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[Economy] 3 Methods of calculating GDP Mrunal

[Economy] 3 Methods of calculating GDP

Got this question from mail, what are these income,production and expenditure methods in calulating GDP?how do terms like NNP, NDP, GNP,GDP,NNPFC,NNPMP DIFFER FROM EACH OTHER. what is difference between gdp at constant prices and current prices. its very confusing Ill deal with each question in one post. First, lets refresh the concepts again.

GDP (Gross Domestic Product) means,

Money value of everything you produce within your country. (Domestic=within country). Everything means products and services.

GNP (Gross National Product) means,

The Money value of everything you produce within your country PLUS your income from abroad. Anil Kapoor goes to America, get 5 million dollar$ to play baddie in Mission Impossible 4, but sends that money to India = counted in Indias GNP. But with same logic, Cricket Coach Gary Kirsten gets 50 lakh rupees from BCCI, and sends it to his family in S.Africa, youve to deduct it from Indias GNP. (South Africans will count it in their GNP) Similarly, Americans will subtract the dollar value of Anil Kapoors remittance to India while counting their GNP. So, whatll be the (stupid) formula? Gross National production=Money value of everything produced within India+Incoming money from outside-Outgoing money to abroad. Or you can simply say GNP = GDP + incoming money from abroad Outgoing money to abroad.

How GDP calculated and what is are these income, production and expenditure methods.

GDP is calculated by three methods.

Theoretically all three of them should give same final number, but in reality there will be slight difference between each of them. #A: EXPENDITURE METHOD OF COUNTING GDP Here you count the money spent by everyone. So How to make a technical formula? Ask yourself, where is the money changing hands? There are five components of that.

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[Economy] 3 Methods of calculating GDP Mrunal

#1: CONSUMPTION BY PRIVATE CITIZENS [C]

like you and me buying (overpriced) daal, vegetables and milk (courtesy: Sharad Pawar). I buy your second-hand bike for 15,000 Rupees, should we including it in the consumer Expenditure (C) ? Nope. Because the bike Is not produced again.

Second hand products are not counted When you had bought that bike for Rs.30000, 10 years ago, we had counted that money in that years GDP. So second handproduct sale money cannot be counted in this years GDP. Now, I buy your second-hand bike from an auto dealer, (who gets Rs.1000 Commission) should we include it in the (C)? Hell Yes, because he sold his service to me uniquely. Every time he sells a second hand product, although no new product is created but new service is delivered by him. WHAT IF SAME 1000 RUPEE NOTE IS CHANGING HANDS?

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[Economy] 3 Methods of calculating GDP Mrunal

Each service or product has separate value even if same currency note is used to purchase it I gave a note of Rs.1000 to that dealer as part of his brokerage (dalaali) and he gives the same Rs.1000 note to the electricity company for his monthly bill. Same Rs.1000 note is changing hands so is our GDP =Rs.1000? Nope. GDP is the money value of everything produced within India. So brokerage service is Rs.1000 separately and the electricity produced is also worth Rs.1000 separately. Therefore, Even as same 1000 rupee note is given to both parties. Total GDP=1000 brokeage+1000 electricity bill=Rs.2000 If electri.co gives that 1000 rupee note to its peon as salary, then again it has to be counted. Because peon sold his unique service separately to the company. So in that case Total GDP =Brokerge+Electric bill+peon^ salary=Rs.3000
#2: Investment [I]

People investing in sharemarket, putting money in banks etc.

#3: Government spending [G]

Like buying (overpriced) sports equipment from Kalmaadis associates during Common wealth games. Government paying salary to staff, buying new tanks and missiles..everything.
#4, 5 :Export & Import [X & M]

Money we get from export is added. You remember that GDP means Money value of everything we produce within India. So if we import something, it has to be subtracted, because it is not produced within India. So formula (for ease In remembering)
GDP = Consumer+Investor+Governer + (eXporter iMporter)

Technically correct formula:

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

#B: Income Method of counting gdp Here you count everyones income. But some people may be running business in credit (udhaari), sometimes payments are delayed. So may not give the full picture for the given year. #C: Production method of counting gdp Total money value of everything produced (value added at each stage) 1. 2. 3. Farmer produced Wheat and sold 100 kg of it @ 2000 Rs. (Original value) Flour mill, purchased it, grinded it and sold the flour to baker @ 2500 Rs. (+500 value added to previous purchase) Baker made breads, cookies and biscuits and sold the total production @3500 Rs to its final customers. (+1000 value added to previous purchase)

