Ptp Gdp Vikas

Department of Architecture and Regional Planning

INDIAN INSTITUTE OF TECHNOLOGY, Kharagpur

A TERM PAPER ON

GDP- GROSS DOMESTIC PRODUCT

international standard of economy representation . . .

by

VIKAS KUMAR NIRMAL 08AR6031

Under the Guidance of

Prof . B.K.Sen Gupta

2008-09

GDP-Gross Domestic Product Page 0

GDP GROSS DOMESTIC PRODUCT VIKAS KUMAR NIRMAL Abstract

This aimed at telling the GDP and its parameters with the positive and negative points attached to its representation of any economy. Any economy in world is represented by GDP and irrespective of several other measure which are running individual nations economy is not taken into consideration. With all the criticism by the economists around the globe there are several new methods have come up such as HDI-Human Developemnt Index, GHI-Gross Happy Index etc. And also tells on what basis the calculation of GDP happens i.e sectors of any economy such as primary, secondary, tertiary. And above all the global level scenario of GDP around the world. INTRODUCTION:

The gross domestic product (GDP) or gross domestic income (GDI) is one of the measures of national income and output for a given country's economy. GDP is defined as the total market value of all final goods and services produced within the country in a given period of time (usually a calendar year).

The "Gross" in GDP means that it includes the costs associated with the depreciation of things like buildings machinery and equipment. As for "Product," GDP measures the result of production the value of all goods and services produced in one year.

It is also considered the sum of a 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, and it is given a money value. GDP can be calculated by adding up the following components: consumption, investment, government spending, and net exports, or the spread between imports and exports. The most common approach to measuring and understanding GDP is the expenditure method.


HOW IS GDP CALCULATED?

There are many ways to express a country's GDP. Statistics Canada calculates the country's GDP by industry. It divides the economy into goods-producing industries (like manufacturing, construction, and energy) and service-producing industries (like retail trade, health care, and finance).

GDP is calculated on a "value-added" basis. In other words, only the value of production added at each state of the manufacture of a product is counted. If this didn't happen, production would be double-counted and GDP would be inflated.

The most common and easy calculation of GDP is done is done with the formula:

GDP = consumption + gross investment + government spending + (exports imports)

Consumption includes personal items such as food, utilities, rent, clothing, fuel, and financial services received by individuals. It is important to note that housing purchase costs are NOT included in this category. This is by far the largest component of GDP.

Investments refer to capital expenditures which would include costs associated with building new factories, business machinery expenses, new home purchases, business inventory changes. One important note to make on investments is that stock and bond purchases are not considered in this category as they do not add to the GDP, or any actual output.

The Government spending category includes state and local governments as well as the federal government. This category is the second largest component of the gross domestic product. Items such as school teacher salaries and pensions, congressman and senator salaries, and military goods are a few of the major components.

Finally, net export is simply the difference between the amount of goods we export and import every year. This would account for all foreign consumption of our goods, or output from our economy.

Consumption and investment in this equation are expenditure on final goods and services. The exports-minus-imports part of the equation (often called net exports) adjusts this by subtracting the part of this expenditure not produced domestically (the imports), and adding back in domestic area (the exports).

Economists (since Keynes) have preferred to split the general consumption term into two parts; private consumption, and public sector (or government) spending. 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 directed to increases in long-term private consumption.

If separated from endogenous private consumption, government consumption can be treated as exogenous so that different government spending levels can be considered within a meaningful macroeconomic framework.


GDP SECTOR COMPOSITION

I. Agricultural sector

Agriculture (a term which encompasses farming) is the process of producing food, feed, fiber and other goods by the systematic raising of plants and animals. Agricultural output is a component of the nominal Gross Domestic Product of a nation.

II. Industrial sector

Industry is the segment of economy concerned with production of goods (including fuels and fertilizers). Industrial output is a component of the nominal Gross domestic product of a nation.

