.

Definition of 'Fiscal Deficit'

When a government's total expenditures exceed the revenue that it generates (excluding money from borrowings). Deficit differs from debt, which is an accumulation of yearly deficits.

A fiscal deficit is regarded by some as a positive economic event. For example, economist John Maynard Keynes believed that deficits help countries climb out of economic recession. On the other hand, fiscal conservatives feel that governments should avoid deficits in favor of a balanced budget policy.

National Debt vs. Budget DeficitsBefore addressing how the national debt affects a people and a nation, it is first important to understand what the difference is between the federal government's annual budget deficit, and the country's national debt. Simply explained, the federal government generates a budget deficit whenever it spends more money than it brings in through income generating activities such as taxes. In order to operate in this manner, the Treasury Department has to issue treasury bills, treasury notes and treasury bonds to compensate for the difference. By issuing these types of securities, the federal government can acquire the cash that it needs to provide governmental services . The national debt is simply the net accumulation of the federal government's annual budget deficits.

A Brief History of U.S. DebtDebt has been a part of this country's operations since its economic founding. However, the level of national debt spiked up significantly during President Ronald Reagan's tenure, and subsequent presidents have continued this upward trend. Only briefly during the heydays of the economic markets in the late 1990s has the U.S. seen debt levels trend down in a material manner.

From a public policy standpoint, the issuance of debt is typically accepted by the public, so long as the proceeds are used to stimulate the growth of the economy in a manner that will lead to the country's long-term prosperity. However, when debt is raised simply to fund public consumption, such as proceeds used for Medicare, Social Security and Medicaid, the use of debt loses a significant amount of support. When debt is used to fund economic expansion, current and future generations stand to reap the rewards. However, debt used to fuel consumption only presents advantages to the current generation.

Evaluating National DebtBecause debt plays such an integral part of economic progress, it must be measured appropriately to convey the long-term impacts it presents. Unfortunately, evaluating the country's national debt in relation to the country's gross domestic product (GDP) is not the best approach. Here are three reasons why debt should not be assessed in this manner.

GDP is too complex to make a relative comparison of an acceptable national debt level.

In theory, GDP represents the total market value of all final goods and services produced in a country in a given year. Based on this definition, one has to calculate the total amount of spending that takes place in the economy in order to estimate the country's GDP. One approach is the use of the Expenditure Method, which defines GDP as the sum of all personal consumption for durable goods, nondurable goods and services; plus gross private investment, which includes fixed investments and inventories; plus government consumption and gross investment, which includes public-sector expenditures for services such as education and transportation, less transfer payments for services such as social security; plus net exports, which are simply the country's exports minus its imports. Given this broad definition, one should realize that the components that make up GDP are hard to conceptualize in a manner that facilitates a meaningful evaluation of the appropriate national debt level. As a result, a debt-to-GDP ratio may not fully indicate the magnitude of national debt exposure.

Therefore, an approach that is easier to interpret is simply to compare the interest expense paid on the national debt outstanding in relation to the expenditures that are made for specific governmental services such as education, defense and transportation. When debt is compared in this manner, it becomes plausible for citizens to determine the relative extent of the burden placed by debt on the national budget.

GDP is very difficult to accurately measure.

While the national debt can be precisely measured by the Treasury Department, economists have different views on how GDP should actually be measured. The first issue with measuring GDP is that it ignores household production for services such as house cleaning and food preparation. As a country develops and becomes more modern, people tend to outsource traditional household tasks to third parties. Given this change in lifestyle, comparing the GDP of a country today to its historical GDP is significantly flawed, because the way people live today naturally increases GDP through the outsourcing of personal services.

Moreover, GDP is typically used as a metric by economists to compare national debt levels among countries. However, this process is also flawed because people in developed countries tend to outsource more of their domestic services than people in non-developed countries. As a result, any type of historical or cross-border comparison of debt in relation to GDP is completely misleading.

The second problem with GDP as a measurement tool is that it ignores the negative side affects of various business externalities. For example, when companies pollute the environment, violate labor laws or place employees in an unsafe working environment, nothing is subtracted from GDP to account for these activities. However, the capital, labor and legal work associated with fixing these types of problems are captured in the calculation of GDP.

The third problem with using GDP as a measurement tool is that GDP is greatly impacted by technological advances. Technology not only increases GDP, but also improves the quality of life for all people. Unfortunately, technological advances do not take place in a uniform manner each year. As a result, technology may skew GDP upward during certain years, which in turn may make the relative national debt level look acceptable, when in fact it is not. Most ratios must be compared based on their change through time, but GDP fluctuations result in errors of calculation.

The National Debt is not paid back with GDP.

The national debt has to be paid back with tax revenue, not GDP, although there is a correlation between the two. Using an approach that focuses on national debt on a per capita basis gives a much better sense of where the country's debt level stands. For example, if people are told that debt per capita is approaching $40,000, it is highly likely that they will grasp the magnitude of the issue. However, if they are told that the national debt level is approaching 70% of GDP, the magnitude of the problem will not be properly conveyed.

Comparing the national debt level to GDP is akin to a person comparing the amount of their personal debt in relation to the value of the goods or services that they produce for their employer in a given year. Clearly, this is not the way one would establish their own personal budget, nor is it the way that the federal government should evaluate its fiscal operations.

How the National Debt Affects EveryoneGiven that the national debt has recently grown faster than the size of the American population, it is fair to wonder how this growing debt affects average individuals. While it may not be obvious, national debt levels directly affect people in at least five direct ways.

First, as the national debt per capita increases, the likelihood of the government defaulting on its debt service obligation increases, and therefore the Treasury Department will have to raise the yield on newly issued treasury securities in order to attract new investors. This reduces the amount of tax revenue available to spend on other governmental services, because more tax revenue will have to be paid out as interest on the national debt. Over time, this shift in expenditures will cause people to experience a lower standard of living, as borrowing for economic enhancement projects becomes more difficult.

Second, as the rate offered on treasury securities increases, corporations operating in America will be viewed as riskier, also necessitating an increase in the yield on newly issued bonds. This in turn will require corporations to raise the price of their products and services in order to meet the increased cost of their debt service obligation. Over time, this will cause people to pay more for goods and services, resulting in inflation.

Third, as the yield offered on treasury securities increases, the cost of borrowing money to purchase a home will also increase, because the cost of money in the mortgage lending market is directly tied to the

short-term interest rates set by the Federal Reserve, and the yield offered on treasury securities issued by the Treasury Department. Given this established interrelationship, an increase in interest rates will push home prices down, because prospective home buyers will no longer qualify for as large of a mortgage loan, since they will have to pay more of their money to cover the interest expense on the loan that they receive. The result will be more downward pressure on the value of homes, which in turn will reduce the net worth of all home owners.

Fourth, since the yield on U.S. Treasury securities is currently considered a risk-free rate of return and as the yield on these securities increases, risky investments such as corporate debt and equity investments will lose appeal. This phenomenon is a direct result of the fact that it will be more difficult for corporations to generate enough pre-tax income to offer a high enough risk premium on their bonds and stock dividends to justify investing in their company. This dilemma is known as the crowding out effect, and tends to encourage the growth in the size of the government, and the simultaneous reduction in the size of the private sector.

Fifth, and perhaps most importantly, as the risk of a country defaulting on its debt service obligation increases, the country loses its social, economic and political power. This in turn makes the national debt level a national security issue.

The Bottom LineThe national debt level is one of the most important public policy issues. When debt is used appropriately, it can be used to foster the long-term growth and prosperity of a country. However, the national debt must be evaluated in an appropriate manner, such as comparing the amount of interest expense paid to other governmental expenditures or by comparing debt levels on a per capita basis.

Alternative Theories

The study of macroeconomics is filled with several competing theories. The dominant theory used in modern macroeconomic analysis is the aggregate market, or AS-AD model. It combines features of Keynesian economics, developed by John Maynard Keynes during the Great Depression, and classical economics, the forerunner of Keynesian economics.Other macroeconomic theories include monetarism, rational expectations, neo-Keynesian economics, supply-side economics, and new classical economics--to name a few. These theories often differ based on the macroeconomic phenomena scrutinized and underlying political orientation.

Concepts as per Keynes

Concept 1. The circular flow can break down because of saving and investment behavior of consumer and business

Phases or Stages of Circular Flow of Income

Production, consumption expenditure and generation of income are the three basic economic activities of an economy that go on endlessly and are titled as circular flow of income. Production gives rise to income, income gives rise to demand for goods and services ; such a demand gives rise to expenditure and expenditure induces for further production.

The whole process forms the basis for circular flow of income and related activities- production, income and expenditure are known as phases or stages of circular flow of income.

Production → Income → Expenditure → Production.

1.Production Phase- Production means creation of utility to satisfy human wants. It involves the co-ordination of all the factors of production in some desired ratio. This job is performed by a producer or firm who takes an initiative with the motive of earning profits. He hires land, labour, capital and an organization and makes them payment in the form of rent, wages and salaries and interest. This phase is to produce goods and services and after selling them, it generates income.

2.Income Phase- Producing firms earn revenue from the sale of goods and services produced by them. Whole of the earning is divided between factors provided by household sector in the form of rent, wages, interest and profits. Such an income is classified into three parts:- •Compensation of employees- Wages, salaries, commission, bonus etc. •Operating Surplus- Profits, rent, interest, royalty etc. •Mixed Income- Income of self- employed Thus production takes the shape of income of household sector.

3.Expenditure Phase- Household sector spends its income to satisfy unlimited and recurring human wants. Any saving out of total income takes the shape of investment on capital goods that helps in generating the income of the economy. Expenditure becomes the income of producing sector that promotes further the uninterrupted flow of income.

Significance of Study of Circular Flow of Income

The book A General Approach to Macroeconomic Policy identifies four possible areas of significance:

1. Measurement of National Income - National income is an estimation of aggregation of any of economic activity of the circular flow. It is either the income of all the factors of production or the expenditure of various sectors of economy. However, aggregate amount of each of the activity is identical to each other.

2. Knowledge of Interdependence - Circular flow of income signifies the interdependence of each of activity upon one another. If there is no consumption, there will be no demand and expenditure which in fact restricts the amount of production and income.

3. Unending Nature of Economic Activities - It signifies that production, income and expenditure are of unending nature, therefore, economic activities in an economy can never come to a halt. National income is also bound to rise in future.

4. Injections and Leakages

Concept 2. Spending Multiplier effect – marginal propensity to save Propagation of each additional rupee of income people save.

• Example – If government gives Rs 1000 to A A will spend Rs 900 to paint house and save Rs 100 Painter will spend Rs 810 for two wheeler repair and save Rs 90 Mechanic will spend Rs 729 on health exp and save Rs 81 Doctor will spend Rs 656 and save Rs 73…… and so on…If this keeps going , the original Rs 1000 given by government will eventually increase people income by by much more

How much more?

The spending multiplier = 1/MPS = 1/0.10 = 10 i.e. 1000* 10= 10000So original 1000 will turn into 10000 in new economy.

Concept 3 : Price go up fast, but go down slow !!!!!!!Classical economists thought that if people did not buy enough goods, price will go down and people will buy them.OR if people were unemployed, wages will go down and people will get job.This is true, but usually it happens too slowly to avoid big long recession.So , when GDP falls, the people are out of work, what can we do/Keynes said- that government should just spend more to make up difference. Replace C or I with G. This works some time but not all the time.Why not? AS Ad has some answer.AS-AD TheoryIn aggregate model, price of all individual goods and services are combined in to a single aggregate commodity. It may be consumer price index or whole sale price index. It combines equilibrium quantities of all individual goods and services in to a single entity called real domestic output.

The aggregate demand curve shows an inverse relationship with price level and domestic output. Though it is downward, but it is not same as single product demand curve.. WHY?

a. Substitution effect does not arise in aggregate case, since there is no substitute for “everything.”b. Income effect does not apply, since income now varies with aggregate output.

What explain movement along the AD curve? Wealth or real balance effect- when price level falls, purchasing power of existing financial

assets rises which can increase spending. Interest rate effect – a decline in price level means lower interest rate, increasing spending. Foreign purchase effect- when price over here falls, foreigner will buy more of our goods and

local will prefer domestic over foreign.

Policies and Politics

The modern study of macroeconomics, developed as an explanation of, and remedy for, the problems of the Great Depression, has always been intertwined with economic policies. The two most noted macroeconomic policies are fiscal policy and monetary policy. Fiscal policy seeks to stabilize the business

cycle using government expenditures and taxes. Monetary policy seeks to stabilize the business cycle using the money supply and interest rates.Other macroeconomic policies include supply-side policies, aimed at improving the productivity and efficiency of production, and "do nothing" policies, in which government explicitly refrains from taking action so that the macroeconomy has the time to heal itself.

Like most aspects of government, macroeconomic policies are intertwined with politics and political views. Political liberals generally favor an active role for government and tend to opt for fiscal policy over alternatives. Political conservatives generally favor little or no government intervention and tend to opt for the least intrusive actions, beginning with a "do nothing" approach.

Theory of NI in macro-economics we study classical and Keynesian theories of national income and employment. Theory of Ni fluctuations: in capitalist economies, the economic activities are never alike. Sometimes there is brisk in the economic life, while on the other occasions, the business activities are sluggish. Such fluctuations in economic life of a country are known as trade cycles. Why there are such fluctuations.