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to previous purchase)

[Economy] 3 Methods of calculating GDP Mrunal

what is total GDP here? 2000+2500+3500=8000 Rs? Hell no! Youve to see the value added. So, total money value of this line is: 2000+500+1000=3500. Not all of the wheat goes into Bakers oven. Some of it will go in making beer, some in a normal household for making roti and so on. Youve to track the value added in each different line. To be continued GDP at nominal price, Market price, Factor Cost, etc.etc.etc. Previous Posts
[Economic Survey Ch2] Demographic Dividend, Employment, Labour reforms, gist of [Economic Survey Ch1] Introduction, GDP FC MC relation (part 1 of 3) [Economic Survey Ch1] Investment, Savings, Gold Rush, Inflation Indexed Bonds (Part 2 of 3) [Economic Survey Ch1] Agriculture challanges, tax to GDP, steps by Government (part 3 of 3) [Economy] Rangarajan Gas Pricing, Production Sharing Contract (PSC), APM, NonAPM, issues, recommendations [Economy] EPFO: Compulsory UID, Investment in AAA Corporate bonds, Air India [Economy] Geographical Indication GI-tag: Features, Issues, benefits, Madurai Malli, Meerut scissors [Economy] Banking Ombudsman: Meaning, functions, appointment, reforms explained [Economy] Dedicated Freight Corridors (DFC), High Speed Rail Corridors, Rail Tariff Regulatory Authority, Issues, Reforms in Indian Railways [Economy] Banking Business Correspondents Agents (BCA): Meaning, functions, Financial Inclusion, Swabhimaan, Common Service Centres (CSC)

35 comments to [Economy] 3 Methods of calculating GDP

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sanjeevMISHRA
Reply to this comment Your presentation is very nice. That is, simple to understand and remember! Thanks!

zico
Reply to this comment mrunal sir,i have a query..we know that GDP means Money value of everything 'PRODUCED WITHIN' India..then why should we add the spending on tanks and other weapons bought by the govt which r produced in other countries????

Mrunal Patel ||

Reply to this comment

@zico No we are only calculating goods and services produced in our country only.

Nirmal
Reply to this comment @mrunal :- I must say that i understood everything what my sir cannot explain in 3 months :) Thanks a lot

Mrunal Patel ||

Reply to this comment

4/8

You've honored me with this complement!

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You've honored me with this complement!

[Economy] 3 Methods of calculating GDP Mrunal

The Heart writter

Reply to this comment my question is again the same HOW U CAN BE SO SMART..???????

Naba
Reply to this comment Well explained Mrunal. I have a little doubt though. In the expenditure method of calculating GDP can u count Anil Kapoor's income as u had done in calculating GNP. After all aren't we exporting his skills/services to get that money into the country? I know a question along the similar lines was asked but i couldn't relate the answer. Thanks anyway mate.

Naba
Reply to this comment Thanks Mrunal. I have a little doubt though. In the expenditure method of calculating GDP can we calculate Anil Kapoor's income as u had done in calculating GNP. After all aren't we exporting his services/skills to get that money into the country. I know a question along the same lines was asked but I cudn't relate to the answer. Thanks anyway mate

Vikas Shakyawar
Reply to this comment @mrunal sir: thnx for this awesome presentation.by reading this presentation..terms like .. GNP,GDPseems like very easy terms .

Vikas Shakyawar
Reply to this comment @mrunal sir: thanks for this awesome presentationafter reading this terms GNP,GDP,..seems very easy.

ARNAB CHATTERJEE
Reply to this comment Its a noble endeavourI feel like appreciating..what should b the approach if one wants to appear for state level civil service exam??

durga
Reply to this comment its really awesome the way GDP,GNP have been explained were really fantasticn nobody can forget if anyone teaches like thisappreciating u a lot sir, hope to see many more explicit explanations

neeraj kumar ahlawat

Reply to this comment the way of explanation by quoting example is awsesome u r superb sir

renu
Reply to this comment sir, plz tell me one thing what is national income?

sharma
Reply to this comment i am a faculty for upsc in pune and teach economics, am constantly following your posts all the time. you are smart, have a sense on need from the people so do i. the only difference in us is i speak and tech and you type and express, which requires a lot of commitment for the way you doing it. WHATS THE SECRETE BEHIND HUH? WHAT MAKE YOU SO CONSTANT FOR WHAT YOU DO? EXPECTING THE ANSWER.. AND ALL THE BEST, YOU HELPING UNCOUNTABLE AUDIENCE OUT HERE.
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ANSWER.. AND ALL THE BEST, YOU HELPING UNCOUNTABLE AUDIENCE OUT HERE.

