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GDP Gross Domestic Product is defined as the total monetary value of all completely finished goods and services within the geographical boundaries of a country within a stipulated time. Generally it is calculated on a yearly basis. • • • • Expenditure Approach. Income Approach. Production Approach. National Expenditure =National Output = National Income • 1. Production Approach: Total GDP is the sum of gross value added by institutional units that are resident in the economy (in different economic activities) plus taxes on products and import (VAT, excise tax and customs duties) less subsidies on products. • Calculation scheme is as follows: Total output (goods and services) by types of activities in market prices - intermediary consumption for generating goods and services = GDP at market prices + taxes on products and import - subsidies on products = Total GDP at market prices. • 2. Expenditure Approach: Calculation of GDP by the expenditure approach is based on expenditures incurred in a given period by institutional units that are resident in the economy. • Calculation scheme is as follows: Consumption expenditure of households + Services rendered by non-profit institutions serving households + Collective (public administration, defense, social security and safety) and personal services (education and healthcare) rendered by General Government + Gross capital formation + Changes in inventories = Total expenditure at market prices + Exports of goods and services - Imports of goods and services = Total GDP at market prices. Expenditures → GDP = C + I + G + Xn Consumption (C) • Consumer durables • Consumer nondurables • Services Investment (I) • Business investment • Residential investment • Inventory investment Government purchases (G) • • • • National State Local NOT transfer payments Net exports (Xn) • Exports • MINUS Imports • 3. Income Approach: Calculation of GDP by the income approach is based on sum of income of those institutional units who are directly involved in production of goods and services in a given period. • Calculation scheme is as follows: Employment income in the form of wages and Social benefits (including Income tax) + Mixed income received from self-employment + Total profit received by companies from economic activities + Taxes on production and import - Subsidies on production and import = Total GDP at market prices. • GDP estimates calculated by different approaches might differ as data sources are different. The differences are known as “Statistical Discrepancy”. Income → GDP ≈ W + R + I + P Labor Land Capital Entrepreneur Wages Rent Interest Profit Circular Flow Resources Land, Labor, Capital, Entrepreneurship Resource Market Resource Payments Rent, Wages, Interest, Profit Households Businesses Household Expenditures Business Revenues Product Market Goods and Services Three variations of GDP Per Capita GDP Real GDP vs. nominal GDP GDP vs. GNP Per capita GDP = GDP ÷ population • Average level of income in a nation • Not income distribution • Nominal GDP – current production at current prices • Real GDP – current production at base year prices • To convert, use the GDP deflator – GDP Deflator = (Nominal GDP / Real GDP) * 100 • GNP – total market value of all final goods and services produced in a year from factors of production (resources) owned by country’s residents – GNP is produced with the resources owned by the country (anywhere in the world). – GDP is produced inside the country’s borders. Limits of GDP Measure • • • • • • Leisure time Nonmarket economic activities Environmental quality and resource depletion Quality of life Poverty and economic inequality International GDP comparisons based on exchange rates, which can introduce bias Famously Quoted: “[GDP] does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.” Robert Kennedy Economic Growth What is it? • Steady (long-term) increase in the quantity and quality of goods and services an economy can produce Why do we care? • It affects living standards How do we measure it? • Percentage change in real GDP Determinants Availability of resources Technology Growth Productivity Trade Rule of 72 72 ÷ annual % growth ≈ Years to double value • Shows the number of years required for a variable to double at a given annual rate of growth Rule of 72 – Examples • An economy that grows at 2% per year will double its GDP in about 36 years – (72 ÷ 2 = 36) • An economy that grows at 7% per year will double its GDP in just over 10 years – (72 ÷ 7 = 10.3) • An investment that earns a 4% annual return will double in value in about 18 years – (72 ÷ 4 = 18) 2010 Growth Rates and doubling time (World Bank) • India – 72 /8.8% = 8.1 Years • China – 72/10.4% = 7 Years Components of GDP • Agriculture Sector • Industry Sector • Service Sector Agriculture Sector • • • • • • Comprises of: Agriculture Fishing Forestry Poultry farming Horticulture, etc… Industry Sector • • • • Comprises of: Mining and Quarrying Manufacturing Electricity, Gas and Water-supply Service Sector • • • • Comprises of: Construction Trade, hotels, transport and communication Financing, insurance, real-estate and business services. • Community, social personal services. Factors affecting GDP • • • • • • Government policies People spending (more or less) Level of interest Climatic conditions Political stability World environment Present GDP of India is around Rs. 105 Lakh Crores. ( US $ 1.8 Trillion) Present GDP US$ 9.24 Trillion (2013). [ Around Rs.650 Lakh Crores] CHINA v. USA GDP in the last 20 years (Billions of US$) Recent Law Changes in China • Labor Law-Dispatch Labor System • Trademark Law • Company Law • India and China are among the most important destinations for economic growth and the supremely important markets of the world economy. They are serious stakeholders in the present and future economic stability of the world. With three seventh (3/7th) of the entire world population residing in these two nations (roughly around three billion people) this region is the intense hotbed of economic activities and growth. • There is a need for strategic co-operation between the two Asian behemoths so that a meaningful economic development can be attained. Thank You!