Theory of consumption and savings: in macroeconomics, AD plays an important role. The AD has an important component which is consumption. The consumption has a counterpart which is saving. Ho people behave regarding consumption expenditures an savings? In this connection, starting from Keynes consumption function, we have a lot of consumption theories like Dusenberry's Relative income theory and Modigiliani's relative income theory.Theory of growth: the Keynes model of income and employment just deals with the static and comparative static situations. But in addition to this model, we have a lot of dynamic growth models in macroeconomics where we study the growth path of the economy; effect of change in population on the level of NI; effect of the change in technology on the level of NI, etc.

According to Kenneth E. Boulding, “Macroeconomics is the study of the nature, relationships and behaviour of aggregates of economic quantities…”

According to P.A. Samuelson, “Macroeconomics is the study of the behaviour of the economy as a whole. It examines the overall level of Nation’s output, employment, prices and foreign trade.”

The definitions given above and a few other similar definitions capture the central theme of macroeconomics but they do not fully capture its subject matter. As stated above in the introduction of this chapter, macroeconomics covers a wide range of economic activities and the related theories in respect of the lumped or the aggregated units or of the economy as a whole, as to

(a) How they generate and spend income through production of goods and services,

(b) How human or non-human resources are employed,

(c) How supply and demand of money influence the general price level,

(d) How and what policies regarding production, income, expenditure be formulated for growth and development, and

(e) How and what policies regarding foreign trade be formulated to serve the interest of people at large, best.It is, indeed, difficult to cover the scope of macroeconomics in any single definition. Let us attempt to develop a workable definition here to serve our purpose.

It is a study of national output, income, expenditure, employment, growth and development, demand and supply of money and general price level as also of the nation’s foreign trade.

In a much simpler way, macroeconomics is a study of economic problems of a nation as a whole with a view to analysing ways and means to solve them.

The definition may not specify the range of the subject matter but it sure points out its domain. It lays down a criterion to list the areas that may, or may not, fall within its purview.

ECONOMIC GROWTH AND DEVELOPMENT Introduction Economic growth and development affect each one of us. The two concepts are closely linked. Economic growth takes place when a country’s production and consumption of goods and services increase. If the goods and services produced are of the right kind and benefit the people of a country, their quality of life improves and economic benefit takes place. The term standard of living is the amount of goods and services that people consume, and this is a function of their income.

Economic Development vs Economic Growth

Economic Growth is a narrower concept than economic development. It is an increase in a country's real level of national output which can be caused by an increase in the quality of resources (by education etc.), increase in the quantity of resources & improvements in technology or in another way an increase in the value of goods and services produced by every sector of the economy. Economic Growth can be measured by an increase in a country's GDP (gross domestic product).

Economic development is a normative concept i.e. it applies in the context of people's sense of morality (right and wrong, good and bad). The definition of economic development given by Michael Todaro is an increase in living standards, improvement in self-esteem needs and freedom from oppression as well as a greater choice. The most accurate method of measuring development is the Human Development Index which takes into account the literacy rates & life expectancy which affect productivity and could lead to Economic Growth. It also leads to the creation of more opportunities in the sectors of education, healthcare, employment and the conservation of the environment.It implies an increase in the per capita income of every citizen.

Economic Growth does not take into account the size of the informal economy. The informal economy is also known as the black economy which is unrecorded economic activity.

Development alleviates people from low standards of living into proper employment with suitable shelter. Economic Growth does not take into account the depletion of natural resources which might lead to pollution, congestion & disease. Development however is concerned with sustainability which means meeting the needs of the present without compromising future needs. These environmental effects are becoming more of a problem for Governments now that the pressure has increased on them due to Global warming. Economic growth is a necessary but not sufficient condition of economic development.

Comparison chart

Economic Development Economic growthImplication Economic development implies

changes in income, savings and investment along with progressive changes in socio-economic structure of country (institutional and technological changes).

Economic growth refers to an increase in the real output of goods and services in the country.

Factors Development relates to growth of human capital indexes, a decrease in inequality figures, and structural changes that improve the general population's quality of life

Growth relates to a gradual increase in one of the components of Gross Domestic Product: consumption, government spending, investment, net exports.

Measurement Qualitative.HDI (Human Development Index), gender- related index (GDI), Human poverty index (HPI), infant mortality, literacy rate etc.

Quantitative. Increase in real GDP

Effect: Brings qualitative and quantitative changes in the economy

Brings quantitative changes in the economy

Concept: Normative concept Narrower concept than economic development

Relevance: Economic development is more relevant to measure progress and quality of life in developing nations.

Economic growth is a more relevant metric for progress in developed countries. But it's widely used in all countries because growth is a necessary condition for development

scope: concerned with structural changes in the economy

Growth is concerned with increase in the economy's output

Measuring growth performance of a country is easier than measuring its economic development.

One way of measuring economic development is through the Human Development Index, compiled by the United Nations.

• The index measures the following three basic dimensions of human development: A long and healthy life Knowledge, through the adult literacy rate • A decent standard of living, using GDP

Note of interest: For the period 1970-1975, the life expectancy at birth in South Africa was 53.7 years. For the period 2000-2005 this figure fell to 49 years. This decline can be attributed to the HIV/AIDS epidemic. Thus higher economic growth rate was needed to improve the standard of living. In India in 1970, we had 49 years which has now climbed up to 65 years.Italy stand as no 1 position in world with 84 years of life expectancy.

Growth policies 5 macro-economic objectives pursued by the government.

high rate of economic growth High levels of employment Price stability Exchange rate stability Economic equity

Growth enables a community to consume more private goods and services. Furthermore, it contributes (through taxation) to the provision of social goods and services such as infrastructure, education, etc. Economic growth is a function of the following:

Improvements in technology Increases in productivity Increases in factors of production Effective government policies and efficient administration Investment

Investment is central to economic growth. Development policies are compiled of a mixture of the following:

- Macro-economic policies (e.g. employment creation) - Micro-economic policies (e.g. competition) - Social care policies (e.g. welfare)

The main instruments that are used internationally to carry the policies of countries into reality are demand-side and supply-side approaches.

Factors influencing development strategies: Incentives to work and to produce Human and physical capital formation Satisfying international benchmarks

The demand-side approach Producing growth

The demand-side approach focuses on the expansion of the demand for goods and services produced in the economy. To ensure growth, there should be an adequate and growing demand for goods and services produced in the economy. Aggregate demand for goods and services consists of C, G, I and X-M GDP = C + I +G + (X-M) The purpose of demand-side policies is to eliminate or reduce the severity of recessions through discretionary fiscal and monetary policies. The idea is to use these tools to ensure that aggregate demand increases at an appropriate non-inflationary pace. Factors influencing development strategies Internationally economic development is defined in terms of the reduction of poverty, inequality and unemployment in a growing economy. A key element in economic development is that the people of a country must be major participants in the process that brings about improvement in the lives of the population. If growth only benefits a tiny, wealthy minority, it is not development. There are 3 major factors influencing development:

Domestic demand Exports – increase in exports will lead to growth Import substitution – a strategy to replace imports with domestically produced substitutes

Introduction to Indian economy – Salient features

The economy of India is the tenth-largest in the world by nominal GDP and the third-largest by purchasing power parity (PPP). The country is one of the G-20 major economies and a member of BRICS. On a per-capita-income basis, India ranked 141st by nominal GDP and 130th by GDP (PPP) in 2012, according to the IMF. India is the 19th-largest exporter and the 10th-largest importer in the world. The economy slowed to around 5.0% for the 2012–13 fiscal year compared with 6.2% in the previous fiscal. On 28 August 2013 the Indian rupee hit an all time low of 68.80 against the US dollar. In order to control the fall in rupee, the government introduced capital controls on outward investment by both corporates and individuals. India's GDP grew by 9.3% in 2010–11; thus, the growth rate has nearly halved in just three years. GDP growth rose marginally to 4.8% during the quarter through March 2013, from about 4.7% in the previous quarter. The government has forecast a growth rate of 6.1%-6.7% for the year 2013–14, whilst the RBI expects the same to be at 5.7%. Besides this, India suffered a very high fiscal deficit of US$ 88 billion (4.8% of GDP) in the year 2012–13. The Indian Government aims to cut the fiscal deficit to US$ 70 billion or 3.7% of GDP by 2013–14.The independence-era Indian economy (from 1947 to 1991) was based on a mixed economy combining features of capitalism and socialism, resulting in an inward-looking, interventionist policies and import-Substituting economy that failed to take advantage of the post-war expansion of trade.This model contributed to widespread inefficiencies and corruption, and the failings of this system were due largely to its poor implementation.In 1991, India adopted liberal and free-market principles and liberalized its economy to international trade under the guidance of Former Finance minister Manmohan Singh under the Prime Ministry of P.V. Narasimha Rao, prime minister from 1991 to 1996, who had eliminated Licence Raj, a pre- and post-British era mechanism of strict government controls on setting up new industry. Following these major economic reforms, and a strong focus on developing national infrastructure such as the Golden Quadrilateral project by former Prime Minister Atal Bihari Vajpayee, the country's economic growth progressed at a rapid pace, with relatively large increases in per-capita incomes.

Overview

The combination of protectionist, import-substitution, and Fabian social democratic-inspired policies governed India for some time after the end of British occupation. The economy was then characterized by extensive regulation, protectionism, and public ownership of large monopolies, pervasive corruption and slow growth. Since 1991, continuing economic liberalization has moved the country towards a market-based economy. By 2008, India had established itself as one of the world's fastest growing economies. Growth significantly slowed to 6.8% in 2008–09, but subsequently recovered to 7.4% in 2009–10, while the fiscal deficit rose from 5.9% to a high 6.5% during the same period. India's current account deficit surged to 4.1% of GDP during Q2 FY11 against 3.2% the previous quarter. The unemployment rate for 2010–11, according to the state Labour Bureau, was 9.8% nationwide.] As of 2011, India's public debt stood at 68.05% of GDP which is highest among the emerging economies. However, inflation remains stubbornly high with 7.55% in August 2012, the highest amotrade (counting exports and imports) stands at $606.7 billion and is currently the 9th largest in the world. During 2011–12, India's foreign trade grew by an impressive 30.6% to reach $792.3 billion (Exports-38.33% & Imports-61.67%)

History

Pre-colonial period (up to 1773)

The citizens of the Indus Valley civilisation, a permanent settlement that flourished between 2800 BC and 1800 BC, practiced agriculture, domesticated animals, used uniform weights and measures, made tools and weapons, and traded with other cities. Evidence of well-planned streets, a drainage system and water supply reveals their knowledge of urban planning, which included the world's first urban sanitation systems and the existence of a form of municipal government.

The spice trade between India and Europe was the main catalyst for the Age of Discovery. Maritime trade was carried out extensively between South India and southeast and West Asia from early times until around the fourteenth century AD. Both the Malabar and Coromandel Coasts were the sites of important trading centers from as early as the first century BC, used for import and export as well as transit points between the Mediterranean region and southeast Asia. Over time, traders organised themselves into associations which received state patronage. Raychaudhuri and Habib claim this state patronage for overseas trade came to an end by the thirteenth century AD, when it was largely taken over by the local Parsi, Jewish and Muslim communities, initially on the Malabar and subsequently on the Coromandel coast.

Atashgah is a temple built by Indian traders before 1745. The temple is west of Caspian Sea, between West Asia and Eastern Europe. The inscription shown is in Sanskrit (above) and Persian.

Other scholars suggest trading from India to West Asia and Eastern Europe was active between 14th and 18th century. During this period, Indian traders had settled in Surakhani, a suburb of greater Baku, Azerbaijan. These traders had built a Hindu temple, now preserved by the government of Azerbaijan.

French Jesuit Villotte, who lived in Azerbaijan in late 1600s, wrote this Indian temple was revered by Hindus;] the temple has numerous carvings in Sanskrit or Punjabi, dated to be between 1500 and 1745 AD. The Atashgah temple built by the Baku-resident traders from India suggests commerce was active and prosperous for Indians by the 17th century.

Further north, the Saurashtra and Bengal coasts played an important role in maritime trade, and the Gangetic plains and the Indus valley housed several centres of river-borne commerce. Most overland trade was carried out via the Khyber Pass connecting the Punjab region with Afghanistan and onward to the Middle East and Central Asia. Although many kingdoms and rulers issued coins, barter was prevalent. Villages paid a portion of their agricultural produce as revenue to the rulers, while their craftsmen received a part of the crops at harvest time for their services.

Silver coin of the Maurya Empire, 3rd century BC.

Silver coin of the Gupta dynasty, 5th century AD.Sean Harkin estimates China and India may have accounted for 60 to 70 percent of world GDP in the 17th century.Assessment of India's pre-colonial economy is mostly qualitative, owing to the lack of quantitative information. The Mughal economy functioned on an elaborate system of coined currency, land revenue and trade. Gold, silver and copper coins were issued by the royal mints which functioned on the basis of free coinage. The political stability and uniform revenue policy resulting from a centralised administration under the Mughals, coupled with a well-developed internal trade network, ensured that India, before the arrival of the British, was to a large extent economically unified, despite having a traditional agrarian economy characterised by a predominance of subsistence agriculture dependent on primitive technology. After the decline of the Mughals, western, central and parts of south and north India were integrated and administered by the Maratha Empire. After the loss at the Third Battle of Panipat, the Maratha Empire disintegrated into several confederate states, and the resulting political instability and armed conflict severely affected economic life in several parts of the country, although this was compensated for to some extent by localised prosperity in the new provincial kingdoms.

