ABM UNIT 9

GDP CONCEPTS
Gross Domestic Product (GDP)
The size of a nation’s overall economy is typically
measured by its Gross Domestic Product (GDP). It
involves
 Counting of all the the production of goods and services
(such as – smart phones, laptops, cars etc) within the
nation’s boundary
 Finding their market value.

GDP is the market value of all the final goods

and services produced within a country for a
given time period.

1. The word “domestic” in Gross Domestic Product pertains to the

fact that only the goods and services produced within a country
are counted in the GDP.For example – an Indian company –
Haldiram produces potato chips and USA company PespiCo
also produces potato chips in India. Since both these
companies produce Chips within India – their product will be
considered for calculation of GDP of India. Similarly – Tata
motors producing Car in Gujarat is counted in India’s GDP. But,
Tata motors producing Car in UK is not counted in India’s GDP

2. Only ‘final’ goods and services are included in the calculation of

GDP. A final goods and services means goods and services
meant for final consumption (for final user). It is unlike the
intermediate goods and services which acts as component for
final goods and services.
3. Goods and Services produced during a certain period (usually
an year) is counted. In India, GDP is computed quarterly and
yearly.

Gross National Product (GNP)

GNP is another measure for National Income of the country.
Indian economy is not closed economy but an open economy.
India has transactions with the rest of the world in the form of
exports, imports loans etc. This give rise to the concept of
national or domestic Income.
In case of GDP, we calculate the market value of all the final
goods and services produced within the country.
However, It may be the case that resident of India work and
earn in some other foreign countries. Similarly, Conversely,
some production taking place within a country may be
attributed to temporary and seasonal foreign labour.
This is measured by the Gross National product.
It is measured as the GDP plus the Net Factor income from
Abroad

GNP = GDP + ‘Net’ factor income from abroad

Net Factor income from abroad = income earned by the
domestic factors of production employed in the rest of the world
– Factor income earned by the factors of production of the rest
of the world employed in the domestic economy.
For example, in case of India
Net Factor Income from abroad will be = income earned by
Indian resident in foreign countries – Income earned by
foreign resident in India.
Let us understand this through an example.
Many Indians reside and work in Saudi Arabia. They earn
their wages in the same country. The wages earned by
Indians in Saudi Arabia will be counted in the Saudi
Arabia’s GDP. It will not be counted in the India’s GDP
Similarly, Switzerland firm Nestle produces Maggi in in
India. This will be counted in the Indian’s GDP.
Gross national Product provides a way to capture the
trans boundary economic activity of nationals.
For example –
Profits earned by Chinese Company Xiaomi by selling
smartphones in India will not be included in the GNP of
India. Similarly, Profits earned by ONGC Videsh from its
subsidiaries in different countries will be included in the
GNP of India.

Net National Product (NNP)

Factors of production under go wear and tear. This wear
and tear is called Depreciation. A part of capital is used
for this wear and tear which is not used in production of
goods and services.
If we deduct depreciation from the GNP, we get is NNP
Net National Product (@Market Price) =
Gross National Product – Depreciation

GDP COMPUTATION
 1. Expenditure method
This method works on the principle that all of the
products (Goods and services ) must be purchased by
somebody , hence the value of total product must be
equal to people’s expenditure in buying thing .

GDP = C+I+G+(X-M)

Private consumption – all first time purchases of goods

and services.
Gross investment - investment in shares , banks etc
Government spending – salaries, purchases etc
(Export – import) because import is not being made in
India.

2. Income method
GDP is some total of income of individual iving in a coutry in a
given year.
Revenues earned by all the firm together must be distributed
among the factor of production as salaries , wages , profit ,
interest earning and rents .

GDP = W + P + In + R
W = salary and wages
P = profit
In = interest
R = Rent
 3. PRODUCT APPROACH
Nominal GDP : It refers to an estimate of the total value
of an economy's production and services; usually
considered over a one year period.

It is evaluated at present market prices.

Example In 2019 We produced 40 pens & 30 books.

If price of 1 Pen is Rs.10)and price of 1 Book is Rs.20.

Thus, (40 x 10) + (30 x20)

= 400+600
=Rs.1000 (It means in 2019 we added Rs.1000 to our GDP).

Suppose till 2018,Our overall GDP value was Rs. 10,000.

In 2019, we added Rs. 1000 to our GDP.Thus the GDP growth
rate is 10% .This is called Nominal GDP rate.

REAL GDP
While nominal GDP is calculated at the current market price,
Whereas real GDP is simply the value of today’s output at
some base year price.
Suppose in 2012,
Price of Pen & Book was Rs. 5 and Rs. 10 respectively.
In 2012, We produced same number- 40 pens & 30 books.
Thus, (40 x 5) +(30 ×10)
= 200+300
=Rs.500
Thus,
In 2012 we produced Rs.500 value of goods whereas in 2019
we produced Rs. 1000 value of goods.
But the important thing is we produced same quantity of
goods i.e. 40 pens & 30 books.

Remember till 2018, Our GDP was Rs. 10,000

Thus in 2019.Nominal GDP growth rate will be @ 10%
(current market price- (Rs.1000)
Real GDP growth rate will be @ 5%
(2012 price Rs.500)
SOME KEY POINTS :
(a) Central statistics office (CSO) computes the GDP.
(b) Base year of GDP calculation changed from 2004-05
to 2011- 12.
(c) Green GDP is a term used generally for expressing
GDP after adjusting for environmental damage.

Net Domestic Product at Factor Cost

Net domestic product at factor cost is also called

net domestic income . Net domestic income is the
income generated in the form of wages, rent,
interest and profit in the domestic territory of a
country by all the producers.
NDP AT FACTOR COST = NDP AS MARKET PRICE – Indirect
taxes + Subsidies

Personal Income: It is the income actually received by

the individuals or households in a country during one
accounting year, but undistributed profits of
enterprises and taxes are deducted from private
income as they are not distributed.
Personal Income = Private income – undistributed
profits – corporate profits – retained earnings of
foreign companies – taxes.

Methods for Measuring

National Income
1. Product Method : We calculate money value of all
final goods and services produced in an economy
during a year. Final goods here refer to those
goods which are directly consumed and not used
in further production process.

National Income = GDP(mp) – Depreciation +

NFIA – Inirect taxes + Govt subsidies

2.Income Method :
National income is measured as a flow of factor incomes. There are
generally four factors of production labour, capital, land and
entrepreneurship. Labour gets wages and salaries, capital gets
interest, land gets rent and entrepreneurship gets profit as their
remuneration.
National income = Wage rent + Interest + Dividend +
Undisributed profits + opening stock of public
enterprises + Direct taxes collected by government +
NFIA
3.Expenditure Method :
national income is measured as a flow of expenditure.
GDP is sum-total of private consumption expenditure.
Government consumption expenditure, gross capital
formation (Government and private) and net exports
(Export-Import)
National Income = Private consumption +
private investment + Government consumption
+ changes in stock + Net exports of goods and
services.