III. Service sector

A service is the non-material equivalent of a good. Service provision is defined as an economic activity that does not result in ownership, and this is what differentiates it from providing physical goods. It is claimed to be a process that creates benefits by facilitating either a change in customers, a change in their physical possessions, or a change in their intangible assets. Service output is a component of the nominal Gross domestic product of a nation. Gigantic supermarkets, luxury showrooms and serviced offices are peculiar features of the advanced economies.

Fig. Relationship between GDP and the Value Added by the Different Growth Sectors

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GDP vs GNP (Gross National Product)

GDP can be contrasted with gross national product (GNP, or gross national income, GNI), which the United States used in its national accounts until 1992. The difference is that GNP includes net foreign income (the current account) rather than net exports and imports (the balance of trade). GNP adds net foreign investment income compared to GDP.

GDP is concerned with the region in which income is generated. It is the market value of all the output produced in a nation in one year. GDP focuses on where the output is produced rather than who produced it. GDP measures all domestic production, disregarding the producing entities' nationalities.

In contrast, GNP is a measure of the value of the output produced by the "nationals" of a region. GNP focuses on who owns the production. For example, in the United States, GNP measures the value of output produced by American firms, regardless of where the firms are located. Year-over-year real GNP growth in the year 2007 was 3.2%.

TYPES OF GDP & GDP GROWTH

1. Current GDP is GDP expressed in the current prices of the period being measured 2. Nominal GDP growth is GDP growth in nominal prices (unadjusted for price changes). 3. Real GDP growth is GDP growth adjusted for price changes.

World map showing GDP real growth rates for 2007


THE GDP INCOME ACCOUNT

Another way of measuring GDP is to measure the total income payable in the GDP income accounts. In this situation, Gross Domestic Income (GDI) is sometimes used rather than Gross Domestic Product. This should provide the same figure as the expenditure method described above. (By definition, GDI=GDP. In practice, however, measurement errors will make the two figures slightly off when reported by national statistical agencies.)

The formula for GDP measured using the income approach, called GDP (I), is:

GDP = Compensation of employees + Gross operating surplus + Gross mixed income + Taxes less subsidies on production and imports

Compensation 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, and 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).

Another formula can be written as this:

GDP = R + I + P + SA + W

Where, R = rents, I = interests, P = profits, SA = statistical adjustments, W = wages


STANDARD OF LIVING AND GDP

GDP per capita is often used as an indicator of standard of living in an economy, the rationale being that all citizens would benefit from their country's increased economic production.

The major advantages to using GDP per capita as an indicator of standard of living are that it is measured frequently, widely and consistently; frequently in that most countries provide information on GDP on a quarterly basis (which allows a user to spot trends more quickly), widely in that some measure of GDP is available for practically every country in the world, and consistently in that the technical definitions used within GDP are relatively consistent between countries, and so there can be confidence that the same thing is being measured in each country.

The major disadvantage of using GDP as an indicator of standard of living is that it is not, strictly speaking, a measure of standard of living. GDP is intended to be a measure of particular types of economic activity within a country.

Nothing about the definition of GDP suggests that it is necessarily a measure of standard of living. For instance, in an extreme example, a country which exported 100 per cent of its production and imported nothing would still have a high GDP, but a very poor standard of living.

The argument in favour of using GDP is not that it is a good indicator of standard of living, but rather that (all other things being equal) standard of living tends to increase when GDP per capita increases. This makes GDP a proxy for standard of living, rather than a direct measure of it. GDP per capita can also be seen as a proxy of labor productivity.

World GDP/ Capita 1-2300 A.D.


LIMITATIONS OF GDP TO JUDGE THE HEALTH OF AN ECONOMY

GDP is widely used by economists to gauge the health of an economy, as its variations are relatively quickly identified. However, its value as an indicator for the standard of living is considered to be limited. Criticisms of how the GDP is used include:

I. Wealth distribution

GDP does not take disparity in incomes between the rich and poor into account. Economists have disputed the importance of inequality as a factor in improving long-term

economic growth.

