TERM 1- Credits 3 (Core)

Prof Madhu & Prof Rajasulochana

TAPMI, Manipal
Session 4

Does higher GDP reflects higher level of economic activity?

Real versus Nominal GDP

Inflation can distort economic variables like GDP, so we have two
versions of GDP: One is corrected for inflation, the other is not.

Nominal GDP values output using current prices. It is not corrected

for inflation.
Real GDP values output using the prices of a base year. Real GDP is
corrected for inflation.

Example, Nominal GDP

Cellphone

Beer

year

2012

12K

100

10

2013

11K

110

11

2014

10K

120

12

Compute nominal GDP in each year:

2012:

12000x 4 + 100x 10

Increase:
= 49,000

2013:

11000x 5 + 110x 11

= 56,210

2014:

10000x 6 + 120x 12

= 61,440

14.71%
9.30%

Example, Real GDP

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year

2012

12K

100

10

2013

11K

110

11

2014

10K

120

12

Compute real GDP in each year,

using 2012 as the base year:

Increase:

2012:

12000x 4 + 100x 10

= 49,000

2013:

12000x 5 + 100x 11

= 61100

2014:

12000x 6 + 100x 12

= 73,200

24.69%
19.80%

GDP Deflator

How is GDP Deflator different from CPI??

WPI?? PPI??

Different measures of Inflation

CPI measures the changes in the price level of a
representative basket of consumer goods and services
purchased by households.
WPI - measures the changes in the price level of a
representative basket of wholesale goods purchased by
firms, includes taxes.
PPI - provides a broader coverage in terms of goods and
services and industries, excludes taxes.

Recent Changes in National Account System

 India s National Account System follows the UN System of

National Account (SNA), that mandates a comprehensive
methodology of compilation and classification system and
timeliness in the public release of select macro-economic
data and key indicators of national accounts.
The UN SNA underwent periodic changes in 1968, 1993
and 2008

Change in Base year of GDP from 2004-05 to 2011-12.

A base year is a reference year with respect to which GDP numbers
for the following as well as preceding years are computed.
Revisions in base year (5-10 years) is required to account for :
1. Changing patterns of consumption and the commodity composition
of the economy.
2. Incorporate changes in ways of data compilation and new
classification systems.
3. Incorporate new data sets results in corrections in levels of GDP,
which affect a wide range of indicators such as trends in public
expenditure, taxes and public sector debt.

CPI replaces GDP deflator, to convert current

price into constant price estimates.
CPI(Industrial Worker) & CPI(Agricultural Labour)
replaced by CPI Combined, Rural and Urban.
PPI to replace WPI from 2016.

MCA 21 e-governance initiative to compile a

new data source on Private Corporate sector
It comprises annual accounts of companies (in mining, manufacturing
and services), statutorily filed online with the Ministry of Corporate
Affairs.
Allows for sector-wise estimates of corporate savings and
investment, unlike the previous method of RBI of relying on sample
corporate data.
Due to MCA 21, the savings and investments estimates have gone up
sizeably.
23.4%(old series) to 35.4%(new series) for savings and 28.5%(old
series) to 40.3%(new series) for investment for 2013-15.

2 Categories of indirect taxes under SNA 1993

and 2008
1. Indirect taxes Subsidies on production

(Before the product is ready for sale) Ex Land Revenue, Stamp and
Registration fees ..Subsidies on railways, farm input subsidies,
administrative subsidy to corporations and co-operatives etc
2. Indirect taxes Subsidies on product
(On the final product for sale)

GDP at FC replaced by GVA at Basic Prices

GVA at Basic Prices = GVA at Factor Cost

+ Net Indirect Taxes on Production

GDP at MP replaced by GDP

GDP = GVA at Basic Prices

+ Net Indirect Taxes on Product

Differences due to changes in base year

Sector Wise GVA at Basic Prices- 2011-12 series

Time for Classroom Assignment

Session4_Assignments.xlsx

Instructions for Assignment.

Assignment 1: Compute GDP deflator
1. Go to website : https://www.rbi.org.in/
2. Click on Publication/Handbook on Indian economy
3. Click on Database on Indian Economy
4. Download Table 1 and 2 : Macroeconomic aggregates at current
and constant prices respectively
5. Tabulate GDP at Current prices and GDP at Constant prices
6. Compute GDP Deflator

Instructions for Assignment.

Assignment 2: Compute Macroeconomic Aggregates
Go to website : https://www.rbi.org.in/
1. Download Table 1 and 2 : Macroeconomic aggregates at current
and constant prices respectively

2. Compute
GNP at MP,
GNP at FC,
NNP at FC

Instructions for Assignment.

Assignment 3: Represent in a pie chart the share of Industry by Origin
in GVA at Basic Prices (Constant Prices)
1. Go to website : https://www.rbi.org.in/
2. Download Table 3 : Components of Gross Domestic Product (At
Factor Cost) and Gross Value Added (At Basic Price)
3. Use a pie chart to represent different industries.

Instructions for Assignment.

Assignment 4 : Represent in pie chart the Gross Saving by the type
of Institution 2013-14
1. Go to website : https://www.rbi.org.in/
2. Download Table 11 on Sector wise Savings
3. Depict Savings in a pie chart

Instructions for Assignment.

Assignment 5 : Represent in pie chart the Gross Capital Formation by
the type of Institution 2013-14
1. Go to website : https://www.rbi.org.in/
2. Download Table 14 on Sector wise Gross Capital Formation
3. Depict Gross Capital Formation in a pie chart