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Pratik

Gupta
Indian Economy for IAS by Pratik Gupta

Calculation of GDP as per the New Method


(Economic Survey 2014-15)
GDP
The gross domestic product (GDP) is one of the primary indicators used to
measure the health of a country's economy. It represents the total rupee value
of all goods and services produced over a specific time period; by this one can
think of it as the size of the economy. Usually, GDP is expressed as a
comparison to the previous quarter or year. For example, if the year-to-year
GDP is up 3%, this is thought to mean that the economy has grown by 3% over
the last year.
Measuring GDP is complicated (which is why we leave it to the economists),
but at its most basic, the calculation can be done in one of two ways: either by
adding up what everyone earned in a year (income approach), or by adding up
what everyone spent (expenditure method). Logically, both measures should
arrive at roughly the same total.
The income approach, which is sometimes referred to as GDP (I), is calculated
by adding up total compensation to employees, gross profits for incorporated
and non-incorporated firms, and taxes less any subsidies. The expenditure
method is the more common approach and is calculated by adding total
consumption, investment, government spending and net exports.
As one can imagine, economic production and growth, what GDP represents,
has a large impact on nearly everyone within that economy. For example,
when the economy is healthy, you will typically see low unemployment and
wage increases as businesses demand labour to meet the growing economy. A
significant change in GDP, whether up or down, usually has a significant effect
on the stock market. It's not hard to understand why: a bad economy usually
means lower profits for companies, which in turn means lower stock prices.
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Investors really worry about negative GDP growth, which is one of the factors
economists use to determine whether an economy is in a recession.
Changes in the GDP Calculation by Govt. of India by Example
Say only 5 Maaza are made in economy (Consider in 2014), Value of 5 Maaza
i.e. Rs 100 will be our GDP.
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CONSTANT VS CURRENT PRICE:

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Pratik Gupta
Indian Economy for IAS by Pratik Gupta

In 2015, Price of Maaza comes out 105 i.e 21*5. Let us consider this 1 Rs
increase as inflation. Now
GDP at CURRENT PRICE will be Rs. 105, but GDP at CONSTANT PRICE will be Rs.
100, i.e., adjusted for Inflation.
FACTOR COST VS MARKET PRICE:
Next is difference between Factor cost and Market price,
Suppose value of Maaza at "factory gate" is Rs.17 and till it reach retail shop in
market, Tax is added and subsidies are subtracted to its price Say 17 + 3
(Excise) - 0 (Subsidies) = RS 20.
Prior to recent calculation changes in GDP:
Earlier to have a real outlook, CSO i.e Central Stats Organisation was giving us
national figure of GDP @ factor cost @ constant price. That in our example will
be Rs 17 (Price of Maaza at factory gate) * 5

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= Rs 85.

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Now Value of GDP after revision has been given at GDP @ Constant price @ giam
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Market price i.e GDP @ Constant market price. So, Value in our example will be
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= 20 * 5 = Rs100.
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How currently will CSO calculate GDP figure which is mentioned in Economic
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Survey:
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Following formula will help us reach to our goal of calculating GDP


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GVA at basic prices + product taxes - product subsidies = GDP @ Market price
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@ Current price
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Where GVA is Gross value added taken at basic price.


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First let me state same example: say, material for making 5 Maaza costing
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Rs.30 and After making them they were sold at Rs. 100 market value. Now, 100
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- 30 = Rs 70 will meet the company's employee income, bills, expenses etc., &
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what remains will be company's profit.


In other words Rs. 70 will act for, CE i.e compensation of employees; OS:
operating surplus; MI: mixed income; and, CFC: consumption of fixed capital

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Pratik Gupta
Indian Economy for IAS by Pratik Gupta

CE will be salaries of employees


Operating surplus is earning of company without paying taxes and deducting
depreciation
CFC is simply depreciation i.e how much Maaza making machine has
depreciated or wear and tear.
Coming back to GVA,
Definition: value of an output (5 Maaza i.e., Rs. 100) less the value of inputs
(Value of Inputs i.e 30, raw material)
or
GVA at basic prices = CE + OS/MI + CFC + production taxes less production
subsidies
Earlier we have seen difference between market price & factor cost, i.e.,

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subsidy and taxes on PRODUCT, not PRODUCTION

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But, What is this Basic price?

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Come back to concept of factor cost, When we exclude tax and add subsidy
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from market price of product we get factor price. But certain tax and subsidies
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already comes into scenario when the PRODUCTION was happening, say Taxes
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like land revenues, stamps and registration fees and tax on profession &
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Subsidies on Production like subsidies to Railways, input subsidies to farmers,


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subsidies to village and small industries, administrative subsidies to


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corporations or cooperatives.
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So GVA at basic price will include these PRODUCTION taxes and subsidies.
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Again writing, PRODUCT taxes or subsidies are paid or received on per unit of
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product, hence decide market price.


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Now we will derive our value of GDP @ Constant market price:


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Σ GVA at basic prices (i.e., Add all GVA of all production units of all sector) +
product taxes – product subsidies = GDP @ Current price @ Market price
So if we take out Inflation:
Σ GVA at basic prices + product taxes - product subsidies = GDP @ Constant
Market Price (Which is our newly calculated GDP mentioned in ECO survey).
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Pratik Gupta
Indian Economy for IAS by Pratik Gupta

Q) If we take out our Raw material value i.e., Rs 30, won't our GDP show a
Shrunked figure, or in our example if we deduct our raw material price our
GDP will come from 100 to 70.
A: Kindly note, Rs 30 will also be added as Maaza brought this product from
another production unit, which will be income for that production unit.

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India’s GDP in US $
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