Definition of Gross Domestic product
“Gross Domestic Product is money value of all final goods and services produced with in the geographical boundary of a country in a financial year is called gross domestic product.” It is representative of the total output and income within an economy of a country.
GDP= (P×Q)
GDP= Gross domestic product
P= Price of final goods and services
Q= Quantity of final goods and services
GDP = C+I+G+(X-M)
Types of Gross Domestic Product
- Nominal GDP
- Real GDP
- Nominal GDP: Nominal GDP is the GDP without the effects of inflation or deflation. Nominal GDP reflects current GDP at current prices.
- Real GDP: Real GDP is the GDP with the effect of inflation or deflation. Real GDP reflects current GDP at past (base) year prices. Real GDP represents the actual picture of economic growth.
There are three methods to calculate the Gross Domestic Product of any country. There are production method, income method and expenditure method. All the methods give the same result.
Methods of Measuring Gross Domestic Product
As it is already defined that, “Production generates Income.” For generation of production and income there are some defined sources and factors for both.
There are four defined sources where from income is generated.
- Wages
- Rent
- Interest
- Profit
There are four defined factors where from production is generated, known as factor of production.
- Labour
- Land
- Capital
- Entrepreneurship
Four factor of production viz labour, land, capital, entrepreneurship jointly produce value added goods and services. When these value added goods and services are sold in domestic and international market, income generates.
This income is distributed among the owners of factors of production viz labour receives wages, land receives rent, capital receives interest and entrepreneur receives profit for their contribution to the production of goods and services.
The income, generated by owners of the factors of production again spent for the purpose of production of goods and services.
This is an endless process, generated income is used for expenditure, and expenditure leads to consumption of goods and services, consumption of goods and services leads to production, that production again generates income.
| Factors of Production | Sources of Income |
| Labour | Wages |
| Land | Rent |
| Capital | Interest |
| Entrepreneurship | Profit |
Methods to Calculate the National Income.
There are three methods to calculate the national income.
- Production Method
- Income Method
- Expenditure Method
1. Production Method
In production method national income is the value of final goods and services produced in domestic boundaries plus net factor income from abroad during the financial year.
Net factor income from abroad= Factor income received from abroad – Factor income paid to abroad
In this method producing enterprises and goods are classified into industrial sectors according to their activities.
- Production Units
- Primary Sector: Industries which producing natural resources like, petrol, coal, mining, agriculture, forestry, fishing
- Secondary Sector: Industries which transforms the raw material into finished goods like Textile industry use cotton fibers as raw material and transforms into fabric as a finished goods. Example of such industries: Construction, Manufacturing, Electricity etc.
- Tertiary Sector: This type of industry produces all kind of services. This is called service sector. Example: communication, aviation, banking, transportation etc.
2. Goods
- Final goods and services: means the product or service which is ready to consume immediately.
- Intermediate goods: Goods or services which are work in progress. Not ready to consume right now.
- Natural resources: Natural resources are not called final goods. Like: petrol, coal, etc.
- Perishable goods: goods that spoil quickly and therefore have a short shelf life. Example : milk, bread, fruit, and vegetables
2. Income Method
In income method national income is measured by adding incomes earned by all the factor of production during the financial year.
Estimate the following factor incomes paid out by the production units in each industrial sector like wages, rent, profit, interest, and mixed income of self-employed.
Take the sum of factor payments by all the industrial sector to arrive at the net domestic product at factor cost. Add net factor income from abroad to the net domestic product at factor cost to arrive at net national, product at factor cost.
3. Expenditure Method
It estimates national income by measuring final expenditure on final goods. Component of the expenditure method are:
- Consumer spending
- Government expenditure
- Gross investment
- Net exports (Exports – imports)
Purchasing Power Parity
Purchasing Power Parity is a relative study of Price. Purchasing Power Parity is a study of ratio of the prices in national currencies of the same” Basket of goods or services” in different countries. By PPP we can do comparative study of economic productivity and standards of living between countries.
Calculation of Purchasing Power Parity
S = P1 / P2
S = Exchange rate of currency 1 to currency 2
P1 = Cost of good X in currency 1
P2 = Cost of good X in currency 2
Gross National Income (GNI)
Earlier Gross National Income was known as Gross National Product. To meet the international statistic parameter Gross National Income replaced the Gross National product. Though Gross National Income and Gross National Product are same.
“Gross National Income is the money value of all final goods and services produced by the citizen of a country whether living in India or outside India in a financial year.”
Gross National Income = Gross Domestic Product + Net Factor Income Earned from Abroad
Net factor Income Earned from Abroad= Income received from Abroad – Income paid to Abroad
GNI = GDP + {Money earned from abroad – Money paid to abroad}
GNP= [{C+I+G+(X-M)} + NFIA]
Net National Product
Before understanding the Net National Income we will have to understand some important terms like depreciation, net value, market price and factor cost.
“Depreciation means the decreasing money value of an asset over the period of time due to use, wear and tear or the asset is obsolete from the market.” This decrease in money is known as depreciation.
Net value means: “the value which we get after deduction of depreciation value from the gross value.”
Net Value = Gross Value – Depreciation Value
Net National product (NNP) = Gross National product (GNP) – Depreciation
Net National product (NNP) = {Gross Domestic Product (GDP) + NFIA} – Depreciation
For better understanding of the factor cost, we take an example. There is an industry which is manufacturing a table (any product). For the production of table (any product) we require factor of productions who will do the production, like land, labour, capital, entrepreneur. These factor of productions actually do the production.
These factor of productions are paid some monetary value like rent, wages, interest, and profit respectively in lieu of helping in production of the table (any product).
That monetary value is called factor cost.
In short, “Factor cost is total monetary value which was paid to factor of productions for helping in production of any product.”
Market Price is final monetary value which comes by adding and deducting some values in factor cost.
Market Price = Factor Cost – Indirect Tax + Subsidy
Net Indirect Tax = Indirect Tax – Subsidy
Example:
Per unit Factor Cost of table = Rs. 1500
Market Price Rs. 1550 = 1500 (factor cost) – 100 (Indirect Tax) + 50 (Subsidy)
Now it will be easy to understand the Net National Product.
Net National Product at Market Price
Net National Product is calculated on the basis of market price that is called Net national product at market price. Whereas Net National Product is sum of all prices that paid to the factor of productions in form of wages, rent, interest and profit for their contribution in production is called NNP at factor cost.
NNP at FC (NNP fc) = (NNP MP) – Net Indirect Taxes
NNP at FC (NNP fc) = (NNP MP) – (Direct Taxes – Subsidy)
NNP at FC (NNP fc) = NNP MP – Direct Tax + Subsidy