By the end of the eighteenth century, the British East India Company entered the Indian political theatre and established its dominance over other European powers. This marked a determinative shift in India's trade, and a less powerful impact on the rest of the economy.

Colonial period (1773–1947)

Calcutta, which was the economic hub of British India, saw increased industrial activity during World War II.There is no doubt that our grievances against the British Empire had a sound basis. As the painstaking statistical work of the Cambridge historian Angus Maddison has shown, India's share of world income collapsed from 22.6% in 1700, almost equal to Europe's share of 23.3% at that time, to as low as 3.8% in

1952. Indeed, at the beginning of the 20th century, "the brightest jewel in the British Crown" was the poorest country in the world in terms of per capita income.

Company rule in India brought a major change in the taxation and agricultural policies, which tended to promote commercialisation of agriculture with a focus on trade, resulting in decreased production of food crops, mass impoverishment and destitution of farmers, and in the short term, led to numerous famines. The economic policies of the British Raj caused a severe decline in the handicrafts and handloom sectors, due to reduced demand and dipping employment. After the removal of international restrictions by the Charter of 1813, Indian trade expanded substantially and over the long term showed an upward trend.The result was a significant transfer of capital from India to England, which, due to the colonial policies of the British, led to a massive drain of revenue rather than any systematic effort at modernisation of the domestic economy.

Estimates of the per capita income of India (1857–1900) as per 1948–49 prices.India's colonisation by the British created an institutional environment that, on paper, guaranteed property rights among the colonisers, encouraged free trade, and created a single currency with fixed exchange rates, standardised weights and measures and capital markets. It also established a well-developed system of railways and telegraphs, a civil service that aimed to be free from political interference, a common-law and an adversarial legal system. This coincided with major changes in the world economy – industrialisation, and significant growth in production and trade. However, at the end of colonial rule, India inherited an economy that was one of the poorest in the developing world, with industrial development stalled, agriculture unable to feed a rapidly growing population, a largely illiterate and unskilled labour force, and extremely inadequate infrastructure.

The 1872 census revealed that 91.3% of the population of the region constituting present-day India resided in villages,] and urbanisation generally remained sluggish until the 1920s, due to the lack of industrialisation and absence of adequate transportation. Subsequently, the policy of discriminating protection (where certain important industries were given financial protection by the state), coupled with the Second World War, saw the development and dispersal of industries, encouraging rural-urban migration, and in particular the large port cities of Bombay, Calcutta and Madras grew rapidly. Despite this, only one-sixth of India's population lived in cities by 1951.

The impact of British occupation on India's economy is a controversial topic. Leaders of the Indian independence movement and economic historians have blamed colonial occupation for the dismal state of India's economy in its aftermath and argued that financial strength required for industrial development in Europe was derived from the wealth taken from colonies in Asia and Africa. At the same time, right-wing historians have countered that India's low economic performance was due to various sectors being in a state of growth and decline due to changes brought in by colonialism and a world that was moving towards industrialisation and economic integration.

Pre-liberalisation period (1947–1991)Indian economic policy after independence was influenced by the colonial experience, which was seen by Indian leaders as exploitative, and by those leaders' exposure to British social democracy as well as the progress achieved by the planned economy of the Soviet Union. Domestic policy tended towards protectionism, with a strong emphasis on import substitution industrialisation, economic interventionism, a large public sector, business regulation, and central planning, while trade and foreign investment policies were relatively liberal. Five-Year Plans of India resembled central planning in the

Soviet Union. Steel, mining, machine tools, telecommunications, insurance, and power plants, among other industries, were effectively nationalised in the mid-1950s

“ Never talk to me about profit, Jeh, it is a dirty word. ”

—Nehru, India's Fabian Socialism inspired first prime minister to industrialist J.R.D. Tata, when Tata suggested state-owned companies should be profitable,

Jawaharlal Nehru, the first prime minister of India, along with the statistician Prasanta Chandra Mahalanobis, formulated and oversaw economic policy during the initial years of the country's independence. They expected favourable outcomes from their strategy, involving the rapid development of heavy industry by both public and private sectors, and based on direct and indirect state intervention, rather than the more extreme Soviet-style central command system. The policy of concentrating simultaneously on capital- and technology-intensive heavy industry and subsidising manual, low-skill cottage industries was criticised by economist Milton Friedman, who thought it would waste capital and labour, and retard the development of small manufacturers. The rate of growth of the Indian economy in the first three decades after independence was derisively referred to as the Hindu rate of growth by economists, because of the unfavourable comparison with growth rates in other Asian countries.“(In the current Indian regulatory system,) I cannot decide how much to borrow, what shares to issue, at what price, what wages and bonus to pay, and what dividend to give. I even need the government's permission for the salary I pay to a senior executive. ”—J. R. D. Tata in 1969, Since 1965, the use of high-yielding varieties of seeds, increased fertilisers and improved irrigation facilities collectively contributed to the Green Revolution in India, which improved the condition of agriculture by increasing crop productivity, improving crop patterns and strengthening forward and backward linkages between agriculture and industry. However, it has also been criticised as an unsustainable effort, resulting in the growth of capitalistic farming, ignoring institutional reforms and widening income disparities.

Subsequently the Emergency and Garibi Hatao concept under which income tax levels at one point rose to a maximum of 97.5%, a record in the world for non-communist economies, started diluting the earlier efforts.

Post-liberalisation period (since 1991)

GDP of India has risen rapidly since 1991.

In the late 1970s, the government led by Morarji Desai eased restrictions on capacity expansion for incumbent companies, removed price controls, reduced corporate taxes and promoted the creation of small scale industries in large numbers. However, the subsequent government policy of Fabian socialism hampered the benefits of the economy, leading to high fiscal deficits and a worsening current account.

The collapse of the Soviet Union, which was India's major trading partner, and the Gulf War, which caused a spike in oil prices, resulted in a major balance-of-payments crisis for India, which found itself facing the prospect of defaulting on its loans. India asked for a $1.8 billion bailout loan from the International Monetary Fund (IMF), which in return demanded de-regulation.

In response, Prime Minister Narasimha Rao, along with his finance minister Manmohan Singh, initiated the economic liberalisation of 1991. The reforms did away with the Licence Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since then, the overall thrust of liberalisation has remained the same, although no government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming labour laws and reducing agricultural subsidies.

By the turn of the 21st century, India had progressed towards a free-market economy, with a substantial reduction in state control of the economy and increased financial liberalisation. This has been accompanied by increases in life expectancy, literacy rates and food security, although urban residents have benefited more than agricultural residents.

While the credit rating of India was hit by its nuclear weapons tests in 1998, it has since been raised to investment level in 2003 by S&P and Moody's. India enjoyed high growth rates for a period from 2003 to 2007 with growth averaging 9% during this period. Growth then moderated due to the global financial crisis starting in 2008. In 2003, Goldman Sachs predicted that India's GDP in current prices would overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035, making it the third largest economy of the world, behind the US and China. India is often seen by most economists as a rising economic superpower and is believed to play a major role in the global economy in the 21st century.

Starting in 2012, India entered a period of more anemic growth, with growth slowing down to 4.4%. Other economic problems also became apparent: a plunging Indian rupee, a persistent high current account deficit and slow industrial growth. Hit by the U.S. Federal Reserve's decision to taper quantitative easing, foreign investors have been rapidly pulling out money from India.

SectorIndustry and services

Industry accounts for 26% of GDP and employs 22% of the total workforce. India is 11th in the world in terms of nominal factory output according to data compiled through CIA World Factbook figures. The Indian industrial sector underwent significant changes as a result of the economic liberalisation in India economic reforms of 1991, which removed import restrictions, brought in foreign competition, led to the privatisation of certain public sector industries, liberalised the FDI regime, improved infrastructure and led to an expansion in the production of fast moving consumer goods.

Post-liberalisation, the Indian private sector was faced with increasing domestic as well as foreign competition, including the threat of cheaper Chinese imports. It has since handled the change by squeezing costs, revamping management, and relying on cheap labour and new technology. However, this has also reduced employment generation even by smaller manufacturers who earlier relied on relatively labour-intensive processes.

TextileTextile manufacturing is the 2nd largest source of employment after agriculture and accounts for 20% of manufacturing output, providing employment to over 20 million people. A previous Indian Minister of Textiles Shankersinh Vaghela, has stated that the transformation of the textile industry from a declining to a rapidly developing one has become the biggest achievement of the central government. After freeing the industry in 2004–2005 from a number of limitations, primarily financial, the government

gave a green light to massive investment inflows – both domestic and foreign. During the period from 2004 to 2008, total investment amounted to 27 billion dollars. By 2012, this figure was predicted to reach 38 billion and was expected to create an additional 17 million jobs. However, demand for Indian textiles in world markets continues to fall. Ludhiana produces 90% of woollens in India and is known as the Manchester of India. Tirupur has gained universal recognition as the leading source of hosiery, knitted garments, casual wear and sportswear. Considering the Rs 15,000,000,000 revenue from textile sales with an approximate of a nominal 20% net profit and with around 257,572 residents of the city, per capita income of Ichalkaranji is 116,472, among one of the highest per capita incomes in the country.

Textile Development Cluster : To enhance and improve the infrastructure facilities of the city, the Municipal Council along with Ichalkaranji Co-operative Industrial Estate, Laxmi Co-operative Industrial Estate, Parvati Industrial Estate and DKTE Textile and Engineering Institute have jointly come together and formed a Special Purpose Vehicle (SPV) company viz. Ichalkaranji Textile Development Cluster Limited (ITDC).The individual members will contribute to the extent of about 50% of the project cost and the balance amount would come in from the grant in aid from Department of Industrial Promotion and Policy, Government of India,under the Industrial Infrastructure up-gradation Scheme (IIUS).

Services

India is 13th in services output. The services sector provides employment to 27% of the work force and is growing quickly, with a growth rate of 7.5% in 1991–2000, up from 4.5% in 1951–80. It has the largest share in the GDP, accounting for 57% in 2012, up from 15% in 1950. Information technology and business process outsourcing are among the fastest growing sectors, having a cumulative growth rate of revenue 33.6% between 1997 and 1998 and 2002–03 and contributing to 25% of the country's total exports in 2007–08. The growth in the IT sector is attributed to increased specialisation, and an availability of a large pool of low cost, highly skilled, educated and fluent English-speaking workers, on the supply side, matched on the demand side by increased demand from foreign consumers interested in India's service exports, or those looking to outsource their operations. The share of the Indian IT industry in the country's GDP increased from 4.8% in 2005–06 to 7% in 2008. In 2009, seven Indian firms were listed among the top 15 technology outsourcing companies in the world.

Retail

Retail industry is one of the pillars of Indian economy and accounts for 14–15% of its GDP. The Indian retail market is estimated to be US$ 450 billion and one of the top five retail markets in the world by economic value. India is one of the fastest growing retail market in the world, with 1.2 billion people.

India's retailing industry essentially consists of the local mom and pop store, owner manned general stores, convenience stores, hand cart and pavement vendors, etc. Organised retail supermarkets account for 4% of the market as of 2008. Regulations prevent most foreign investment in retailing. In 2012 government permitted 51% FDI in multi brand retail and 100% FDI in single brand retail. Moreover, over thirty regulations such as "signboard licences" and "anti-hoarding measures" may have to be complied before a store can open doors. There are taxes for moving goods from state to state, and even within states.

Tourism

Tourism in India is relatively undeveloped, but a high growth sector. It contributes 6.23% to the national GDP and 8.78% of the total employment. The majority of foreign tourists come from USA and UK.India's rich history and its cultural and geographical diversity make its international tourism appeal large and diverse. It presents heritage and cultural tourism along with medical, business and sports tourism. India has one of the largest and fastest growing medical tourism sectors.

Mining

Mining forms an important segment of the Indian economy, with the country producing 79 different minerals (excluding fuel and atomic resources) in 2009–10, including iron ore, manganese, mica, bauxite, chromite, limestone, asbestos, fluorite, gypsum, ochre, phosphorite and silica sand.

Agriculture

India ranks second worldwide in farm output. Agriculture and allied sectors like forestry, logging and fishing accounted for 17% of the GDP in 2012, employed 51% of the total workforce, and despite a steady decline of its share in the GDP, is still the largest economic sector and a significant piece of the overall socio-economic development of India. Crop yield per unit area of all crops have grown since 1950, due to the special emphasis placed on agriculture in the five-year plans and steady improvements in irrigation, technology, application of modern agricultural practices and provision of agricultural credit and subsidies since the Green Revolution in India.

However, international comparisons reveal the average yield in India is generally 30% to 50% of the highest average yield in the world. Indian states Uttar Pradesh, Punjab, Haryana, Madhya Pradesh, Andhra Pradesh, Bihar, West Bengal, Gujarat and Maharashtra are key agricultural contributing states of India.

