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Measurement of growth: National Income and per capita income

10 Oct, 2018 RBI General Studies

Economic and Social Issues for RBI Grade B and SEBI Grade A

Gross Domestic Product -

Let us consider a hypothetical situation-

A US mobile manufacturer Apple has opened it’s new manufacturing unit in India for manufacturing of I-Phones. Micromax which is an Indian entity is also working in the same industry. Apple manufactures 10 phones per year and the total final cost of these phones is Rs. 10 per phone. Micromax manufactures 5 phones per year and the total final cost is Rs. 5 per Phone. There is a single supplier named as Intel, who is working in India and is the supplier for all the intermediate goods at a fixed cost of Rs. 3 per phone.

The final cost of products for all the companies is-

  1. Apple – Rs. 100.
  2. Micromax – Rs. 25
  3. Intel – Rs. 45

So, the GDP in this case will be Rs. 100 + Rs. 25 – Rs.45

while calculating GDP we have to keep these things in mind –

  1. The company which is selling it’s goods has it’s plant or the unit installed inside the geographical boundaries on India. There is no differentiation between a foreign company and an Indian company as long as they are set up in India.
  2. GDP only considers the price of the final goods after subtracting the value of the intermediate goods, Why? The answer is the intermediate goods that Intel is producing for Apple and Micromax is the final good for Intel. Hence that intermediate goods will be counted twice and the GDP figures will be an erroneous one.
  3. GDP is calculated at the Market value of the product. Whatever be the MRP marked on the product will be considered for calculating GDP.
  4. GDP is calculated during a given period of time. It is financial year for India, i.e. from April to March.

Let us come to another situation where the same company Apple is having it’s manufacturing unit in USA and it is selling mobiles built in USA to Indian market. In that condition that revenue will not be a part of India’s GDP as it is not produced within the boundaries of India.

Now we are in a position to define GDP –

Definition: GDP is the market value of all the the goods and services produced within the geographic boundaries of a country during a specified period of time, normally a year.
  • In India, contributions to GDP are mainly divided into 3 broad sectors – agriculture and allied services, industry and service sector.
  • GDP is the measure to be used while calculating the growth of an economy. The percentage change in the GDP with respect to the previous year is called as growth of the economy for that F.Y.
  • Current Account Deficit is also defined with respect to GDP. The threshold of Current Account Deficit is determined at 3 % of GDP in India.
India’s GDP growth predictions –

 

S.No.
Organization
2018-19
2019-20

1.

International Monetary Fund

7.3%

7.4%

2.

World Bank

7.3%

7.5%

3.

United Nations

7.6%

 

4.

Fitch

7.3%

7.8%

5.

Moody’s

7.5%

7.5%

6.

ADB

7.3%

7.6%

7.

RBI

7.4%

7.5%

 

Gross Value Added -
  • There is a concept called as GVA (Gross Value Added) used by the economies to show the growth rate in a particular sector. As GDP is a wholesome phenomenon and take economy as a whole, GVA can tell us more clearly about the performance of a particular sector of the economy.
  • Gross value Added is the addition of basic prices of all the intermediate goods added to form a final good. Like in the case mentioned above Intel acquired the raw materials to build the chips and processors from the market at Rs. 1 per mobile. Intel now converted the raw material in to a processor and sold it to Apple at Rs. 5 per mobile. Now Apple put this chip inside it’s phone along with other material and finally sold it for Rs. 10 per phone.
  • So now the GVA will be Rs. 1 i.e. the basic cost of the Raw material + Rs. 4 (the basic price of the value added from intel after purchase from the raw material seller) + Rs. 5 (the basic price of value added from Apple for final consumption) = Rs. 10.
  • Gross value is the total output (10 + 5 + 1 = 16 (at all the steps)) – total intermediate consumption (5 + 1 = 6) = Rs. 10.
Definition - Gross value added (GVA) is defined as the value of output less the value of intermediate consumption. 

Factor - Factors of production describes the inputs that are used in the production of goods or services in order to make an economic profit. The factors of production include land, labor, capital and entrepreneurship.

The price for procuring and implementing all the factors is called as factor price.

What are Basic Prices?

For any commodity the basic price is the amount receivable by the producer from the purchaser for a unit of a product minus any tax on the product plus any subsidy on the product.

When we add the taxes given by a company for production and subtract the subsidies received by the company (for promotion of exports or a particular sector like textiles, leather or merchandise etc. by the govt.) from the GVA at factor prices then we will get GVA at Basic Price.

GVA  at factor cost + Production taxes -  Production subsidies = GVA at basic  prices

 

Calculation of GDP –

1. By Production Method –

  • The production, or value added, approach consists of adding the gross value added of all industries.
  • For each industry, this involves first determining its output and then subtracting the goods and services that were used up in the process of generating that output.
  • The goods and services that are used up are referred to as intermediate consumption. 
GDP  at market prices = GVA at basic prices + Product taxes- Product subsidies

2. Expenditure Method: 

  • This measures the total expenditure incurred by all entities on goods and services within the domestic boundaries of a country.
GDP (as per expenditure method) = C + I + G + (X-IM)
  • C: Consumption expenditure – Final goods and services inside India
  • I: Investment expenditure – Investment made in financial instruments, Real estates etc.
  • G: Government spending – In terms of subsidies, salaries to employees, loan repayment etc.
  • (X-IM): Exports minus imports that is net exports. 

