Measuring National Output/ Income:

Dr. A.K. Dash

IBS Hyderabad, IFHE University
Gross Domestic Product(GDP)

GDP is defined as the sum of market value of all the final goods
and services produced within the domestic territory of a country
during one year.
Market Value: Goods and services are counted in GDP at their
market value that is, at the price which they are sold. The advantage
of using market values to measure economic activity is that it
allows adding the output of different types of goods and services.
Expressing the products in market values has some problem. All the
goods and services are not sold in the formal market. Services
provided to the family members e.g. housewife cooking for the
family and taking care of the family members, parents teaching
their own children, doctors treating their own family members,
gardening in your garden, services provided by the neighbours each
other on festivals and marriage. Though they add to human welfare
they are not paid and it’s not included in GDP.
GDP Defn. Continues…
Goods and services produced during a period of time may be classified as either intermediate or final goods
Intermediate Goods Final Goods
1. They are used for production of 1. They are used for final consumption.
other goods and services Milk brought by household for
2. They are meant for resale, so consumption
value gets added to these goods. 2. They are not meant for resale, so no
Milk is used in a sweet shop for value is added to these goods
resale 3. They remain outside the production
3. They remain within the boundary
production boundary 4. Their value is included in national
4. Their value is not included in income
national income

The distinction between intermediate goods and final goods arises because of the problem
of double counting i.e. the value of same product counted more than once in national
income accounting. For example of Sandwich production, wheat is converted into flour,
wheat flour is converted into bread, and bread into Sandwich. At each stage of production,
the products –wheat, flour, bread and Sandwich –are priced differently. Double counting
leads to overestimation of the national income.
GDP Defn. Continues…
Domestic territory includes geographical boundary,
administered by the government within which persons,
goods, and capital circulate freely. The Domestic territory of
a country includes the following
Foreigners who resides in India for less than one year
Ships and aircraft owned and operated by normal residents
between two or more countries. For example, planes
operated by Air India between Russia and Japan are part of
the domestic territory of India.
Fishing boats operated by Indian fishermen in international
waters of the Indian ocean is considered a part of the
domestic territory of India.
Indian embassy in the US is a part of the domestic territory
of India.
GDP Defn. Continues…
 Why GDP is called Gross?
The GDP is called “Gross” because it measures the nation’s total output of goods
and services without subtracting depreciation.

In simple language, GDP is the value of goods and services

produced in India.

 GDP includes income earned by the foreigners in the country and excludes
income earned in abroad by the residents.
GDP=market value of final goods and services produced by the residents in
the country
Plus income locally earned by the non –nationals (foreigners)
Minus income received by the residents of a country from abroad
GDP=GNP-NFIA(Net factor income from abroad)
NFIA means the difference between how much factor income you receive and
how much factor income you paid
Gross National Product(GNP)
 GNP measures the value of goods and services that a country’s citizens
produce regardless of their location.
 In simple language, GNP is the value of goods and services produced by
Indians.
 GNP measures the total income earned by national residents of a nation.

GNP=Market value of domestically produced goods and services

Plus income earned by the residents of a country in foreign countries
Minus income earned by foreigners in the country

GNP=GDP+NFIA
GNP=GDP+Factor payments received from abroad-factor payments to abroad

GNP includes the income of the residents nationals which they receive abroad
and excludes the incomes generated locally but accruing to the non nationals.
GNP Continues….
Ex. Suppose US Capital and Labour are used in India to produce output. Both
Labour and Capital will receive wages and interest. US Labour and Capital
earn factor income from India. The income earned is included in US GNP but
not US GDP because they don’t represent production taking place within the
US. The output produced by US labour and capital in India is included in
India’s GDP.
Similarly, India’s Labour and Capital are used in the US, the output produced
is part of US GDP(because the production takes place within the US). The
income earned by Indian labour and capital counted in India’s GNP

GNP is called gross because it measures the nation’s total output of goods and
services without subtracting depreciation.
GDP and GNP Comparison
 The difference between GNP and GDP lies in the treatment of output
produced by labour and capital outside its home country
 GDP=GNP-NFIA
 GNP=GDP+NFIA
The GNP and GDP are called “Gross” because they measure the nation’s total
output of goods and services without subtracting depreciation.

If GNP is less than the GDP of a country then Net factor income from abroad
is negative

If GNP is greater than the GDP of a country then Net factor income from
abroad is positive

The country like the US, during 2008, GDP and GNP were very close to each
other which implies Net factor payments are relatively small.
Nominal GDP
 The Nominal GDP measures the market value of all the goods and services
produced in a country and expressed in current-year prices. In other words,
nominal GDP is defined as the value of current output at the current year
price. It can be said that valuing all output at current year prices.
 GDP estimated at current year prices is called nominal GDP.

