3 Methods of Calculating GDP - Mrunal

2/8/2014 [Economy] 3 Methods of calculating GDP - Mrunal
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[Economy] 3 Methods of calculating GDP
CSAT

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.

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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.

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
How GDP calculated and what is are these
income, production and expenditure
methods.
H
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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.
#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
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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 hand-product 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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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
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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:

#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. Farmer produced Wheat and sold 100 kg of
GDP(Expenditure)=C+I+G+(X-M)
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it @ 2000 Rs. (Original value)
2. Flour mill, purchased it, grinded it and sold
the flour to baker @ 2500 Rs. (+500 value
added to previous purchase)
3. Baker made breads, cookies and biscuits
and sold the total production @3500 Rs to its
final customers. (+1000 value added to
previous purchase)
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.
Previously in this category
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Roshani
30/05/2013 at 00:02
Reply
Finally got these GDP and GNP.
jogesh
15/06/2013 at 10:14
Reply
mrunal u r blog is uber useful n i really like the economy
part .. the way u explain things is remarkable . u make
life easier when it comes to understanding economy
Praveen
20/06/2013 at 12:28
You said that
GNP = GDP + incoming money from abroad Outgoing
money to abroad.
Reply
But then again you said GDP(Expenditure)=C+I+G+(X-M)
where x and M are incoming money from abroad and
Outgoing money to abroad, which is contradicting the
statement that GDP and GNP are different except for
imports and exports.
Alok
29/08/2013 at 20:55
Reply
Praveen,
It gets simpler, if you see GDP and GNP in their
own contexts.
1- GDP is estimated value of the total worth of a
countrys production and services, on its land,
by its nationals and foreigners, calculated over
the course of one year.
However, GNP is estimated value of the total
worth of production and services, by citizens of
a country, on its land or on foreign land,
calculated over the course on one year
2- Simply saying Anil Kapoor going abroad
working for MI-4 will not be counted in our GDP
instead, it will be counted in GNP . However,
Gary Kirsten gets 50 lakh rupees from BCCI will
be counted in our GDP and not in GNP.
Now, a countrys GDP is a good parameter for
analysing the countrys economy locally but for
global analysis and standing of a country you
would require GNP value instead.
Hope, i helped.
Sailesh
21/03/2014 at 00:53
Reply
Thanks for very nice explanation.. little
doubts of mine also removed
Sailesh
21/03/2014 at 00:53
Reply
Thanks for very nice explanation.. little
doubts of mine also clarified
prakash
25/06/2013 at 15:34
Reply
so nice
abhi
29/06/2013 at 23:11
Reply
sir will u analyze the upsc changed syllabus, especially
on world history.& also will u provide some notes(in ur
humorous ad lucid way),on Development processes
and the development industry- the role of NGOs, SHGs,
various groups and associations, donors, charities,
institutional and other stakeholders.eagerly waiting
Harsha
05/07/2013 at 16:45
Reply
For the forthcoming RBI GRADE B exam For Economy
and Current affairs How many months Backdated
information should i be covering from a exam
perspective for August 2013 Exam
Sumeet
08/07/2013 at 01:09
Reply
This is the best website to understand everything about
the Indian economy.
goutham
22/07/2013 at 09:20
Reply
sir doubt!! which method is currently used by our
country..?
and which method is more easy to calculate..?
aravind
24/07/2013 at 08:24
Reply
nice one sir ji
sanjaya
25/07/2013 at 16:03
Reply
hey thanks a lot u have explain it in such a way by
including instances a lay man will be get it clearlybe
continue
Arvind
31/07/2013 at 12:01
Reply
finally i learnt to calculate GNP
kishan
06/08/2013 at 19:31
Reply
Sir, Your article is very useful and informative. thank you
NILADRI GARAI
12/08/2013 at 00:56
Reply
The concept given in NIOS ECONOMICS START UP
MATERIAL L-11.3 MEANING OF NATIONAL is
contradicting with the concept given here although this
concept matches with NEW NCERT CLASS XII
MACROECONOMICS 2.3.chapter 2.3 named some
economic identities page 23).
Amanda
12/08/2013 at 19:54
Reply
I really like your blog, it makes me easy for me to learn.
Ive been confuse a little.
puneeth
20/08/2013 at 22:06
Reply
i really like your blog, it makes me easy for me to learn.
Ive been confuse a little.
saket shandilya
23/08/2013 at 23:33
Reply
we say gdp is 4.8 percent now 4.8 percent of what????
Alok
31/08/2013 at 10:17
Reply
Thats not gdp .. thats actually GDP growth rate
calculated annually YoY(Year over Year) or
quarterly QoQ(Quarter over Quarter)
durgesh kumar singh
12/09/2013 at 16:14
Reply
mrunal sir a lots of thanks to teach in such a easiest way
,the fundamentals of gdp nd calculation of it.
Sridhar
18/09/2013 at 11:08
Reply
Mrunal Great work, your content on GDP helped me lot
to understand the concept. want you to continue the
GDP chapter further for depth understanding.
Thanks
Pankaj
20/09/2013 at 17:57
Reply
Why GDP is shown as our growth rate axept NNPfc?????