3. Income Method: 

It measures the total income earned by the factors of production, that is, labour and capital within the domestic boundaries of a country. 

Effect of Inflation on GDP –
  • The figures that are calculated at the end of the F.Y. may show a swelling number because of Inflation. Inflation makes the cost of intermediate goods or factor costs grow up also the final good’s cost can increase in turn makes the GDP figure higher than the actual.
  • Because of this reason the GDP is adjusted for the Inflation factor.
Nominal GDP - is the market value of goods and services produced in an economy, unadjusted for inflation (It is the GDP measured at current prices).
Real GDP - is nominal GDP, adjusted for inflation to reflect changes in real output (It is the GDP measured at constant prices).

 

Base Year 
  • It is the benchmark year and the prices of Goods and Services in this year is taken as benchmark for adjusting the prices in any given year.
  • The Base Year in India is currently 2011-12 and the government will change the base year for calculation of GDP to 2017-18, which is likely to come to effect by 2019-20. 
The Gross Domestic Product (GDP) deflator 

It is a measure of general price inflation. It is calculated by dividing nominal GDP by real GDP and then multiplying by 100.

GDP deflator reflects the prices of all domestically produced goods and services in the economy

GDP Deflator = [Nominal GDP / Real GDP] X 100

 

Net Domestic Product (NDP)

Net Domestic Product is the Net of GDP adjusted after subtracting Depreciation happened in factors of Production while producing Goods and Services.

An increase in NDP denotes the advancement in the Technologies of production so that there is less wear and tear and hence less depreciation.

NDP = GDP – Depreciation

 

Gross National Product –
  • GNP of a country is the GDP added with the net income from abroad.
  • The net of all the incomes from abroad is negative for due to lesser export than the import from the other countries.

The income from abroad will include –

1. Private Remittances-

Remittances that the Indian nationals residing outside the country sent to India minus the remittances goes outside of India, sent by foreign nationals residing in India. This is always positive in India as a large Diaspora of Indian nationals are living all over the world for better employment opportunities.

News – According to the World bank, India retained the top position as recipient of remittances with its diaspora sending about USD 69 billion back home in 2017-18.

2. Interest paid on External Loans –

As India has been a Net Borrower from the world so naturally they have to pay more interest than they receive in an year.

3. External Grants –

Being in a category of a Developing country India is a net negative receiver of Grants from Bigger countries and UN bodies.

GNP = GDP + (- Net Factor Income from abroad)

 

Net national Product –

When GNP is adjusted with depreciation it gives out the Net National Product.

NNP =  GNP - Depreciation
National Income – NNP is considered as the National Income of a country.       
Net national income can be defined as the net national product minus indirect taxes.

 

Costs of an Economy –

1. Factor Cost – The total cost of all the factors (interest on capital, cost of Land, cost of Labour, cost of Electricity etc.) incurred by the producer in producing a good is called as Factor Cost.

2. Market Cost – When we add Indirect Taxes (GST etc.) to the Factor we get the Market Cost of a good.

The National Income is calculated on Market cost in India since 2015.

Prices of an Economy-

1. Constant Prices – The prices that are considered as a benchmark and calculated at the Base year.

 

2. Current prices – When the prices are inclusive of present day inflation then they are current Prices. Denoted as MRP (maximum retail Price) of a good.

The National Income is calculated on constant prices in India.

National Income at Factor Cost = NNP at Market Prices – Indirect Taxes + Subsidies

 

Per Capita Income –

When we divide the National Income by the total population of India we will have the Per Capita Income of India.

Per Capita Income = National Income / Total Population

India's per capita income grew at a pace of 8.6 News -per cent to Rs 1,12,835 during the fiscal ended March 2018 

Purchasing Power Parity (PPP) –
  • Purchasing power parity (PPP) compares different countries' currencies through a "basket of goods" approach. According to this concept, two currencies are in equilibrium or at par when a basket of goods (taking into account the exchange rate) is priced the same in both countries.
  • It aims to determine the adjustments needed to be made in the exchange rates of two currencies to make them at par with the purchasing power of each other. In other words, the expenditure on a similar commodity must be same in both currencies when accounted for exchange rate. 
  • For an example a pair of shoes costs Rs 2100 in India. Then it should cost $30 in America when the exchange rate is 70 between the dollar and the rupee.
Pointers from Economic Survey for GDP Growth
  • GDP growth expected to be between 6.5 and 6.75 per cent in 2017-18.
  • Real GDP growth expected at 6.5 per cent in 2017-18.
  • GVA growth at basic prices is expected to be 6.1 per cent in 2017-18.

 

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