 Nominal GDP can rise either when the output of goods and services rises or
when current prices rise.
 When people use GDP numbers, they are often talking about nominal GDP,
which can be defined as the total economic output of a country. This output is
measured at current price levels without factoring in inflation.
 You know that any GDP figure that does not account for inflation can be
misleading because GDP will appear higher than it actually is.
 Real GDP
Real GDP measures the value of all the goods and services produced expressed
in the prices of some base year.
 it is the value of current output at base year prices. Real GDP can increase
when the output of goods and services rises in the current year.
GDP estimated at constant prices in a chosen year (base year) is called real
GDP.
 The main difference between nominal and real GDP is that real GDP values
are adjusted for inflation, while nominal GDP values are not. As a result,
nominal GDP number will often appear higher than real GDP number.
 Real GDP accounts for inflation. For example, if the nominal GDP has
grown by 10% and the inflation rate is 3%, the real GDP growth is 7%.
 Real GDP offers a better perspective than nominal GDP when tracking
economic output over a period of time.
What do you mean by Base year?
The base year is a normal year and there are no inflationary or deflationary
 Real and nominal GDP
Real GDP and nominal GDP values are equal in the base year.
Because current price and base year prices are same in the base
year.
Real GDP= (Nominal GDP/GDP Deflator)*100
Nominal GDP and Real GDP Calculation
Year Price Quantity
Calculate nominal GDP in 2018 and 2019
2018 100 of 2018 multiplied by 50
Nominal GDP in 2018=Price the quantity produced in
2019
2018 90 20
That is 100*50=5000

Nominal GDP in 2019=Price of 2019 multiplied by the quantity produced in

2019
That is 90*20=1800

Calculate real GDP in 2018 and 2019

Let’s assume the base year is 2018.
Real GDP in 2018=Price of 2018 multiplied by the quantity produced in 2018
That is 100*50=5000

Real GDP in 2019=Price of 2018 multiplied by the quantity produced in 2019

That is 100*20=2000

We have seen that in the base year nominal GDP is equal to real GDP. It is
visible that in 2018, nominal GDP and real GDP values are the same i.e. 5000.
 Nominal and Real GDP which one is Good
Real GDP has no meaning by itself unless it is compared to GDP of a
different year.
Do you think there is a problem with measuring GDP in the nominal term?
(Ans) Yes. A large increase in nominal GDP might be a country has greatly
expanded its production of goods and services or might be increase in price
level. Nominal GDP (which is expressed at current year prices) produces a
misleading picture of the economic performance of the country when prices
are continuously rising or falling. In a country having a high rate of inflation,
the nominal GDP produces an inflated estimate of GDP and creates a false
sense of richness or economic growth.
Nominal GDP gives false sense under following condition
(i) Actual production is decreasing but prices are rising. Food grain
production valued at current prices showed increase in food grains
supply whereas it had actually declined
(ii) Actual production remains constant and prices are rising.
Nominal and Real GDP Application

Usage and Applications

When should we use real GDP numbers and when is
nominal GDP used?
One uses the nominal GDP figures to determine the total
value of the goods and services manufactured in a country
during a particular year. However, when one wants to
compare GDP in one year with past years to study trends in
economic growth, real GDP is used.
GDP Deflator
 Economists have developed the concept of GDP deflator which measure the
relationship between nominal GDP (output measured at current prices) and
real GDP (output measured at constant prices). GDP deflator gives an
indication of the overall level of inflation or deflation in the economy.
 Note: in the base year, real GDP is equal to nominal GDP. So that, the GDP
deflator in the base year is always equal to 100.
 GDP deflator measures the price changes in current year compared to those
in a base year.
 GDP Deflator

Year Price Quantity

2018 100 50
2019 90 20

GDP Deflator=(Nominal GDP/Real GDP)*100

Calculate nominal GDP in 2018 and 2019
Nominal GDP in 2018=100*50=5000
Nominal GDP in 2019= 90*20=1800
Calculate real GDP in 2018 and 2019
Lets assume base year is 2018.
Real GDP in 2018=100*50=5000
Real GDP in 2019=Base year price multiplied by current year quantity(2019 quantity)=100*20=2000

Calculate GDP deflator in 2018=(Nominal GDP in 2018/Real GDP in 2018)*100

(5000/5000)*100=100
Calculate GDP deflator in 2019=(Nominal GDP in 2019/Real GDP in 2019)*100
(1800/2000)*100=90
GDP deflator tells us the inflationary or deflationary trend of an economy
The initial base year price was 100 in 2018 and GDP deflator value is showing 90 in 2019. It represents a
deflationary trend in the price level.

If nominal and real GDP figures are the same, the value of the GDP deflator is 100
Consumer Goods Vs. Capital Goods
Consumer Goods: These are those goods that are brought by the consumer
for final consumption to satisfy their wants.
These include (i) consumer durable goods(Long-lived goods) like Car,
Television, Radio etc (ii) consumer nondurable goods (Short lived goods) like
fruits, oil, milk, vegetables etc (iii) Service made by doctors, teachers etc.
Consumer goods are used by consumers and have no future productive use.