II. What is being produced

I. GDP counts work that produces no net change or that results from repairing harm. Eg: 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.

II. Alternative economic measures, such as the standard of living or discretionary income per capita better measure the human utility of economic activity.

III. Sustainability of growth

GDP does not measure the sustainability of growth. i.e. any country may achieve a temporarily high GDP by over-exploiting natural resources or by

misallocating investment. Economic growth at the expense of environmental degradation can end up costing dearly to clean

up; GDP does not account for this.

IV. Black market

Official GDP estimates may not take into account the black market, where the money spent is not registered resulting in inaccurate or abnormally low or high GDP figures.

V. GDP ignores externalities such as damage to the environment. GDP even views externalities as positive if work/production is required in response to the externalities.

VI. 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 (PPP).

VII. GDP does not capture the economic surplus between the price paid and subjective value received, and can therefore underestimate aggregate utility.

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.


ALTERNATIVES TO GDP

1. Human Development Index (HDI)

This index is the work of the United Nations Human Development Report. It calculates an annual HDI that ranks the world's countries on their achievements in three main aspects of human development: health (life expectancy at birth), knowledge (as measured by literacy rates and school and college enrollments) and standard of living (as measured by GDP per capita based on purchasing power parity.) For 2007-08, Iceland was in first place, Canada was fourth, the U.S. 12th, and Sierra Leone was last, in 177th place.

2. Genuine Progress Indicator (GPI)

The GPI was developed in 1995 by Redefining Progress, a private research institute based in California. It arrives at its Genuine Progress Indicator by taking GDP figures and then adjusts them to take into account income distribution. It adds points for household and volunteer work, and subtracts points for the costs of things like crime, pollution, car accidents & loss of leisure time. Under GPI formula, the U.S. has been basically treading water for the last 30 years.

3. Wealth Estimates

The MEW is the work of Yale University economists William Nordhaus and James Tobin. They developed their Measure of Economic Welfare back in1972 as one of the first attempts to address the shortcoming and mismeasures of GDP. It proposed accounting for such variables as household work, pollution, and spending on crime. This measure was to form the basis of several later attempts to measure well-being. Norway was at the top of its Index of Economic Well-being, while Canada was in 10th spot, the U.S. was 11th, and Spain was 14th.

4. Gross National Happiness

This set of indicators would be used to assess progress towards Gross National Happiness, which they have already identified as being the nation's priority, above GDP.

5. Happy Planet Index

The Happy Planet Index was developed by the British-based New Economics Foundation to, in their words, "show the relative efficiency with which nations convert the planet's natural resources into long and happy lives for their citizens." In other words, it doesn't really measure whether people are "happy".

HPI ranking puts Vanuatu, Colombia and Costa Rica first, second, and third. Canada is in 111th place (just below Benin), and the U.S. is 150th.


WORLD GDP

World GDP, also known as world gross domestic product or GWP - gross world product, calculated on a nominal basis, was estimated at $65.61 trillion in 2007 by the CIA World Factbook. While the US is the largest economy, growth in world GDP of 5.2% was led by China (11.4%), India (9.2%) and Russia (8.1%).

World map of GDP (Nominal and PPP), 2007 CIA World Factbook figures

Throughout the twentieth century the United States of America has dominated world gross domestic product, or World GDP.

GDP: GWP (gross world product): $65.95 trillion (2006 est.) (purchasing power parity).


INDIA GDP

The India GDP is the culmination of all the differential factors that contributes to the economy of India. India GDP reflects a consolidated report of the performance of the Indian economy. The Indian Gross Domestic Product is determined either by 'cost factor' or 'actual price' method. The growth of India GDP especially, after the 1990s was the effect of opening-up of Indian economy. This paradigm shift of Indian economy occurred in the wake of balance-of-payments crisis in the 1980s.