[Economy] 3 Methods of calculating GDP Mrunal

sunny roy
Reply to this comment u r g8 ,how u do this.

Nihtiyana
Reply to this comment Thank you so muche. Seriously easy to understand and to the point. :)

vilas tandel
Reply to this comment thanx sir awesome finaaly understood gdp gnp

saiteja
Reply to this comment Sir, a bike manufactured for 30000. But after one year seller sold it for 20000. so value reduced.My question is in this case how to calculate using 3rd model?

pramod
Reply to this comment hi mrunal, l am new to your blog na i have a question in todays newspaper jaipal reddy has said that anyone who holds oil min will be frustrated because india imports 75% of the oil and not even god can explain why and who is increasing oil prices when there is no disconnect between demand and supply please help on this though i lnow that when dollar becomes expensive oil pices go up but still i need a thorough details on this topic. Thanks

nishu koul
Reply to this comment Hi mrunal sir, thanx for ur simple notes on economy , you have made it quite easy to understand the economys different concepts in a laymans language

Anurag kumar
Reply to this comment your articles are very easy to understand and remember..than you so muchplease keep up the good work:)

Nuttan Abhijan Swain

Reply to this comment Mrunal sir.u r doing a great jobmaking things simpleam a regular visitorin a couple of days,my economy basic ideas turned into a shapethnk u so much

prabhu
Reply to this comment you are doing a humble contribution to the aspirants who are struggling for years or months without knowing whom to ask certain queries. my sincere heart felt thanks for all the work of yours.

Abdullah Javed
Reply to this comment Mrunal, how can investing in shares or putting money in bank account be counted in GDP?
mrunal.org/2011/04/economy-3-methods-of-calculating-gdp.html

wikipedia says-

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wikipedia says-

[Economy] 3 Methods of calculating GDP Mrunal

In contrast to its colloquial meaning, Investment in GDP does not mean purchases of financial products. Buying financial products is classed as saving, as opposed to investment. This avoids double-counting: if one buys shares in a company, and the company uses the money received to buy plant, equipment, etc., the amount will be counted toward GDP when the company spends the money on those things; to also count it when one gives it to the company would be to count two times an amount that only corresponds to one group of products. Buying bonds or stocks is a swapping of deeds, a transfer of claims on future production, not directly an expenditure on products. please clarify

Abdullah Javed
Reply to this comment in my opinion only the service charges of bank or the brokerage on shares bought must be considered

sushil dhir
Reply to this comment @mrunal ..thnks bro.could u plz help to understand the concept of gdp in form of different taxes what type of taxes it include

Nitijita
Reply to this comment I salute your efforts..!!..really noteworthy work you are doing

priyanka shukla
Reply to this comment sir,you r doing really a commendable job.all the write ups r really helpful.thanks a tongod bless!

irshad shaikh
Reply to this comment sir are fiis and fdi calculated while calculating,gnp ,nnp or national income?????

AVINASH
Reply to this comment Murnal sir,my general knowledge is nill. i want to improve myself . i want learn from the basics but i am really confussed and i am really not able to make it out. so can you please suggest me any books or magazines or website through which i gain information.

Learner
Reply to this comment Theoretically speaking, will tax increase effect GDP?

Ranveer Singh
Reply to this comment You make every topic looks so simple ..Just awesome :)

Rohan
Reply to this comment I started a new hobby as reading Mrunal.org various post on Economics and Everything. Courtsey :Sharad Pawar Lolz Thanks mrunal for wonderful presenation, God bless You.

Rohan
Reply to this comment I started a new hobby as reading Mrunal.org various post on Economics and Everything. Courtsey :Sharad Pawar Lolz Thanks mrunal for wonderful presenation, God bless You
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