India receives an average annual rainfall of 1,208 millimetres (47.6 in) and a total annual precipitation of 4000 billion cubic metres, with the total utilisable water resources, including surface and groundwater, amounting to 1123 billion cubic metres.[95] 546,820 square kilometres (211,130 sq mi) of the land area, or about 39% of the total cultivated area, is irrigated. India's inland water resources including rivers, canals, ponds and lakes and marine resources comprising the east and west coasts of the Indian ocean and other gulfs and bays provide employment to nearly six million people in the fisheries sector. In 2008, India had the world's third largest fishing industry.

India is the largest producer in the world of milk, jute and pulses, and also has the world's second largest cattle population with 175 million animals in 2008. It is the second largest producer of rice, wheat, sugarcane, cotton and groundnuts, as well as the second largest fruit and vegetable producer, accounting for 10.9% and 8.6% of the world fruit and vegetable production respectively. India is also the second largest producer and the largest consumer of silk in the world, producing 77,000 million tons in 2005.

Banking and finance

The Indian money market is classified into the organised sector, comprising private, public and foreign owned commercial banks and cooperative banks, together known as scheduled banks, and the unorganised sector, which includes individual or family owned indigenous bankers or money lenders and non-banking financial companies. The unorganised sector and microcredit are still preferred over

traditional banks in rural and sub-urban areas, especially for non-productive purposes, like ceremonies and short duration loans.Prime Minister Indira Gandhi nationalised 14 banks in 1969, followed by six others in 1980, and made it mandatory for banks to provide 40% of their net credit to priority sectors like agriculture, small-scale industry, retail trade, small businesses, etc. to ensure that the banks fulfill their social and developmental goals. Since then, the number of bank branches has increased from 8,260 in 1969 to 72,170 in 2007 and the population covered by a branch decreased from 63,800 to 15,000 during the same period. The total bank deposits increased from INR59.1 billion (US$900 million) in 1970–71 to INR38309.22 billion (US$590 billion) in 2008–09. Despite an increase of rural branches, from 1,860 or 22% of the total number of branches in 1969 to 30,590 or 42% in 2007, only 32,270 out of 500,000 villages are covered by a scheduled bank.India's gross domestic saving in 2006–07 as a percentage of GDP stood at a high 32.8%. More than half of personal savings are invested in physical assets such as land, houses, cattle, and gold. The public sector banks hold over 75% of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.[106] Since liberalisation, the government has approved significant banking reforms. While some of these relate to nationalised banks, like encouraging mergers, reducing government interference and increasing profitability and competitiveness, other reforms have opened up the banking and insurance sectors to private and foreign players.

Energy and power

As of 2010, India imported about 70% of its crude oil requirements.

As of 2009, India is the fourth largest producer of electricity and oil products and the fourth largest importer of coal and crude-oil in the world. Coal and oil together account for 66% of the energy consumption of India.India's oil reserves meet 25% of the country's domestic oil demand.[107] As of 2009, India's total proven oil reserves stood at 775 million metric tonnes while gas reserves stood at 1074 billion cubic metres. Oil and natural gas fields are located offshore at Mumbai High, Krishna Godavari Basin and the Cauvery Delta, and onshore mainly in the states of Assam, Gujarat and Rajasthan. India is the fourth largest consumer of oil in the world and imported $82.1 billion worth of oil in the first three quarters of 2010, which had an adverse effect on its current account deficit. The petroleum industry in India mostly consists of public sector companies such as Oil and Natural Gas Corporation (ONGC), Hindustan Petroleum Corporation Limited (HPCL), Bharat Petroleum Corporation Limited (BPCL) and Indian Oil Corporation Limited (IOCL). There are some major private Indian companies in the oil sector such as Reliance Industries Limited (RIL) which operates the world's largest oil refining complex.

As of December 2011, India had an installed power generation capacity of 185.5 Giga Watts(GW), of which thermal power contributed 65.87%, hydroelectricity 20.75%, other sources of renewable energy 10.80%, and nuclear power 2.56%. India meets most of its domestic energy demand through its 106 billion tonnes of coal reserves. India is also rich in certain alternative sources of energy with significant future potential such as solar, wind and biofuels (jatropha, sugarcane). India's huge thorium reserves – about 25% of world's reserves – are expected to fuel the country's ambitious nuclear energy program in the long-run. India's dwindling uranium reserves stagnated the growth of nuclear energy in the country for many years. However, the Indo-US nuclear deal has paved the way for India to import uranium from other countries.

Infrastructure

India has the world's third largest road network, covering more than 4.3 million kilometers and carrying 60% of freight and 87% of passenger traffic. Indian Railways is the fourth largest rail network in the world, with a track length of 114,500 kilometers.India has 13 major ports, handling a cargo volume of 850 million tonnes in 2010.India has a national teledensity rate of 74.15% with 926.53 million telephone subscribers, two-thirds of them in urban areas, but Internet use is rare, with around 13.3 million broadband lines in India in December 2011. However, this is growing and is expected to boom following the expansion of 3G and WiMAX services.

External trade and investment

Until the liberalisation of 1991, India was largely and intentionally isolated from the world markets, to protect its economy and to achieve self-reliance. Foreign trade was subject to import tariffs, export taxes and quantitative restrictions, while foreign direct investment (FDI) was restricted by upper-limit equity participation, restrictions on technology transfer, export obligations and government approvals; these approvals were needed for nearly 60% of new FDI in the industrial sector. The restrictions ensured that FDI averaged only around $200 million annually between 1985 and 1991; a large percentage of the capital flows consisted of foreign aid, commercial borrowing and deposits of non-resident Indians. India's exports were stagnant for the first 15 years after independence, due to general neglect of trade policy by the government of that period. Imports in the same period, due to industrialisation being nascent, consisted predominantly of machinery, raw materials and consumer goods.

Since liberalisation, the value of India's international trade has increased sharply, with the contribution of total trade in goods and services to the GDP rising from 16% in 1990–91 to 47% in 2008–10. India accounts for 1.44% of exports and 2.12% of imports for merchandise trade and 3.34% of exports and 3.31% of imports for commercial services trade worldwide. India's major trading partners are the European Union, China, the United States of America and the United Arab Emirates. In 2006–07, major export commodities included engineering goods, petroleum products, chemicals and pharmaceuticals, gems and jewellery, textiles and garments, agricultural products, iron ore and other minerals. Major import commodities included crude oil and related products, machinery, electronic goods, gold and silver. In November 2010, exports increased 22.3% year-on-year to INR850.63 billion (US$13 billion), while imports were up 7.5% at INR1251.33 billion (US$19 billion). Trade deficit for the same month dropped from INR468.65 billion (US$7.2 billion) in 2009 to INR400.7 billion (US$6.1 billion) in 2010.

India is a founding-member of General Agreement on Tariffs and Trade (GATT) since 1947 and its successor, the WTO. While participating actively in its general council meetings, India has been crucial in voicing the concerns of the developing world. For instance, India has continued its opposition to the inclusion of such matters as labour and environment issues and other non-tariff barriers to trade into the WTO policies.

Balance of payments

Cumulative Current Account Balance 1980–2008 based on IMF data

Since independence, India's balance of payments on its current account has been negative. Since economic liberalisation in the 1990s, precipitated by a balance of payment crisis, India's exports rose consistently, covering 80.3% of its imports in 2002–03, up from 66.2% in 1990–91. However, the global economic slump followed by a general deceleration in world trade saw the exports as a percentage of imports drop to 61.4% in 2008–09. India's growing oil import bill is seen as the main driver behind the large current account deficit,[109] which rose to $118.7 billion, or 9.7% of GDP, in 2008–09.[136] Between January and October 2010, India imported $82.1 billion worth of crude oil.

Due to the global late-2000s recession, both Indian exports and imports declined by 29.2% and 39.2% respectively in June 2009. The steep decline was because countries hit hardest by the global recession, such as United States and members of the European Union, account for more than 60% of Indian exports. However, since the decline in imports was much sharper compared to the decline in exports, India's trade deficit reduced to INR252.5 billion (US$3.9 billion). As of June 2011, exports and imports have both registered impressive growth with monthly exports reaching $25.9 billion for the month of May 2011 and monthly imports reaching $40.9 billion for the same month. This represents a year on year growth of 56.9% for exports and 54.1% for imports.

India's reliance on external assistance and concessional debt has decreased since liberalisation of the economy, and the debt service ratio decreased from 35.3% in 1990–91 to 4.4% in 2008–09. In India, External Commercial Borrowings (ECBs), or commercial loans from non-resident lenders, are being permitted by the Government for providing an additional source of funds to Indian corporates. The Ministry of Finance monitors and regulates them through ECB policy guidelines issued by the Reserve Bank of India under the Foreign Exchange Management Act of 1999. India's foreign exchange reserves have steadily risen from $5.8 billion in March 1991 to $283.5 billion in December 2009.

Foreign direct investmentShare of top five investing countries in FDI inflows. (2000–2010) (million USD)

Rank Country Inflows %1 Mauritius 50,164 42.002 Singapore 11,275 9.003 USA 8,914 7.004 UK 6,158 5.005 Netherland 4,968 4.00

As the third-largest economy in the world in PPP terms, India is a preferred destination for FDI;[143] During the year 2011, FDI inflow into India stood at $36.5 billion, 51.1% higher than 2010 figure of $24.15 billion. India has strengths in telecommunication, information technology and other significant areas such as auto components, chemicals, apparels, pharmaceuticals, and jewellery. Despite a surge in foreign investments, rigid FDI policies were a significant hindrance. However, due to positive economic reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned itself as one of the front-runners of the rapidly growing Asia-Pacific region. India has a large pool of skilled managerial and technical expertise. The size of the middle-class population stands at 300 million and represents a growing consumer market.

During 2000–10, the country attracted $178 billion as FDI. The inordinately high investment from Mauritius is due to routing of international funds through the country given significant tax advantages; double taxation is avoided due to a tax treaty between India and Mauritius, and Mauritius is a capital gains tax haven, effectively creating a zero-taxation FDI channel.

India's recently liberalised FDI policy (2005) allows up to a 100% FDI stake in ventures. Industrial policy reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and foreign direct investment FDI. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalised FDI regime. In March 2005, the government amended the rules to allow 100% FDI in the construction sector, including built-up infrastructure and construction development projects comprising housing, commercial premises, hospitals, educational institutions, recreational facilities, and city- and regional-level infrastructure.Despite a number of changes in the FDI policy to remove caps in most sectors, there still remains an unfinished agenda of permitting greater FDI in politically sensitive areas such as insurance and retailing. The total FDI equity inflow into India in 2008–09 stood at INR1229.19 billion (US$19 billion), a growth of 25% in rupee terms over the previous period. India's trade and business sector has grown fast. India currently accounts for 1.5% of world trade as of 2007 according to the World Trade Statistics of the WTO in 2006.

Currency

The Indian rupee (INR) is the only legal tender in India, and is also accepted as legal tender in the neighbouring Nepal and Bhutan, both of which peg their currency to that of the Indian rupee. The rupee is divided into 100 paise. The highest-denomination banknote is the INR 1,000 note; the lowest-denomination coin in circulation is the 50 paise coin;with effect from 30 June 2011 all denominations below 50 paise have ceased to be legal currency.

India's monetary system is managed by the Reserve Bank of India (RBI), the country's central bank.Established on 1 April 1935 and nationalised in 1949, the RBI serves as the nation's monetary authority, regulator and supervisor of the monetary system, banker to the government, custodian of foreign exchange reserves, and as an issuer of currency. It is governed by a central board of directors, headed by a governor who is appointed by the Government of India.The rupee was linked to the British pound from 1927 to 1946 and then the U.S. dollar till 1975 through a fixed exchange rate. It was devalued in September 1975 and the system of fixed par rate was replaced with a basket of four major international currencies – the British pound, the U.S. dollar, the Japanese yen and the Deutsche mark. From 2003 to 2008, the rupee appreciated against the U.S. dollar; thereafter, it has sharply depreciated. Between 2010 and 2012, the rupee value had depreciated by about 30% of its value to the U.S. dollar in 2010.

Income and consumption

India has a Gini coefficient of 0.368.India's gross national income per capita had experienced high growth rates since 2002. India's Per Capita Income has tripled from Rs. 19,040 in 2002–03 to Rs. 53,331 in 2010–11, averaging 13.7% growth over these eight years peaking 15.6% in 2010–11.[157] However growth in the inflation adjusted Per capita income of the nation slowed to 5.6% in 2010–11, down from 6.4% in the previous year. As of 2010, according to World Bank statistics, about 400 million people in India, as compared to 1.29 billion people worldwide, live on less than $1.25 (PPP) per day. These consumption levels are on an individual basis, not household.Per 2011 census, India has about 330 million houses and 247 million households. The household size in India has dropped in recent years, with 2011 census reporting 50% of households have 4 or less members. Some households have 6 or more members, including the grandparents. These households produced a GDP of about $1.7 Trillion. The household consumption patterns per 2011 census:

about 67 percent of households use firewood, crop residue or cow dung cakes for cooking purposes;

53 percent do not have sanitation or drainage facilities on premises; 83 percent have water supply within their premises or 100 metres from their house in urban

areas and 500 metres from the house in rural areas; 67 percent of the households have access to electricity; 63 percent of households have landline or mobile telephone connexion; 43 percent have a television; 26 percent have either a two wheel (motorcycle) or four wheel (car) vehicle.

