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Lecture - 1 - GDP Introduction PGP 26

1) The document discusses measuring economic activity using Gross Domestic Product (GDP). It defines GDP and explains that it is the total market value of all final goods and services produced within a country in a given period of time. 2) Three approaches to calculating GDP are described: the output approach, income approach, and expenditure approach. The output approach focuses on total output, the income approach adds up income components, and the expenditure approach accounts for total consumer and investment expenditures. 3) Components of the expenditure approach include household consumption, investment, government spending, and net exports. Private consumption makes up around 60% of GDP while investment accounts for around 30% and government spending around 10%.

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Parth Bhatia
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33 views

Lecture - 1 - GDP Introduction PGP 26

1) The document discusses measuring economic activity using Gross Domestic Product (GDP). It defines GDP and explains that it is the total market value of all final goods and services produced within a country in a given period of time. 2) Three approaches to calculating GDP are described: the output approach, income approach, and expenditure approach. The output approach focuses on total output, the income approach adds up income components, and the expenditure approach accounts for total consumer and investment expenditures. 3) Components of the expenditure approach include household consumption, investment, government spending, and net exports. Private consumption makes up around 60% of GDP while investment accounts for around 30% and government spending around 10%.

Uploaded by

Parth Bhatia
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© © All Rights Reserved
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Download as PPTX, PDF, TXT or read online on Scribd
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Lecture 2

Measuring Growth :GDP

EPGP -14
Sec C
Prof Ashok Thomas
Learning objectives
o Measuring economic activity using gross domestic product (GDP)

o Understanding the different approaches that are used to calculate GDP

o Calculating GDP growth rate

o Nominal vs Real GDP

o Deflating GDP

Analysis : Video Q3 GDP 2022 review (Slide 22)


: Newspaper article to read :
27/06/2023 2
Objective 1: What is Gross Domestic Product
Gross domestic product (GDP) is the sum of the market value of all final goods
and services produced within a country in a given period of time.
Market value: Used so there are common units to add up goods and services.
( INR or dollar)
Final goods and services: Only count expenditures on goods and services
sold to the consumer.
Final goods vs intermediate goods: Issue of double counting
Produced within a country: Goods and services are counted towards GDP in
terms of location of production.
Given period of time: Usually refers to an annual estimate. Annual/ Quarter
(seasonally adjusted)
National Accounts Statistics produced by the Central Statistics Office of the
Ministry of Statistics & Programme Implementation (http://mospi.nic.in)

27/06/2023 3
GDP of the world ( USD at current prices)

27/06/2023 GDP Lecture 1 4


Indian GDP story ( in USD)

27/06/2023 GDP Lecture 1 5


Objective 2: Approaches to calculate GDP
Output method ( Producers)
Output approach focuses on finding the total output of a nation.
(output figures of all firms/services in the economy to get the total
value of the nation’s output)
Income method ( Workers)
GDP can also be obtained by adding together the income
components that make up value added.
Expenditure method ( consumers)
If all the income generated and the output produced are to be spent and
bought what is the expenditure get accounted?
27/06/2023 6
Measuring GDP from Production (1)
1.GDP is value of final goods and services.
 A final good is destined for final consumption.
 An intermediate good is used in the production of another good.

Steel company Car company


Revenue 100 200
Wages 80 70
Other expense 0 100 (steel purchases)
Profit 20 30
 What is the GDP of this two-firm economy?
200
Note: do not double count; (Note: Car is final good while
do not include sale of second hand goods steel is intermediate good)
Measuring GDP from Production (2)

2.GDP is the sum of gross value added (GVA).


 Value added equals the value of a firm’s production minus the
value of the intermediate goods it uses in production.

Steel company Car company


Revenue 100 200
Wages 80 70
Other expense 0 100 (steel purchases)
Profit 20 30
 What is the GDP of this two-firm economy?
200
(note: V.A.1 is 100 + V.A.2 is 100)
GVA calculation : Sectoral analysis in Indian economy

AGRICULTURE
Agriculture, forestry and fishing
INDUSTRY
Mining and quarrying
Manufacturing
Electricity, gas, water supply and other utility services
Construction 
SERVICES
 Trade, hotels, transport, communication and services related to broadcasting 
 Financial, insurance, real estate and professional services
 Public administration and defence and other services
oDiscrepancies
27/06/2023 9
Income method: Components
GDP can also be obtained by adding together the income components that make
up value added.
GDP by income approach covers only the incomes generated within the domestic
economy.
GDP Income method = The income generated in value added process + taxes
less subsidies on products
Components of Income : Compensation of employees
Remuneration in cash or in kind payable by employers to employees for the work
Direct social transfers from employers to their employees or retired employees
and their family, such as payments for sickness, educational grants and pensions if
there is no independent fund.