The Government of India opened up Indian markets to facilitate entry of private investments into the Indian markets. This change in Indian economic policy, from a highly insulated market to an open market facilitated inflow of foreign direct investment (FII) and foreign institutional investor (FII). A good number of Government of India undertakings were divested to private business house. The period after the 1990s witnessed sudden incremental growth of the annual average gross domestic product of the Indian economy and till then it used to be around 4.5% to 5%. With the meteoritic rise of Indian Information Technology, Indian service industry and the Indian BPO sector, the average Indian GDP skyrocketed to around 6%, during the period from 1988 to 2003.

From the financial year 2004 onwards the average gross domestic product of India 'at cost factor' reflected a stable growth. This period marks the meteoritic rise of gross domestic product of India and this rise was affected by service and manufacturing industry. The Indian GDP registered an impressive growth rate of 8.5% during this period and the present growth target is secured at 9.5% to 10 %.

The latest scenario of Indian gross domestic product factor is much higher than the world's annual average GDP of 5.5%. With such rate of economic growth, the Indian economy is poised to become the second largest economy after China in the year 2050.


COMPOSITION OF GDP AND LABOUR FORCE IN SELECTED COUNTRIES:

Following table shows the contribution to GDP by the distribution of labous force in developed & developing countries:

Country Year ContributioninGDP DistributioninlabourForce

Agriculture Industry Service Agriculture Industry ServiceIndia 1980 38 26 36 70 13 17

1999 28 25 46 64 16 20 Pakistan 1980 30 25 46 62 15 23

1999 26 25 49 56 20 24 Sri Lanka

1980 28 30 43 52 18 30 1999 21 28 51 49 21 30

China 1980 30 49 21 76 14 10 1999 17 50 33 74 15 11

UK 1980 2 43 54 3 38 59 1999 2 32 66 2 29 69

Japan 1980 4 42 54 11 35 54 1999 2 37 61 7 34 59

USA 1980 3 34 64 3 31 66 1999 2 26 72 3 28 69


ANALYSIS ON SOUTH ASIAN COUNTRIES

GROWTH RATE OF GDP IN SOUTH ASIA

Following graph shows the per capita growth of South Asian countries of past 8 years

Per Capita Growth Rate of GDP per Year

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SECTOR-WISE GROWTH OF SOUTH ASIAN COUNTRIES

I. Agriculture Sector y

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101214

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RELATION BETWEEN GDP & VALUE ADDED BY DIFFERENT SECTORS

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SECTORAL-WISE WORKFORCE DISTRIBUTION IN INDIA

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Workforce Structure, %

1983-84 1987-88 1993-94 1999-2000

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LIST OF COUNTRIES WITH TOP GDP IN THE WORLD The three list of countries of the world sorted by their gross domestic product (GDP), the market value of all final goods and services from a nation in a given year. The GDP dollar estimates presented here are calculated at market or government official exchange rates.

INT. MONETARY FUND WORLD BANK CIA WORLD FACTBOOK Rank Country GDP(PPP) $m Rank Country GDP(PPP) $m Rank Country GDP(PPP) $m World 64903314 World 65458750 World 65610000 1 U.S 13843825 1 U.S 13811200 1 U.S 13840000 2 China 6991036 2 China 7055079 2 China 6991000 3 Japan 4289809 3 Japan 4283529 3 Japan 4290000 4 India 2988867 4 India 3092126 4 India 2989000 5 Germany 2809693 5 Germany 2727514 5 Germany 2808000 6 U.K 2,137,421 6 Russia 2,088,207 6 U.K 2,137,000 7 Russia 2,087,815 7 France 2,061,884 7 Russia 2,088,000 8 France 2,046,899 8 U.K 2,046,780 8 France 2,047,000 9 Brazil 1,845,642 9 Brazil 1,843,601 9 Brazil 1,836,000 10 Italy 1,786,429 10 Italy 1,777,353 10 Italy 1,786,000