Compared to 2001, these income and consumption trends represent moderate to significant improvements. One report in 2010 claimed that the number of high income households has crossed lower income households.

GNI per capita: India (1,170 $)

India has about 61 million children under the age of 5 who are chronically malnourished, compared to 150 million children worldwide. Majority of malnourished children of India live in rural areas. Girls tend to be more malnourished than boys. Malnourishment, claims this report, is not a matter of income, rather it is education as in other parts of the world. A third of children from the wealthiest fifth of India's population are malnourished. This is because of poor feeding practices – foremost among them a failure exclusively to breastfeed in the first six months – play as big a role in India's malnutrition rates as food shortages. India's government has launched several major programs with mandated social spending programs to address child malnourishment problem. However, Indian government has largely failed.

A public distribution system that targets subsidised food to the poor and a vast midday-meal scheme, to which 120 million children subscribe —are hampered by inefficiency and corruption. Another government-paid program named Integrated Childhood Development Service (ICDS) has been operating since 1975 and it too has been ineffective and a wasteful program. A 2011 UNICEF report claims recent encouraging signs. Between 1990 to 2010, India has achieved a 45 percent reduction in under age 5 mortality rates, and now ranks 46 in 188 countries on this metric.

Poverty

According to World Bank international poverty line methodology, India's poverty dropped from 42% of its total population in 2005 to about 33% in 2010. In rural India, about 34 percent of the population lives on less than $1.25 a day, down from 44 percent in 2005; while in urban India, 29 percent of the population lived below that absolute poverty line in 2010, down from 36 percent in 2005, according to the World Bank report.[166]Since the early 1950s, successive governments have implemented various schemes to alleviate poverty, under central planning, that have met with partial success. All these programmes have relied upon the strategies of the Food for work programme and National Rural Employment Programme of the 1980s, which attempted to use the unemployed to generate productive assets and build rural infrastructure. In 2005, Indian government enacted the Mahatma Gandhi National Rural Employment Guarantee Act, guaranteeing 100 days of minimum wage employment to every rural household in all the districts of India. The question of whether these government spending programs or whether economic reforms reduce poverty, by improving income of the poorest, remains in controversy. In 2011, the Mahatma Gandhi National Rural Employment Guarantee pro

GROSS DOMESTIC PRODUCT

Brief Method of compiling Gross Domestic Product estimates by Industry

Broadly, the methodology for compiling the estimates of GDP consists in dividing the whole economy into various sectors comprising primary, secondary and tertiary activities. The estimates of GDP in respect of agriculture, forestry and logging, fishing, mining and quarrying, registered manufacturing (establishments registered under Factories Act, 1948) and construction are based on production approach. Income approach is used in the estimation of GDP originating in Un-) manufacturing sector are made using data from the Annual Survey of Industries, the estimates relating to the unorganised sectors in various economic activities are made using the figures of per worker value added available from the results of follow-up surveys of the Economic Census and the labour force in the activity. Generally, the unorganised sectors estimate of GDP is compiled for the base year or the bench mark survey year and estimates of subsequent years are obtained by moving the base year estimate with the help of appropriate physical indicators. The extent of this type of indirect estimation in the compilation of annual GDP estimates is indicated in various Annexes. Annexe 13.1 gives the list of items, sector-wise, estimates for which are compiled by indirect methods, while Annexe 13.2 gives the proportion of direct registered manufacturing (establishments not registered under Factories Act), electricity, gas and water supply, trade, hotels and restaurants, transport, storage, communication, banking and insurance, real estate, ownership of dwellings, business services, public administration and defence and other services. The estimates of various services in the public sector are compiled by analysing the budget documents and annual reports of departmental and non-departmental commercial undertakings, those of the organised (registeredestimation in the GDP during the benchmark year and for a year other than the benchmark year, both for the series (at base 1980-81) and the series (at base 1993-94) of NAS; and Annexe 13.3, the list of benchmark surveys used in series (at base 1993-94) of NAS.

Source Agencies, in the compilation of Gross Domestic Product Estimates

Agriculture

13.3.2 The principal source agency for data on the agriculture sector is the Directorate of Economics and Statistics, Ministry of Agriculture. Out of about 78 crops, crop-groups for which estimates of value of output are prepared, data on area and yield in respect of 49 principal crops (see Annexe 13.4) are available with a reasonable time lag from the DESMOA. For other crops, although the area figures are available from the DESMOA, production estimates are based on the information supplied by the State Government sources and ad hoc reports. Data on State level weighted average prices of crops, which are used for evaluating the corresponding output of State level crops, are made available by the State DESs.

13.3.3 The principal sources of data for inputs are the results of the Cost of Cultivation Studies (CCS) (for list of crops covered under CCS see Annexe 13.5), State DESs, State Agriculture Departments, Central Electricity Authority, Fertiliser Association of India and Pesticides Association of India.

Livestock

13.3.4 The source agency for the data on milk, egg and wool is the Department of Animal Husbandry and Dairying (DAHD), which collects this information through the Integrated Sample Survey conducted by the State AHDs. Estimates of meat and the number of slaughtered and fallen animals are

available from the State AHDs and DESs and that of the livestock population from the DESMOA and State AHDs from the results of Livestock Censuses. Estimates of silk and honey are available from the respective Boards and State AHD.

Forestry

13.3.5 The sources for data on production of forest products (industrial wood, fuel-wood and minor forest products) are the various Forest Departments of State Governments (SFD). However, the estimates of production of fuel-wood reported by the SFDs are considered totally unreliable as most of the fuel-wood is lifted in an unauthorised way. For the purpose of estimation of GDP, the output of fuel-wood is estimated from the consumption side making use of the results of NSS on consumption expenditure of households.

Fishing

13.3.6 The main source of data for inland fishing, marine fishing and production of prawns is the Ministry of Agriculture. The source agencies for data on other ancillary activities like sun drying of fish and salting of fish are the State Fisheries Departments. Data on prices are made available by the DESs.

Mining

13.3.7 The source agencies for the major minerals are the Indian Bureau of Mines (IBM), Coal India Ltd. (CIL) and its subsidiaries, and Oil and Natural Gas Corporation (ONGC). The information on minor minerals is obtained from the State Geological Departments. The information on the material inputs is available from the Office of Coal Controller, IBM, ONGC and Oil India Limited. An Enterprise Survey conducted in 1992 is the new source on minor minerals.

Registered Manufacturing

13.3.8 The registered sector of manufacturing covers all factories employing 10 or more workers and using power and those employing 20 or more persons but not using power, and bidi and cigar establishments registered under Bidi and Cigar Workers’ Act, 1966 employing 10 or more workers using power and 20 or more workers but not using power. Data on products and by-products of the factories covered under Factories’ Act, 1948 and material inputs are collected annually through the Annual Survey of Industries (ASI) by the CSO. Factories employing 100 persons or more are covered on a census basis and other factories are covered on a sample basis. Non-response is taken care of by adjusting the estimates of GDP on the basis of the number of workers in the non-responding units assuming that the gross value added per worker in the responding and non-responding unit is of the same order.

Unregistered Manufacturing

13.3.9 Data from unregistered manufacturing (factories other than those covered under the ASI) is not collected on an annual basis. Data from such units is collected once in five years on a sample basis through the Follow-up Surveys of the Economic Census. Directory Establishments employing 6 persons and more and Non-Directory establishments employing 1 to 5 persons and Own-account

Enterprise with no hired worker are covered separately in the Follow-up Surveys. The Index of Industrial Production (IIP) is generally used for extrapolating the benchmark estimates.

Electricity, Gas and water supply

13.3.10 Information on output/sales of and material inputs into electricity, gas supply by pipeline and water supply, are available in respect of departmental undertakings, Central and State Power Corporations, State Electricity Boards. For data on gobar gas, the source agencies are the Ministry of Non-conventional Energy and the Khadi & Village Industries Commission (KVIC). Estimates of water supply are based on the data of responding municipalities and estimates of workforce engaged in this activity.

Construction

13.3.11 Information on current production exports and imports and intermediate consumption of basic construction materials are available from various official sources. Information on the other construction materials is based on the norms provided by National Buildings Organisation (NBO), Central Public Works Department (CPWD) and Central Building Research Institute (CBRI) on various types of constructions namely, residential buildings, non-residential buildings, roads, bridges, and the like. Information on expenditures made on the kutcha construction in respect of the public sector is culled out from the budget documents of the administrative departments and annual reports and DCUs and NDCUs. In case of the private corporate sector, for kutcha construction, the information on construction activities in plantations of Tea, Coffee and Rubber is taken from the Tea, Coffee and Rubber Boards. The sources of information for the household sector are the All-India Debt and Investment Survey (AIDIS) and some old NSS reports.

Trade, hotels and restaurants

13.3.12 For the public sector components of Trade, Hotels and Restaurants, information on factor incomes is available in the budget documents/annual reports of the departmental and non-departmental commercial undertakings. For the organised private sector components, estimates of value added and work force are taken from the Reserve Bank of India (RBI)’s, Company Finance Studies and the publications of the Directorate General of Employment and Training (DGE&T). For the unorganised segments of trade and hotels and restaurants, benchmark estimate (prepared on the basis of working force and per worker value added) is moved with the help of a physical indicator namely, the Gross Trading Income. The per worker value added information is available from the Enterprise Surveys conducted quinquennially by the CSO/NSSO.

Transport, Storage and Communication

13.3.13 The activities of transport services by railways and other means, and storage and communication are compiled separately for the public sector, private organised sector and unorganised sector. For the public sector component, the requirements relating to factor incomes, capital formation and other aggregates are based on the budget documents and annual reports of the departmental and non-departmental commercial undertakings. For the private sector, particularly the private shipping companies and air transport, the annual reports of the companies are available which provide the required information for compiling GVA and other aggregates. For the unorganised segments of other activities namely, mechanised road transport, non-mechanised road transport, sailing vessels other than

ships, the services incidental to transport and storage, GDP estimates are built up using estimates of workforce and per worker value added from bench mark surveys. Estimates for years other than the benchmark survey year are made on the basis of appropriate physical indicators, like commercial vehicles registered and cargo handled at major ports.

Banking and Insurance

13.3.14 As most of the banking and insurance activities are in the public sector, requisite data are available from the annual reports. Also, the RBI provides information on the banks including the Reserve Bank. The information on cooperative credit societies is available from the Statements Relating to the Cooperative Movement in India published by the National Bank for Agricultural and Rural Development (NABARD).

Services

13.3.15 In public administration and defence, information on compensation of employees is available from the budget documents. However, the requisite data in respect of local bodies are not available. The estimates in respect of local bodies are prepared on the basis of transfers made by the State Government to the local bodies. For the rest of the services activities, the estimates of unorganised component are built-up using various sources of data, like Population Census (for dwellings), NSS (for rent per dwelling), Bar Council (for number of registered advocates), Ministry of Human Resource Development (for recognised educational institutions), Enterprise Surveys (for value added per worker) and Directorate General of Employment and Training (DGE&T) (for number of workers in the organised sector, which is required to derive the workforce in the unorganised sector) and other ad hoc sources.

Methodology of compilation of GDP estimates by industry

Agriculture and allied activities

In the NAS, the agriculture sector includes agriculture proper, livestock and operation of the irrigation system. Agriculture proper includes various crops including plantation crops, agricultural and horticultural services and ancillary activities like gur making, transportation of own produce to the primary markets and activities yielding rental income from machinery. The livestock sector covers breeding and rearing of animals and poultry, production of milk, slaughtering, preparation and dressing of meat, production of raw hides and skins, eggs, dung, raw wool, honey, silk worm cocoons and increment in livestock. The estimates of domestic product from these activities are prepared using the production approach, except in the case of operation of irrigation system, which is arrived at from the Government records through the income approach. The production approach requires estimation of gross value of output and value of inputs.

In respect of the sub-sector agriculture proper, the estimates of value of output are prepared separately for all the 78 crops/crop-groups. These 78 crops are divided into four categories namely, principal crops, minor crops, miscellaneous and unspecified crops and other products and by-products. The estimates of value of output for the 49 principal crops are prepared using the production figures compiled by the DESMOA and the prices relating to the peak marketing period prevailing in the primary market Centres compiled by the State Directorates of Economics and Statistics (DES's). In the case of minor crops like cashewnut, indigo and papaya, the area and outturn figures are available with a time lag of one year. In

respect of minor crops such as mango, citrus fruits, grapes and other fruits and vegetables, the estimates of production are built up from the data provided by the National Horticulture Board (NHB) and the State DESs. The source for production figures of, coffee, rubber and opium are the Coffee Board, Rubber Board and Central Bureau of Narcotics, respectively. The estimated production of tea is arrived at by utilising the information on processed tea received from the Tea Board. The miscellaneous and unspecified crops cover other cereals, other oil seeds, other sugars, other fibres, other dyes and tanning material, other drugs and narcotics, other condiments and spices, other fruits and vegetables, fodder, miscellaneous food crops, grass and miscellaneous non-food crops. In respect of these crops, area figures are available from the DESMOA and data on value of output per hectare are estimated using the norms provided by various surveys conducted by the NSSO and the estimates of value of output of the respective crop groups. The benchmark estimates of production of fodder related to the year 1955-56 and the area figures available from the DESMOA are the two sources for estimating the output of fodder. In the case of grass, the area figures are estimated from the Land Use Statistics (LUS) and the source for yield estimate is the NSS Report No.65, “Tables with Notes on Animal Husbandry year 1951-52". The products and by-products include stalks and straw, arhar, sesamum, jute and cotton sticks, bagasse and cane trash. The primary source of data for these, with the exception of bagasse, is the CCS, which give the estimates of by-products in terms of value of output per hectare. In the case of bagasse, the estimate is arrived at as a percentage of quantity of sugarcane that goes into the making of gur.