ADARSH SINGH
27/09/2013 at 13:00
Reply
GDP NDP GNP etc etc:-these all we calculating to see
the economic condition of country in different way.
New thing is to learn here is that the most of the
countries are following same method to calculate
GDP,NDP,GNPdo u want to know why ????? bcz
most of the country has taken copyright for this
calculation from UN(United nation) country.thats the
reason allmmost all countries are following same
method.
Now a days this cocept (GDP,NDP,GNP) are adepting by
company alsoyes.they call this GVA,NVA & EVA.
There are very interesting and value added thing for
those who are doing Finance,Marketing ..
tenc
27/09/2013 at 16:00
Reply
Thank you Murnal Sir.you explaining economy in
simplest way,which look complex when i read books and
Surf internet,because lot of things are dumped there.
ashish
27/09/2013 at 23:24
Reply
sir! i want to clear my doubt ..you have quoted 15000
wont be calculated in GDP because it is a second hand
product. but the seller who got that amount after
selling .can use this money in the development of
other unique service or product.. by this 15000 will be
included in GDP..
Dee
11/10/2013 at 05:13
Yes, even I am stucked here.If brokers 1000
service charge is counted in GDP because it will
eventualy be translated in to different service
(ultimately summing upto 3000 in GDP), then
why the second-hand bike sold at 15000 is not
considered. The seller can use the 15000 in
paying to same electricity company and thus the
money changes hands..
Please Sir, clarify .
Reply
suneet
08/12/2013 at 07:39
Reply
Hi DEE
did u find any answer on this . i am also
stuck here.
should there be some criteria like
GDP=domestic(investment
disinvestment).
Madhukar
05/01/2014 at 16:04
Reply
You are right
Madhukar
05/01/2014 at 16:03
Reply
you arre dee
manoj
04/02/2014 at 14:29
Reply
that 15000 is not calculated as he
bought that bike in past at 30000. (No
new Item or service produced.)
that 1000 rs has been added in GDP as
he receives that amount due to some
services(New) provided.
sonwane karuna
25/10/2013 at 13:50
Reply
This site is one of the best source for economics nd also
all the subjects for us. thanks to publish it.
sonwane karuna
25/10/2013 at 13:52
Reply
so nice nd helpful.
Prabhat
05/11/2013 at 23:38
Reply
good .
shilpa
06/11/2013 at 19:50
Being an economics teacher, I still found the content
much more informative and easier. Appreciate your
effort, keep it up.
Reply
harneet singh
21/11/2013 at 21:31
Reply
sir i m having a sense ov satisfaction after reading
dis i m preparing fr civil service its so
lucidly explained.how 2 contact you in case i have 2
ask smthng..
Chaitanya
02/12/2013 at 23:47
Reply
Really very good explanation
suneet
08/12/2013 at 07:21
Reply
Sir,
suppose goods worth 10 millon are produced. but sold
are 8 million worth . what will be GPD? 10 million or 8
million . please give the logic behind it as well.
gerrard@ynwa
29/06/2014 at 18:57
Reply
it will be wort 10 million. as initailly its the 10
million worth of production added in the
econoly . dont bother bout that diminished sale.
answer would be 10m.
vinamra
09/12/2013 at 12:50
Reply
sir , u have given an example in GDP counting
production method, in that wheat is produced by
farmer and going to different sectors like bakers , flours
etc out of his total production he is giving to another
sector then how can we count agriculture sector
individually and how can we say agriculture sector
diminishing though it is sharing with other like sugar
cane , milk , wheat etc
Madhukar
05/01/2014 at 16:17
Yes you are right but when produce wheat its
value added in GDP. But when it goes to flour
producer, he has to processed it so that
additional cost cost is added. likewise if bakers
make bread what cost he incurred in is added i
final GDP not entire wheat, flour and bread price
Reply
We say agriculture sector demising because
year on year production of food garin is not
increasing a s we targeting. it means if we
produced 250 MT of food grains last year, in this
year we managed to produce only 255 MT. there
only 2% increase i food grain production.
ansonjerrin@gmail.com
19/02/2014 at 10:19
Reply
Amazing Blog. You have made the understanding very
easy.
Em gonna share it on FB :)
thank you for simplyifing GDP & GNP
Aymen
23/02/2014 at 20:31
Reply
hey im from Pakistan i must say ur blog is
awesome.really very helping ;)
Pavan
26/02/2014 at 15:10
Reply
Dear Mrunal,
This comment is regarding the example titled WHAT IF
SAME 1000 RUPEE NOTE IS CHANGING HANDS?
Here , although Rs 1000 is being paid to the peon by the
electricity company , since it is included in the cost the
company charges to the customers ( which here
incidentally is Rs 1000 only!), shouldnt it be dropped
from final GDP calculation ?
i.e shouldnt the final GDP be Rs 1000 ( brokerage) + Rs
1000 (Final good + service electricity production +
supply) = Rs 2000 going by value addition method ?
because, comparing and contrasting this with the Baker
example reveals that we are not adding the wages the
Baker must be paying to his assistants if any !
lake chaitanya
12/04/2014 at 21:54
Reply
hi mrunal .. previous articles of economy not opening
what shall i do?
caustic576
16/04/2014 at 23:44
Crucial difference to note here:
1 2
Reply
In Expenditure approach, under Investment portion-
Investments in stock market are not ALWAYS to be
accounted for GDP calculation. Investment in the
primary market (IPOs) is ONLY to be considered;
investment in buying shares off of another holder in the
secondary market is to be excluded (no net addition to
the value in the economy).
@Mrunal can correct me if Im wrong.
shweta
20/07/2014 at 22:10
Reply
helpful blog..thanks
!
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