Sunday, March 1, 2015

National Income - Part III (new GDP method)

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Gross Domestic Product (GDP)
The value of all the finished goods and services produced within a country's border in a year is the GDP of that country. (read previous post - National Income - Part II)

It generally includes - public and private consumption, government spending, investments, and net exports (i.e., total exports - total imports).

GDP = consumption + government spending + investments + (exports - imports)

GDP is commonly used as an indicator to determine the economic health of a country.

GDP of India
Nominal GDP of India (October 2014, by IMF) is approx. USD 2.047 trillion, which makes India 10th largest economy of the world (in terms of nominal GDP).

GDP Growth
While discussing about economic health of a country, the actual GDP (in terms of monetary value) is not considered. Instead, GDP growth reflects how healthy an economy is (you often hear about GDP growth of India is say 5.5 %, but not say, USD 2 trillion)

Note that, if we talk about GDP growth, then there should be some standard GDP, with respect to which, current GDP growth will be measured. That standard is determined by economists, and the year is referred to as base year for calculating GDP growth of current year.

New GDP base year
Earlier 2004-05 financial year was used to determine the GDP growth of current financial year. On that basis, GDP growth of India for 2013-14 was 4.7 %.
It means, that if GDP in 2004-05 were say Rs. 100, then the total GDP of India in 2013-14 became Rs. 104.7.

Central Statistical Office (CSO) under Ministry of Statistics & Programme Implementation (MOSPI) has changed the base year to 2011-12 (from that 2004-05). And with respect to the GDP of 2011-12, Indian economy grew by 6.9 % in 2013-14.

Role of Inflation/Deflation
GDP is calculated with the market prices of finished goods and services of an economy (read previous post on methods of measurement). Therefore it is influenced with the inflation (or, deflation) of the economy.

Therefore, it is required to correct the GDP by removing the influence of Inflation or Deflation. Depending on this, GDP is of 2 types -

  1. Nominal GDP - GDP without adjusting the inflation or deflation influences. Therefore, it can be misleading, because inflation can make GDP look higher, while deflation can make it look lower than the actual GDP.
  2. Real GDP - GDP with adjusted (removed) inflation or deflation. It depicts the actual GDP of an economy.
Note that, in the new base year methodology, government has adopted Consumer Price Index (CPI), instead of Wholesale Price Index (WPI), to adjust the GDP.


Latest comment of Chief Economic Adviser (CEA) on "puzzling" new GDP method
Government's new GDP methodology is "puzzling" mentioned by the Chief Economic Adviser (CEA) - Arvind Subramanian (PTI - Feb 27, 2015)

He said, "I am puzzled as I said because the fact that ... especially what happened in 2013-14, that number is puzzling because that is kind of bad year, yet growth accelerated".



Hope these posts on National Income have helped you learn the concepts. If you have any query, feel free to comment or mail at bankoncepts@gmail.com

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