The estimates of value of output for the livestock sector are prepared separately for the items, milk, meat group, eggs, wool and hair, dung, silk-worm cocoons, honey and increment in livestock. The value of output of these products is estimated utilising the figures of production finalised by the Technical Committee for Directions (TCD) and made available by the Department of Animal Husbandry & Dairying (DAHD) and the price figures furnished by the State DESs. In the case of the meat group, which comprises meat (including edible offal and glands and poultry meat), meat products (like fats, legs and head) and by-products (like hides, skins, guts, blood, bones, horns and hoofs), the production figures are estimated with the help of yield rates and the number of slaughtered animals, furnished by the State Animal Husbandry & Dairying AHD's. The estimates of other meat products and by-products are based on the number of slaughtered animals and fallen animals, wherever applicable, and the corresponding yield rates available from various Directorates of Marketing & Inspection (DMI) reports. The estimates of poultry meat are prepared in terms of the number of adult fowls and chicken slaughtered using information on the utilisation of eggs and chicken that survived. The estimates of dung are prepared on the basis of information on livestock population and evacuation rates supplied by the DAHD, as well as the results of Integrated Sample Survey. The utilisation rates of dung used as manure and used as fuel are also supplied by the Department of AHD. In the case of silk and honey, the output figures of silk worm cocoons by types namely, mulberry, tasar, ericot and muga and honey are available with Central Silk Board and Khadi and Village Industries Commission (KVIC), respectively. The estimates of increment in livestock population are estimated by extrapolating the population figures available from the successive ILC's. The State-weighted average prices required for estimating the value of output for both agriculture and livestock products are supplied to the CSO by the State DESs.

In order to avoid double counting the value of the product, the value of inputs, which are also, outputs of some items, are deducted, to arrive at the Gross Value Added (GVA). The inputs, generally being common to both the livestock and agriculture sub-sectors, are estimated for the sector as a whole. Thus, GDP figures are not separately available for the agriculture and livestock sub-sectors. (Utilising the rates and ratios available from the Input-Output Transactions Tables of the CSO, the GDP estimates for these two sub-sectors have been made by the CSO and presented in the NAS publications.) The inputs of the agriculture sector are divided into ten items namely, seed, organic manure, chemical

fertilisers, current repairs, maintenance of fixed assets and other operational costs, feed of livestock, irrigation charges, market charges, electricity, pesticides and insecticides and diesel oil. Data on seed rates are available from the Cost of Cultivation Studies (CCS) as well as the State Agriculture Departments and the reports of the Directorate of Marketing and Inspection. In the case of organic manure, it is assumed that the output of dung manure in the livestock sector is equivalent to the organic manure input in the agriculture sector. The estimates of value of chemical fertilisers consumed are arrived at by using the figures of material-wise distribution of chemical fertilisers published by the Fertiliser Association of India and the retail prices. The livestock feed comprises of roughage and concentrates. The roughage include cane trash, grass, fodder, stalks, straw, and the like, while concentrates are oil cakes, crushed pulses, grains, grams, rice bran, husk, oil seeds, gur, and other concentrates. The entire production of fodder, cane trash and grass and 95 per cent of production of stalks and straws in the agriculture sector are considered to be consumed by the livestock population. Adjustment is made towards the consumption of these items by the animals, which are not directly connected, to the agriculture sector. The estimates of concentrates fed to livestock are largely based on the feed rates collected under the 30th Round of NSSO in 1975-76, studies conducted by the IASRI as well as by the State DES's. The estimates of irrigation charges are based on the information available from the State Irrigation Departments. The estimates of market charges are arrived at by conducting a special study with the help of State DES's and the DESMOA, covering various agricultural and livestock commodities and several primary-marketing centres. These market charges as a proportion of the value of output are assumed to be constant during a period of a few years and are therefore, not revised every year. Whereas the estimates for electricity and pesticides and insecticides are based on the information received from the Central Electricity Authority and the Pesticides Association of India, the estimates of diesel oil are prepared using the norms available from the CCS and figures of the number of diesel engines and tractors available from the State DES's. The estimates of repairs and maintenance are prepared using the norms available from the AIDIS.

Forestry and Logging

Major products comprise industrial wood and fuel wood. Minor products include items like bamboo, fodder, lac, sandalwood, honey, resin and gum. The main sources of data are the State Forest Departments and the Government budget documents. The recorded production of fuel wood is too low on account of the huge unauthorised cutting and lifting in India. Thus the total estimated consumption expenditure on fuel wood is taken as the proxy of value of output. The estimates of fuel wood consumption are based on large-scale quinquennial household consumer expenditure surveys conducted by the NSSO.

Fishing

The activities covered in this sector are - (a) fishing in ocean, coastal, offshore and inland waters for commercial purposes, (b) subsistence fishing in inland waters (c) gathering of sea weeds, sea shells and other ocean and coastal water products, and (d) fish curing. Data on production, prices, and value of fish catch are supplied by the State Fisheries Departments and the State DESs.

Mining and Quarrying

This sector comprises extraction of minerals which occur in nature as solids, liquids or gases with all the supplementary operations for dressing and beneficiating ores and other crude minerals. The major sources of data for fuel minerals namely, coal and lignite and major metallic minerals and non-metallic

minerals are the IBM, Coal India Ltd. and the Office of the Coal Controller. The Oil and Natural Gas Commission (ONGC) provides data on production, prices and inputs of petroleum and natural gas. Data on minor minerals mainly in the form of clay, stones, marbles, building materials are supplied by the State Geological Departments. Data on inputs in respect of major minerals are supplied by the Coal Controller, ONGC and IBM. Data on inputs in respect of minor minerals are based on results of the Sample Surveys conducted by the NSSO in respect of households engaged in extraction of such minerals.

Registered (Organised) Manufacturing

Manufacturing establishments registered under the Indian Factories/Bidi and Cigar Workers Act are included in this sector. Data on the output and inputs for this sector are collected under the Annual Survey of Industries (ASI). Industry-wise estimates are released in the CSO publication, “ASI Summary Results” for the factory sector. The GDP for the registered manufacturing sector is prepared by following the production approach (which is the total output at ex-factory prices minus the total input valued at purchasers’ prices) using the ASI-Summary Results for the factory sector. The estimates are adjusted for non-response on the basis of the workers of non-responding units.

Unregistered (Unorganised) Manufacturing

The estimates of GVA for this sector of the benchmark year are obtained as a product of the estimated work force and the GVA per worker available from the results of the Follow up Surveys of Economic Census conducted periodically by the CSO and the Census of Small Scale Industries conducted by the Office of the Development Commissioner for Small Scale Industries. For years other than the survey year, the estimates are moved forward for current and constant price estimates with the help of suitable price and quantity (IIP) indices separately for each 2-digit industry group.

Electricity

GDP at current prices is worked out by the income approach. The estimates of factor incomes are obtained from the analysis of data contained in the annual reports of the electricity boards, power corporations, annual budget documents of the Central and State Governments, private electricity companies and co-operative units and the electricity undertakings of local bodies. Estimates of GDP at constant prices are obtained by moving forward the base year (1993-94) estimates with the Index of Total Power Generation.

Gas

Data sources utilised for the estimation of the gas sector GVA are the accounts of the Gas Authority of India. Estimates in respect of gobar (organic) gas is worked out from the data supplied by Khadi and Village Industries Commission (KVIC). Estimates at constant prices are worked out from the output at 1993-94 prices using the base year input output ratios for each sub sector separately.

Water Supply

In case of Government and municipal water supply undertakings, the Net Value Added (NVA) is to be taken as a compensation of employees. In the case of the private sector, the estimates of compensation of employees is worked as a product of wages per worker and the total work force engaged in the private sector water supply works. To these the operating surplus in respect of water supply works

available from ASI data are added to arrive at the total NVA for the sector. Estimates of CFC worked out separately for the public and private sectors are added to obtain the estimates of GVA. Estimates at 1993-94 prices are obtained in respect of the public sector by deflating the current price estimates with the consumer price index of industrial workers. In the case of the private sector, the 1993-94 base year estimates are moved forward with the index of the work force. To these, the CFC at 1993-94 prices is added separately for each sub-sector to arrive at the GDP at 1993-94 prices.

Construction

Estimates of basic material inputs in Pucca construction works is estimated by adding together the value of commodities for construction at prices paid by the builders at the site of construction following the commodity flow approach. The value of output in kutcha construction in the public sector and private corporate sector is estimated from the data available in the annual budget documents of the Government and the annual reports of the Rubber, Tea and Coffee Boards on plantation works. In case of the household sector the component of kutcha construction works is estimated from the All-India Debt and Investment Survey (AIDIS) results for the year 1992. For the other years, the estimates are moved forward with suitable indicators. For Pucca construction, based on information available from Central Public Works Department, National Building Organisation and survey results a fixed percentage of material inputs is taken as factor inputs, i.e. GVA in the base year. For other years, the value of material input is duly adjusted for wage and price indices. In the case of labour-intensive kutcha construction works, 75 per cent of the value of output is taken as GVA. Estimates at constant prices are arrived at by deflating the current price GVA estimates by suitable price indices.

Trade, Hotels and Restaurants

Current price estimates of GVA in respect of the public sector are based on the annual budget documents and annual reports of trading enterprises. In case of the private corporate sector and cooperatives, the estimates are based on sample studies undertaken by the Reserve Bank of India (RBI) and annual report of the National Bank for Agriculture and Rural Development (NABARD), respectively. For the remaining unorganised part of the trading activity the estimates for the base year (1993-94) are estimated from the results of the Follow up Surveys of the Economic Census and work force. For other years, the base year estimates in respect of unorganised trade are moved forward with the help of the Gross Trading Income (GTI) specially worked out from the marketable surplus and trade margins of various commodities. Constant price estimates are arrived, by moving forward the base year estimates by the index of GTI. The GTI at constant price is also compiled (on the same lines as that in the case of GTI at current prices) by using value of output of commodity producing sectors at constant prices.

Railways and Communication

The estimates are based on data available in the annual budget documents and the annual reports of Railways and Communication Departmental enterprises. Constant price estimates are arrived at by moving forward the base year (1993-94) estimates by suitable quantum indices.

Transport other than Railways

For the organised public sector part, the estimates are based on annual data available from the budget documents and annual reports of the public sector transport enterprises. For the unorganised part, the base year estimates are based on the results of the Follow up Surveys of Economic Census.

Storage

Estimates in respect of public sector are worked out from the data contained in the reports of the Central and State warehousing corporations. In respect of cold storage, the estimates are based on ASI data, whereas for storage activities in the unorganised sector, the estimates are based on Follow up Surveys of Economic Census duly adjusted with a suitable indicator for the base year and other years. The constant price estimates are prepared by moving forward the base year estimates with the help of quantum indices specially constructed for the purpose.

Banking and Insurance

Detailed data are available from the annual reports of the Reserve Bank of India, non-banking financial companies and corporations and also the Life Insurance and General Insurance Corporations. In respect of post office saving banks and postal life insurance, data are available from the annual budget documents of the Central Government. Data in respect of cooperative credit societies are available from the NABARD. Estimates at constant price are arrived at by using suitable quantum indices in each case. In the absence of data in respect of unorganised moneylenders, the GVA for this sub sector is estimated as one third of the GVA in respect of organised non-banking financial companies and corporations in public and private sectors.

Real Estate, Ownership of Dwellings and Business Services

Estimates in respect of real estate and business services are based on the sample analysis of joint stock companies adjusted for full coverage on the basis of paid up capital of such companies. The estimates in respect of ownership of the dwelling is based on the number of dwellings as per the Population Census and gross rental per dwelling available from the NSSO survey results. Constant price estimates are worked out by moving forward the base year estimates with suitable quantum indices.

Public Administration and Defence

Annual estimates of NVA, which comprise only the compensation of the employees is worked out from the data contained in the Government budget documents. Estimates of CFC worked out separately are added to NVA to arrive at GVA estimates. Estimates of GVA at constant 1993-94 prices are worked out by deflating the current price NVA by consumer price indices (CPI) of Industrial Workers and adding to it the CFC at 1993-94 prices.

Other Services

The Current price estimates in respect of the organised public sector part are based on data available in the budget documents in respect of education, medical, radio & television broadcasting and sanitary services. For the unorganised sector, like tailoring services, barber and beauty services, and laundry, & domestic services, etc. the estimates are worked out on the basis of data on GVA per worker available from Follow up Surveys of the Economic Census and work force. The estimates at constant prices in respect of the public sector are arrived at by deflating the NVA at current prices by the CPI and adding to it the CFC at 1993-94 prices and in case of the unorganised sector moving forward the base year estimates with the growth in the working force of the corresponding services.