CONTRIBUTION BY EACH SECTOR IN TOP GDP IN THE WORLD

Rank Country GDP Agriculture Industry Service World 46660000 4% 32% 64%1 U.S 13220000 1% 20% 79%2 Japan 4911000 2% 25% 73%3 Germany 2858000 1% 29% 70%4 China 2512000 2% 48% 40%5 U.K 2341000 1% 26% 73%6 France 2,154,000 2% 21% 77%7 Italy 1,780,000 2% 29% 69%8 Brazil 1,566,253 8% 38% 54%9 Canada 1,089,000 2% 29% 70%10 Spain 1,081,000 4% 29% 67%11 India 796,100 20% 20% 60%


LIST OF COUNTRIES WITH TOP PER CAPITA GDP IN WORLD The three lists of countries of the world sorted by their gross domestic product per capita at nominal values, the value of all final goods and services produced within a nation in a given year, converted at market exchange rates to current U.S. dollars, divided by the average (or mid-year) population for the same year. The figures presented here do not take into account differences in the cost of living in different countries, and the results can vary greatly from one year to another based on fluctuations in the exchange rates of the country's currency. INT. MONETARY FUND WORLD BANK CIA WORLD FACTBOOK Rank Country GDP Rank Country GDP Rank Country GDP 1 Luxemburg 103125 1 Luxemburg 99879 1 Liechtenstein 106082 2 Norway 83485 2 Norway 81111 2 Luxemburg 104452 3 Qatar 78754 3 Iceland 62733 3 Norway 84595 4 Iceland 64548 4 Ireland 58399 4 Qatar 83152 5 Ireland 60209 5 Denmark 56427 5 Iceland 66240 6 Switzerland 58,513 6 Switzerland 55,035 6 Ireland 62,934 7 Denmark 57,137 7 Sweden 48,584 7 Denmark 57,040 8 Sweden 49,603 8 Finland 46,515 8 Switzerland 56,111 9 Finland 46,856 9 Netherland 46,041 9 Sweden 50,415 10 Netherland 46,774 10 U.S. 45,790 10 Finland 46,769 134 India 942 122 India 1,042 138 India 973


LIST OF COUNTRIES WITH TOP GDP GROWTH RATE The list of countries of the world sorted by their gross domestic product (real) growth rate shows the increase in value of all final goods and services produced within a nation in a given year -- not taking into account Purchasing power parity and taking into account inflation. It is a measure of economic development.

Rank Country GDP Growth rate 1 Azerbaijan 23.4 2 Bhutan 22.4 3 Timor-Leste 19.8 4 Angola 16.7 5 Macau 16.6 6 Armenia 13.7 7 Guinea 12.4 8 China 12 9 Afghanistan 11.9 10 Ethiopia 11.5 22 India 9


CONCLUSION

GDP, to put it bluntly, is a blunt instrument. It was designed in the wake of the Great Depression as a way of measuring the size of a country's productive output. But in the decades since, it has been wielded as a sign of economic well-being, even the happiness of the citizenry. If a country's real GDP rises by four per cent in a year, it doesn't seem to take long before you see politicians taking credit for building a "strong" economy. Times are good, and all that.

More fundamental criticisms of GDP arise when one takes a look at what it measures, and especially what it doesn't. GDP, for instance, does not measure unpaid housework and caregiving. When a maid or professional caregiver is hired, however, that does add to a country's GDP. GDP figures also do not take into account the economic value of the many hours of volunteer work.

GDP includes the costs of rebuilding after a devastating hurricane or earthquake, even though it merely restores the status quo. It also counts the cleanup of an oil spill as "production," just as it counts the billions spent fighting crime and preventing terrorism or dealing with a health epidemic.

And finally, GDP fails to take into account how a country's wealth is divided. A huge gap between rich and poor is irrelevant in the GDP scheme of things, while it clearly matters if one is talking about a healthy society. GDP is a measure of quantity, not quality.


BIBLIOGRAPHY

1. GDP presentation by Prof. Banhi Chakraborty

2. www.mapsofworld.com

3. www.wikipedia.com

4. www.cia.gov

5. www.wisegeek.com

6. www.indexmundi.com

7. www.worldbank.org


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