Download gross domestic product

GROSS DOMESTIC
PRODUCT
Definition
• GDP refers to the market value of final goods
and services produced in an economy in a
given period of time.
NOMINAL Vs REAL GDP
• Value of the final goods is measured by
the price of the final good = P * Q.
– Above relationship says that the GDP can
grow with no change in Q.
– Hence P should be kept constant while
measuring GDP. (Real GDP)
Calculation of Real & Nominal GDP
Goods / P0
Services
X1
2
Q0
P1
Q1
40
3
60
X2
8
90
10
150
X3
80
100
90
110
X4
70
120
80
130
Calculation of GDP:
• GDP for Base Year = 40*2 + 90*8 +
100*80 + 120 * 70 = 17200
Nominal GDP: (No Constants)
• GDP = 60*3 + 150*10 + 110*90 + 130*80
= 21980
Real GDP: (Price constant)
• GDP = 60*2 + 150*8 + 110*80 +130 *70
= 19220
Growth in Nominal GDP:
Growth GDPn = 21980-17200/17200*100
= 27.79%
Growth in Real GDP:
Growth GDPr= 19220-17200/17200*100
= 11.74%
Deflator:
GDP Deflator = GDPn/GDPr * 100
= 21980/19220 * 100
= 114.36 = 14.36%
GDP & GNP
• GDP refers to the value of final goods and
services produced within the country. It does
not matter if the producers of these goods
and services are residents or non-residents.
(INFOSYS in U.S)
• GNP refers to the goods and services
produced by the country’s residents. It does
not matter in which part of the world the
production is taking place, the producers
should be Indian residents. (IBM in India)
GDP Measurement
Expenditure Method
•
Measures the expenditure or total spending on
domestically produced final goods and services
in an economy.
Four Components needed:
1. Consumption Goods: (C)
Expenditure on consumption goods like food,
clothing etc (Consumer Non-Durables) and Air
conditioners, TV’s, Cars etc (Consumer Durables).
Services like haircut, laundry and host of other
services.
2. Investment Goods: (I)
Includes addition to stock of capital like
machinery, equipments etc and investment in
services like consultancy services and financial
services etc.
3. Government Expenditure : (G)
Expenditure on final goods and
investment goods by the government is
taken into consideration.
4. Imports & Exports: (X-M)
Expenditure on goods during exports
and imports.
GDP = C + I + G + (X-M)
Output Method
• This method adds up the value, expressed
in market prices, of all goods and services
produced in the economy.
Eg:
A (Produces raw material)
1000
Value added = 1000
B (Uses raw material to produce a product)
Value added = 500
C (Retailer sells the product)
2000
Value added = 500
1500
Income Method
• Factors of production:
– Payment for land, say rent (r)
– Payment for labor, say wages (w)
– Payment for capital, interest (i)
– Payment for organization, profit (p)
AN EXAMPLE
Stage of
Production
Sales
Receipts
Cost of
Intermediate
Products
Value Added Factor
Incomes
WHEAT 24
0
24
r+w+i+p
FLOUR 33
24
9
r+w+i+p
DOUGH 60
33
27
r+w+i+p
BREAD 90
60
30
r+w+i+p
TOTAL
117
90
207
Using Expenditure method:
GDP = Sum of sales receipts – Sum of costs
intermediate products
=207 – 117 = 90
Using Output Method:
GDP = Sum of the value added at each step.
= 90
Using Income Method:
GDP = 90 = r + w + i + p
of
FACTS
According to the data released for the year
2006-2007, India's GDP grew at an
impressive 9.2 per cent. The share of
different sectors of the economy in India's
GDP is as follows:
Agriculture - 18.5 %,
Industry - 26.4 % and
Services - 55.1 %
Conclusion
• In reality, because of different data sources and
estimation errors involved, the GDP arrived at
through the three different methods give similar but
not identical results. Some adjustments, usually, are
carried out to arrive at a common measure.
• Though the end result of all the three methods is a
common measure of GDP for the economy. Each
method has specific use depending on the purpose
of analysis of GDP data.
References
• LINKS
– http://www.economywatch.com/world_economy/world-economicindicators/world-gdp.html
– http://www.economicswebinstitute.org/glossary/gdp.htm
– http://www.econedlink.org/lessons/index.cfm?lesson=EM225&pa
ge=teacher
– http://www.cftech.com/BrainBank/FINANCE/GDP.html
• BOOKS:
– Macro Economic Policy. By, Shyamal Roy.