The sources of data for different data categories in detail are indicated in the Table 13.7 below. Also given in the last column is the contribution to total output/input/GDP of the country (estimated using IOTT 1993-94 data, which gives such data separately) and a contribution within the sector’s output/input/GDP for the year 1993-94, along with the method of estimation, for the corresponding data categories listed

Gross domestic product

A map of world economies by size of GDP (nominal) in $US, CIA World Factbook, 2012.[1]Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time. GDP per capita is often considered an indicator of a country's standard of living.[2][3]GDP per capita is not a measure of personal income (See Standard of living and GDP). Under economic theory, GDP per capita exactly equals the gross domestic income (GDI) per capita (See Gross domestic income).GDP is related to national accounts, a subject in macroeconomics. GDP is not to be confused with gross national product (GNP) which allocates production based on ownership.Contents [hide] 1 History2 Determining GDP2.1 Production approach2.2 Income approach2.3 Expenditure approach2.3.1 Components of GDP by expenditure2.3.2 Examples of GDP component variables3 GDP vs GNP3.1 International standards3.2 National measurement3.3 Interest rates4 Nominal GDP and adjustments to GDP5 Cross-border comparison and PPP6 Per unit GDP7 Standard of living and GDP8 Externalities9 Limitations and Criticisms10 Lists of countries by their GDP11 List of newer approaches to the measurement of (economic) progress12 See also13 Bibliography14 External linksHistory[edit]

[icon] This section requires expansion. (March 2011)GDP was first developed by Simon Kuznets for a US Congress report in 1934.[4] In this report, Kuznets warned against its use as a measure of welfare (see below under limitations and criticisms). After the Bretton Woods conference in 1944, GDP became the main tool for measuring a country's economy.[5]Determining GDP[edit]

EconomicsGdpercapita.PNGGDP per capita by country (World Bank, 2011)General classificationsMicroeconomics Macroeconomics History of economic thought Methodology Heterodox approachesTechnical methodsEconometrics Experimental Mathematical National accountingFields and subfieldsAgricultural Behavioral Business Computational Cultural Demographic Development Ecological Economic systems Education Environmental Evolutionary Expeditionary Game theory Geography Growth Health History Industrial organization Information International Labour Law Managerial Monetary and Financial economics Natural resource Personnel Public and Welfare economics Regional Rural Urban WelfareListsCategories Economists Index Journals Outline PublicationsPortal icon Business and economics portalv t eGDP can be determined in three ways, all of which should, in principle, give the same result. They are the product (or output) approach, the income approach, and the expenditure approach.The most direct of the three is the product approach, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people's total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors ("producers," colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes.[6]Example: the expenditure method:GDP = private consumption + gross investment + government spending + (exports − imports), orGDP = C + I + G + \left ( X - M \right )Note: "Gross" means that GDP measures production regardless of the various uses to which that production can be put. Production can be used for immediate consumption, for investment in new fixed assets or inventories, or for replacing depreciated fixed assets. "Domestic" means that GDP measures production that takes place within the country's borders. In the expenditure-method equation given above, the exports-minus-imports term is necessary in order to null out expenditures on things not produced in the country (imports) and add in things produced but not sold in the country (exports).Economists (since Keynes) have preferred to split the general consumption term into two parts; private consumption, and public sector (or government) spending.[citation needed] Two advantages of dividing total consumption this way in theoretical macroeconomics are:Private consumption is a central concern of welfare economics. The private investment and trade portions of the economy are ultimately directed (in mainstream economic models) to increases in long-term private consumption.If separated from endogenous private consumption, government consumption can be treated as exogenous,[citation needed] so that different government spending levels can be considered within a meaningful macroeconomic framework.Production approach[edit]" Market value of all final goods and services calculated during 1 year . " The production approach is also called Net Product or Value added method. This method consists of three stages:Estimating the Gross Value of domestic Output out of the many various economic activities;

Determining the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services; and finallyDeducting intermediate consumption from Gross Value to obtain the Net Value of Domestic Output.Symbolically,Net Value Added = Gross Value of output – Value of Intermediate Consumption.Value of Output = Value of the total sales of goods and services + Value of changes in the inventories.The sum of Net Value Added in various economic activities is known as GDP at factor cost.GDP at factor cost plus indirect taxes less subsidies on products is GDP at Producer Price.For measuring gross output of domestic product, economic activities (i.e. industries) are classified into various sectors. After classifying economic activities, the gross output of each sector is calculated by any of the following two methods:By multiplying the output of each sector by their respective market price and adding them together andBy collecting data on gross sales and inventories from the records of companies and adding them togetherSubtracting each sector's intermediate consumption from gross output, we get sectoral Gross Value Added (GVA) at factor cost. We, then add gross value of all sectors to get GDP at factor cost. Adding indirect tax minus subsidies in GDP at factor cost, we get GDP at Producer Prices'.Income approach[edit]

Countries by 2012 GDP (nominal) per capita.[7] over $102,400 $51,200–102,400 $25,600–51,200 $12,800–25,600 $6,400–12,800 $3,200–6,400 $1,600–3,200 $800–1,600 $400–800 below $400 unavailable

GDP (PPP) per capita (World bank, 2011)." [S]um total of incomes of individuals living in a country during 1 year ."Another way of measuring GDP is to measure total income. If GDP is calculated this way it is sometimes called Gross Domestic Income (GDI), or GDP(I). GDI should provide the same amount as the expenditure method described below. (By definition, GDI = GDP. In practice, however, measurement errors will make the two figures slightly off when reported by national statistical agencies.)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.The US "National Income and Expenditure Accounts" divide incomes into five categories:Wages, salaries, and supplementary labour incomeCorporate profitsInterest and miscellaneous investment incomeFarmers' incomeIncome from non-farm unincorporated businesses

These five income components sum to net domestic income at factor cost.Two adjustments must be made to get GDP:Indirect taxes minus subsidies are added to get from factor cost to market prices.Depreciation (or Capital Consumption Allowance) is added to get from net domestic product to gross domestic product.Total income can be subdivided according to various schemes, leading to various formulae for GDP measured by the income approach. A common one is:GDP = compensation of employees + gross operating surplus + gross mixed income + taxes less subsidies on production and importsGDP = COE + GOS + GMI + TP & M – SP & MCompensation of employees (COE) measures the total remuneration to employees for work done. It includes wages and salaries, as well as employer contributions to social security and other such programs.Gross operating surplus (GOS) is the surplus due to owners of incorporated businesses. Often called profits, although only a subset of total costs are subtracted from gross output to calculate GOS.Gross mixed income (GMI) is the same measure as GOS, but for unincorporated businesses. This often includes most small businesses.The sum of COE, GOS and GMI is called total factor income; it is the income of all of the factors of production in society. It measures the value of GDP at factor (basic) prices. The difference between basic prices and final prices (those used in the expenditure calculation) is the total taxes and subsidies that the government has levied or paid on that production. So adding taxes less subsidies on production and imports converts GDP at factor cost to GDP(I).Total factor income is also sometimes expressed as:Total factor income = Employee compensation + Corporate profits + Proprietor's income + Rental income + Net interest[8]Yet another formula for GDP by the income method is:[citation needed]GDP = R + I + P + SA + Wwhere R : rentsI : interestsP : profitsSA : statistical adjustments (corporate income taxes, dividends, undistributed corporate profits)W : wagesNote the mnemonic, "ripsaw".Expenditure approach[edit]" All expenditure incurred by individuals during 1 year . "In economics, most things produced are produced for sale, and sold. Therefore, measuring the total expenditure of money used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP. Note that if you knit yourself a sweater, it is production but does not get counted as GDP because it is never sold. Sweater-knitting is a small part of the economy, but if one counts some major activities such as child-rearing (generally unpaid) as production, GDP ceases to be an accurate indicator of production. Similarly, if there is a long term shift from non-market provision of services (for example cooking, cleaning, child rearing, do-it yourself repairs) to market provision of services, then this trend toward increased market provision of services may mask a dramatic decrease in actual domestic production, resulting in overly optimistic and inflated reported GDP. This is particularly a problem for economies which have shifted from production economies to service economies.Components of GDP by expenditure[edit]

Components of U.S. GDPGDP (Y) is a sum of Consumption (C), Investment (I), Government Spending (G) and Net Exports (X – M).Y = C + I + G + (X − M)Here is a description of each GDP component:C (consumption) is normally the largest GDP component in the economy, consisting of private (household final consumption expenditure) in the economy. These personal expenditures fall under one of the following categories: durable goods, non-durable goods, and services. Examples include food, rent, jewelry, gasoline, and medical expenses but does not include the purchase of new housing.I (investment) includes, for instance, business investment in equipment, but does not include exchanges of existing assets. Examples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in Investment. In contrast to its colloquial meaning, 'Investment' in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products.G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits.X (exports) represents gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.M (imports) represents gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.A fully equivalent definition is that GDP (Y) is the sum of final consumption expenditure (FCE), gross capital formation (GCF), and net exports (X – M).Y = FCE + GCF+ (X − M)FCE can then be further broken down by three sectors (households, governments and non-profit institutions serving households) and GCF by five sectors (non-financial corporations, financial corporations, households, governments and non-profit institutions serving households). The advantage of this second definition is that expenditure is systematically broken down, firstly, by type of final use (final consumption or capital formation) and, secondly, by sectors making the expenditure, whereas the first definition partly follows a mixed delimitation concept by type of final use and sector.Note that C, G, and I are expenditures on final goods and services; expenditures on intermediate goods and services do not count. (Intermediate goods and services are those used by businesses to produce other goods and services within the accounting year.[9] )According to the U.S. Bureau of Economic Analysis, which is responsible for calculating the national accounts in the United States, "In general, the source data for the expenditures components are considered more reliable than those for the income components [see income method, below]."[10]Examples of GDP component variables[edit]C, I, G, and NX(net exports): If a person spends money to renovate a hotel to increase occupancy rates, the spending represents private investment, but if he buys shares in a consortium to execute the renovation, it is saving. The former is included when measuring GDP (in I), the latter is not. However, when the consortium conducted its own expenditure on renovation, that expenditure would be included in GDP.

If a hotel is a private home, spending for renovation would be measured as consumption, but if a government agency converts the hotel into an office for civil servants, the spending would be included in the public sector spending, or G.If the renovation involves the purchase of a chandelier from abroad, that spending would be counted as C, G, or I (depending on whether a private individual, the government, or a business is doing the renovation), but then counted again as an import and subtracted from the GDP so that GDP counts only goods produced within the country.If a domestic producer is paid to make the chandelier for a foreign hotel, the payment would not be counted as C, G, or I, but would be counted as an export.

GDP real growth rates for 2010.A "production boundary" delimits what will be counted as GDP."One of the fundamental questions that must be addressed in preparing the national economic accounts is how to define the production boundary–that is, what parts of the myriad human activities are to be included in or excluded from the measure of the economic production."[11]

All output for market is at least in theory included within the boundary. Market output is defined as that which is sold for "economically significant" prices; economically significant prices are "prices which have a significant influence on the amounts producers are willing to supply and purchasers wish to buy."[12] An exception is that illegal goods and services are often excluded even if they are sold at economically significant prices (Australia and the United States exclude them).This leaves non-market output. It is partly excluded and partly included. First, "natural processes without human involvement or direction" are excluded.[13] Also, there must be a person or institution that owns or is entitled to compensation for the product. An example of what is included and excluded by these criteria is given by the United States' national accounts agency: "the growth of trees in an uncultivated forest is not included in production, but the harvesting of the trees from that forest is included."[14]Within the limits so far described, the boundary is further constricted by "functional considerations."[15] The Australian Bureau for Statistics explains this: "The national accounts are primarily constructed to assist governments and others to make market-based macroeconomic policy decisions, including analysis of markets and factors affecting market performance, such as inflation and unemployment." Consequently, production that is, according to them, "relatively independent and isolated from markets," or "difficult to value in an economically meaningful way" [i.e., difficult to put a price on] is excluded.[16] Thus excluded are services provided by people to members of their own families free of charge, such as child rearing, meal preparation, cleaning, transportation, entertainment of family members, emotional support, care of the elderly.[17] Most other production for own (or one's family's) use is also excluded, with two notable exceptions which are given in the list later in this section.Nonmarket outputs that are included within the boundary are listed below. Since, by definition, they do not have a market price, the compilers of GDP must impute a value to them, usually either the cost of the goods and services used to produce them, or the value of a similar item that is sold on the market.Goods and services provided by governments and non-profit organizations free of charge or for economically insignificant prices are included. The value of these goods and services is estimated as equal to their cost of production. This ignores the consumer surplus generated by an efficient and effective government supplied infrastructure. For example, government-provided clean water confers substantial benefits above its cost. Ironically, lack of such infrastructure which would result in higher water prices (and probably higher hospital and medication expenditures) would be reflected as a higher