27/06/2023 10
Components of Income approach
Consumption of fixed capital ( Depreciation and the cost of repair):
Consumption of fixed capital is the cost of fixed assets used up in production in
the accounting period.
Other taxes less subsidies on production: taxes payable by employers to carry
out production, irrespective of sales or profitability.
 license fees or as taxes on the ownership or use of land,
 buildings or other assets used in production
 or on the labour employed ( Tax on compensation/salary)

27/06/2023 11
Measuring GDP from Income

3. GDP is the sum of incomes.


 Sum of labour income and capital income
(wages + interest + rental income + profits)

Steel company Car company


Revenue 100 200
Wages 80 70
Other expense 0 100 (steel purchases)
Profit 20 30

 What is the GDP of this two-firm economy?


200
(note: 80+20 + 70+30)
A simple example for production approach and income approach
Country Kerala Flour Ltd Modern Bread Total factor income
Wheat

Value of Sales 1800 3700 5400


Intermediate consumption 0 1800 3700
Wages 500 800 700 2000
Rent 400 200 300 900
Interest 600 400 300 1300
Profit 300 500 400 1200
Total Expenditure of firm 1800 3700 5400 total = 5400
Intermediate goods 0 1800 3700
Value Added 1800 1900 1700 =5400

27/06/2023 13
Expenditure method ( Consumers side)

◦ Durable goods
Household final consumption
last a long time (>1 yr)
expenditure: consists of expenditure incurred
e.g., furniture, home by resident households on consumption goods or
appliances services. (Goods and services bought)
◦ Nondurable goods When dwellings are occupied by their owners, the
last a short time (<1 yr) imputed value of the housing services enters into
e.g., food, clothing both the output and final consumption
expenditure of the owners.
◦ Services
When dwellings are rented by their owners,
intangible items purchased rentals are recorded as output of housing services
by consumers by owners and final consumption expenditure by
e.g., dry cleaning, air travel tenants. 06/27/2023 14
Consumption
• Within total final consumption, it is the
private final consumption expenditure
that has a major share (close to 60 per
cent) in the economy’s GDP,
• The growth rate mostly being higher
than the overall GDP growth rate.

06/27/2023 GDP Lecture 1 15


Second component: Investment
Fixed investment mainly refers to the value of new machinery and equipment
and the value of new construction activity of dwellings and other structures.
Investment (Gross Capital Formation) accounts for nearly 32 per cent of GDP,
within which fixed investment (Gross fixed capital formation) accounts for about
29 per cent of GDP.
The other two components of investment are: change in stocks ( 1% of GDP)
They are a part of production but not consumed in this accounting year
 Third component is Valuables (1% of GDP)

27/06/2023 16
Investment loosing steam in last few months

27/06/2023 GDP Lecture 1 17


Third component : Government final consumption expenditure (GFCE).

G includes all government spending – of consumption and investment


nature
GFCE comprises government’s (revenue) expenditure on compensation of
employees, net purchase of goods and services and consumption of fixed
capital ( capital expenditure).
Generally in Indian context this appears to be 10%. (Last 5 years around
9%)
It does not contain: Social security& Welfare benefits, Unemployment
benefits , Debt relief, farmer loan waiver (TRANSFER PAYMENTS). Instead
they are counted as PCFE if they are used to buy goods & services
06/27/2023 18
Fourth component: Net
exports

•Net exports = Value of exports -Value


of imports
•India has a negative trade balance in
most of the quarters
•Service exports has been predominant
•Import growth slowed down with high
exchange rate
•Export growth slowed down with
global growth slowdown

06/27/2023 GDP Lecture 1 19


Articles to read Videos to listen

27/06/2023 GDP Lecture 1 20

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