GDP. This may also cause a bias that mistakenly favors inefficient privatizations since some of the consumer surplus from privatized entities' sale of goods and services are indeed reflected in GDP.[18] xGoods and services produced for own-use by businesses are attempted to be included. An example of this kind of production would be a machine constructed by an engineering firm for use in its own plant.Renovations and upkeep by an individual to a home that she owns and occupies are included. The value of the upkeep is estimated as the rent that she could charge for the home if she did not occupy it herself. This is the largest item of production for own use by an individual (as opposed to a business) that the compilers include in GDP.[18] If the measure uses historical or book prices for real estate, this will grossly underestimate the value of the rent in real estate markets which have experienced significant price increases (or economies with general inflation). Furthermore, depreciation schedules for houses often accelerate the accounted depreciation relative to actual depreciation (a well built house can be lived in for several hundred years – a very long time after it has been fully depreciated). In summary, this is likely to grossly underestimate the value of existing housing stock on consumers' actual consumption or income.Agricultural production for consumption by oneself or one's household is included.Services (such as chequeing-account maintenance and services to borrowers) provided by banks and other financial institutions without charge or for a fee that does not reflect their full value have a value imputed to them by the compilers and are included. The financial institutions provide these services by giving the customer a less advantageous interest rate than they would if the services were absent; the value imputed to these services by the compilers is the difference between the interest rate of the account with the services and the interest rate of a similar account that does not have the services. According to the United States Bureau for Economic Analysis, this is one of the largest imputed items in the GDP.[19]GDP vs GNP[edit]

GDP can be contrasted with gross national product (GNP) or gross national income (GNI). The difference is that GDP defines its scope according to location, while GNP defines its scope according to ownership. In a global context, world GDP and world GNP are, therefore, equivalent terms.GDP is product produced within a country's borders; GNP is product produced by enterprises owned by a country's citizens. The two would be the same if all of the productive enterprises in a country were owned by its own citizens, and those citizens did not own productive enterprises in any other countries. In practice, however, foreign ownership makes GDP and GNP non-identical. Production within a country's borders, but by an enterprise owned by somebody outside the country, counts as part of its GDP but not its GNP; on the other hand, production by an enterprise located outside the country, but owned by one of its citizens, counts as part of its GNP but not its GDP.To take the United States as an example, the U.S.'s GNP is the value of output produced by American-owned firms, regardless of where the firms are located. Similarly, if a country becomes increasingly in debt, and spends large amounts of income servicing this debt this will be reflected in a decreased GNI but not a decreased GDP. Similarly, if a country sells off its resources to entities outside their country this will also be reflected over time in decreased GNI, but not decreased GDP. This would make the use of GDP more attractive for politicians in countries with increasing national debt and decreasing assets.Gross national income (GNI) equals GDP plus income receipts from the rest of the world minus income payments to the rest of the world.[20]In 1991, the United States switched from using GNP to using GDP as its primary measure of production.[21] The relationship between United States GDP and GNP is shown in table 1.7.5 of the National Income and Product Accounts.[22]International standards[edit]

The international standard for measuring GDP is contained in the book System of National Accounts (1993), which was prepared by representatives of the International Monetary Fund, European Union, Organization for Economic Co-operation and Development, United Nations and World Bank. The publication is normally referred to as SNA93 to distinguish it from the previous edition published in 1968 (called SNA68) [23]SNA93 provides a set of rules and procedures for the measurement of national accounts. The standards are designed to be flexible, to allow for differences in local statistical needs and conditions.[icon] This section requires expansion. (August 2009)National measurement[edit]Within each country GDP is normally measured by a national government statistical agency, as private sector organizations normally do not have access to the information required (especially information on expenditure and production by governments).Main article: National agencies responsible for GDP measurementInterest rates[edit]Net interest expense is a transfer payment in all sectors except the financial sector. Net interest expenses in the financial sector are seen as production and value added and are added to GDP.Nominal GDP and adjustments to GDP[edit]

The raw GDP figure as given by the equations above is called the nominal, historical, or current, GDP. When one compares GDP figures from one year to another, it is desirable to compensate for changes in the value of money – i.e., for the effects of inflation or deflation. To make it more meaningful for year-to-year comparisons, it may be multiplied by the ratio between the value of money in the year the GDP was measured and the value of money in a base year.For example, suppose a country's GDP in 1990 was $100 million and its GDP in 2000 was $300 million. Suppose also that inflation had halved the value of its currency over that period. To meaningfully compare its GDP in 2000 to its GDP in 1990, we could multiply the GDP in 2000 by one-half, to make it relative to 1990 as a base year. The result would be that the GDP in 2000 equals $300 million × one-half = $150 million, in 1990 monetary terms. We would see that the country's GDP had realistically increased 50 percent over that period, not 200 percent, as it might appear from the raw GDP data. The GDP adjusted for changes in money value in this way is called the real, or constant, GDP.The factor used to convert GDP from current to constant values in this way is called the GDP deflator. Unlike consumer price index, which measures inflation or deflation in the price of household consumer goods, 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.[24]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)Another thing that it may be desirable to account for is population growth. 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.Cross-border comparison and PPP[edit]

The level of GDP in different countries may be compared by converting their value in national currency according to either the current currency exchange rate, or the purchasing power parity exchange rate.Current currency exchange rate is the exchange rate in the international foreign exchange market.

Purchasing power parity exchange rate is the exchange rate based on the purchasing power parity (PPP) of a currency relative to a selected standard (usually the United States dollar). This is a comparative (and theoretical) exchange rate, the only way to directly realize this rate is to sell an entire CPI basket in one country, convert the cash at the currency market rate & then rebuy that same basket of goods in the other country (with the converted cash). Going from country to country, the distribution of prices within the basket will vary; typically, non-tradable purchases will consume a greater proportion of the basket's total cost in the higher GDP country, per the Balassa-Samuelson effect.The ranking of countries may differ significantly based on which method is used.The current exchange rate method converts the value of goods and services using global currency exchange rates. The method can offer better indications of a country's international purchasing power and relative economic strength. For instance, if 10% of GDP is being spent on buying hi-tech foreign arms, the number of weapons purchased is entirely governed by current exchange rates, since arms are a traded product bought on the international market. There is no meaningful 'local' price distinct from the international price for high technology goods.The purchasing power parity method accounts for the relative effective domestic purchasing power of the average producer or consumer within an economy. The method can provide a better indicator of the living standards of less developed countries, because it compensates for the weakness of local currencies in the international markets. For example, India ranks 10th by nominal GDP, but 3rd by PPP. The PPP method of GDP conversion is more relevant to non-traded goods and services.There is a clear pattern of the purchasing power parity method decreasing the disparity in GDP between high and low income (GDP) countries, as compared to the current exchange rate method. This finding is called the Penn effect.For more information, see Measures of national income and output.Per unit GDP[edit]

GDP is an aggregate figure which does not consider differing sizes of nations. Therefore, GDP can be stated as GDP per capita (per person) in which total GDP is divided by the resident population on a given date, GDP per citizen where total GDP is divided by the numbers of citizens residing in the country on a given date, and less commonly GDP per unit of a resource input, such as GDP per GJ of energy or Gross domestic product per barrel. GDP per citizen in the above case is pretty similar to GDP per capita in most nations, however, in nations with very high proportions of temporary foreign workers like in Persian Gulf nations, the two figures can be vastly different.Standard of living and GDP[edit]

GDP per capita is not a measurement of the standard of living in an economy; however, it is often used as such an indicator, on the rationale that all citizens would benefit from their country's increased economic production. Similarly, GDP per capita is not a measure of personal income. GDP may increase while real incomes for the majority decline. The major advantage of GDP per capita as an indicator of standard of living is that it is measured frequently, widely, and consistently. It is measured frequently in that most countries provide information on GDP on a quarterly basis, allowing trends to be seen quickly. It is measured widely in that some measure of GDP is available for almost every country in the world, allowing inter-country comparisons. It is measured consistently in that the technical definition of GDP is relatively consistent among countries.The major disadvantage is that it is not a measure of standard of living. GDP is intended to be a measure of total national economic activity—a separate concept.The argument for using GDP as a standard-of-living proxy is not that it is a good indicator of the absolute level of standard of living, but that living standards tend to move with per-capita GDP, so that changes in living standards are readily detected through changes in GDP.

Externalities[edit]

GDP is widely used by economists to gauge economic recession and recovery and an economy's general monetary ability to address externalities. It is not meant to measure externalities. It serves as a general metric for a nominal monetary standard of living and is not adjusted for costs of living within a region. GDP is a neutral measure which merely shows an economy's general ability to pay for externalities such as social and environmental concerns.[25] Examples of externalities include:Wealth distribution – GDP does not account for variances in incomes of various demographic groups. See income inequality metrics for discussion of a variety of inequality-based economic measures.Non-market transactions–GDP excludes activities that are not provided through the market, such as household production and volunteer or unpaid services. As a result, GDP is understated. Unpaid work conducted on Free and Open Source Software (such as GNU/Linux) contribute nothing to GDP, but it was estimated that it would have cost more than a billion US dollars for a commercial company to develop. Also, if Free and Open Source Software became identical to its proprietary software counterparts, and the nation producing the propriety software stops buying proprietary software and switches to Free and Open Source Software, then the GDP of this nation would reduce; however, there would be no reduction in economic production or standard of living. The work of New Zealand economist Marilyn Waring has highlighted that if a concerted attempt to factor in unpaid work were made, then it would in part undo the injustices of unpaid (and in some cases, slave) labour, and also provide the political transparency and accountability necessary for democracy.Underground economy–Official GDP estimates may not take into account the underground economy, in which transactions contributing to production, such as illegal trade and tax-avoiding activities, are unreported, causing GDP to be underestimated.Asset Value–GDP does not take into account the value of all assets in an economy. This is akin to ignoring a company's balance sheet, and judging it solely on the basis of its income statement.Non-monetary economy–GDP omits economies where no money comes into play at all, resulting in inaccurate or abnormally low GDP figures. For example, in countries with major business transactions occurring informally, portions of local economy are not easily registered. Bartering may be more prominent than the use of money, even extending to services (I helped you build your house ten years ago, so now you help me).GDP also ignores subsistence production.Quality improvements and inclusion of new products–By not adjusting for quality improvements and new products, GDP understates true economic growth. For instance, although computers today are less expensive and more powerful than computers from the past, GDP treats them as the same products by only accounting for the monetary value. The introduction of new products is also difficult to measure accurately and is not reflected in GDP despite the fact that it may increase the standard of living. For example, even the richest person from 1900 could not purchase standard products, such as antibiotics and cell phones, that an average consumer can buy today, since such modern conveniences did not exist back then.What is being produced–GDP counts work that produces no net change or that results from repairing harm. For example, rebuilding after a natural disaster or war may produce a considerable amount of economic activity and thus boost GDP. The economic value of health care is another classic example—it may raise GDP if many people are sick and they are receiving expensive treatment, but it is not a desirable situation. Alternative economic estimates, such as the standard of living or discretionary income per capita try to measure the human utility of economic activity. See uneconomic growth.Sustainability of growth– GDP is a measurement of economic historic activity and is not necessarily a projection. A country may achieve a temporarily high GDP from use of natural resources or by misallocating investment.

Nominal GDP doesn't measure variations in purchasing power or costs of living by area, so when the GDP figure is deflated over time, GDP growth can vary greatly depending on the basket of goods used and the relative proportions used to deflate the GDP figure.Cross-border comparisons of GDP can be inaccurate as they do not take into account local differences in the quality of goods, even when adjusted for purchasing power parity. This type of adjustment to an exchange rate is controversial because of the difficulties of finding comparable baskets of goods to compare purchasing power across countries. For instance, people in country A may consume the same number of locally produced apples as in country B, but apples in country A are of a more tasty variety. This difference in material well being will not show up in GDP statistics. This is especially true for goods that are not traded globally, such as housingLimitations and Criticisms[edit]

[icon] This section requires expansion. (February 2012)Simon Kuznets, the economist who developed the first comprehensive set of measures of national income, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses of National Income Measurements":[4]The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification. [...]All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.In 1962, Kuznets stated:[26]Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.Austrian School economist Frank Shostak has argued that GDP is an empty abstraction devoid of any link to the real world, and, therefore, has little or no value in economic analysis. Says Shostak:[27]The GDP framework cannot tell us whether final goods and services that were produced during a particular period of time are a reflection of real wealth expansion, or a reflection of capital consumption. For instance, if a government embarks on the building of a pyramid, which adds absolutely nothing to the well-being of individuals, the GDP framework will regard this as economic growth. In reality, however, the building of the pyramid will divert real funding from wealth-generating activities, thereby stifling the production of wealth.So what are we to make out of the periodical pronouncements that the economy, as depicted by real GDP, grew by a particular percentage? All we can say is that this percentage has nothing to do with real economic growth and that it most likely mirrors the pace of monetary pumping. We can thus conclude that the GDP framework is an empty abstraction devoid of any link to the real world.

Many environmentalists argue that GDP is a poor measure of social progress because it does not take into account harm to the environment.[28][29]In 1989 Herman Daly and John B. Cobb developed the Index of Sustainable Economic Welfare (ISEW), which they proposed as a more valid measure of socio-economic progress, by taking into account various other factors such as consumption of non-renewable resources and degradation of the environment.

India and China have the largest population in the world and hence has the greatest potential in productivity due to the fact that the value of a product is measured as the value of service that can be obtained by the holder in exchange for that product. ( Units per man hour