Capital Goods: They are the final goods and are used in the production
process. Goods used in producing other goods are called capital goods. Capital
goods include items like buildings, machinery, tools, equipment, tractors,
trucks etc.
Car is a consumer good if purchased by a household. It is a capital good if
purchased by the firm for business use. It is an intermediate good if purchased
by a car dealer for resale.
Per capita income
 It is known as income per head
 Per capita income is a ratio of a country’s income(GDP) divided its
by population.
 Per capita income counts each man, woman, and child, even
newborn babies, as a member of the population.
 How we will get the percapita income of India in 2019. Take India’s
income(GDP) in 2019 divided by the population of India in 2019
 Per capita income helps determine the average per-person income
 It is used to evaluate the standard of living for a population. The
higher the percapita income is better
 Small, rich countries and more developed industrial countries tend to
have the highest per capita income
Per capita income Application
 Governments can use per capita GDP to understand how the economy is
growing with its population
 It is used to understand how an economy is growing or contracting in terms
of its people
Personal income
 Personal income can be defined as the sum of all kinds of income received
by the individuals from all sources of incomes.
 Personal income includes wages and salaries, bonus, dividend received
from investments, earnings from self employments, rental income, also
includes transfer income like pension, unemployment allowances, sickness
allowances, old age benefits and social security benefits etc..
 Personal income also includes the income earned through illegal means
such as bribe, smuggling, theft etc
 Personal income is the determinants of consumption. Higher the personal
income higher the consumption.
 Personal income tends to display a rising trend during the period of
economic expansion and shows declining trend during recession
Personal Disposable Income
 Disposable income is defined as the income remaining with individuals
after deduction of all taxes levied against their income and their property by
the government. The disposable income can either spend it or save it. It is
calculated by deducting direct taxes and miscellaneous fees, fines etc. paid
by the individual from their income.
 Personal disposable income= personal income- personal income tax(Income
tax and Property tax)-miscellaneous receipts of the government
administrative department (such as fees, fines)

 Personal disposable income= personal income -(personal income tax+Fees+

fines)
 GDP at Market price (
is defined as the market value of all the final goods and services produced
within the domestic territory of a country during a year inclusive of net
indirect taxes.
Market price is the prices paid by the consumers. But this is not what
production units actually receive. Out of what buyers pay, the production
units have to make provision for depreciation and payment of indirect taxes
like excise duty and sales tax. The indirect tax the producer is supposed to
pay. The indirect tax which is imposed on producer the producer sometimes
pass it to consumer. That’s why when you are buying any product you are
paying price for the product +some amount of indirect tax. The firm receives
subsidy on production from the Government. The market price includes the
indirect tax paid by the producer such as excise duties, and sales tax but
excludes the subsidy that which government pays to the producer.
= +indirect tax-subsidy
= +Net Indirect Tax
GDP at Market price (
A simple example based on the value of Sugar

Let’s assume you want to produce Sugar

Sugar cane is the raw material. The raw material cost is (Rs 25)
In order to produce sugarcane you need to employ Land, Labour, Capital, and
Entrepreneurs and you need to pay Rent, Wages, Interest and Profit as factor
payment. Let’s assume the factor payment is Rs 50.

While producing sugar there will be wear and tear to machinery/fixed assets which is
called depreciation. The depreciation cost is Rs. 5.

Then the producer can sell the product (25+50+5)=Rs 80. But he is not selling in Rs
80.
The government gave a subsidy Rs. 10
Then he should sell Rs. 70.
But he is not selling Rs. 70. Government added Rs. 20 as an indirect tax.
He is finally selling it Rs. 90

price is always GDP at current prices. GDP at market price is known as nominal
GDP
Gross National Product at Market Price()
is defined as the market value of final goods and services produced in the
domestic territory of a country by normal residents during an accounting year
including net factor income from abroad(NFIA).

NFIA
Or
+Indirect Tax-Subsidy+NFIA
= +Net Indirect Tax+NFIA
Net Factor Income from Abroad-The normal residents of India earn income
from abroad in the form of Rent, Wage, Interest and profit etc. On the same
time, foreigners who are residents of other countries also earn income from
India. The difference between the two(how much you are earning and how
much you are paying) is called net factor income from abroad(NFIA)
Net National Product at Market Price ()

is defined as the market value of final goods and services produced by normal
residents of an economy in its domestic territory during an accounting year
exclusive of depreciation and inclusive of net factor income from abroad.

 = +indirect tax-subsidy
• = +Net indirect tax
 = +Net factor income from abroad
 = +Net factor income from abroad-depreciation
Net Domestic Product at Market Price ()

is defined as the market value of final goods and services produced in the
domestic territory of a country by its normal residents and non-residents
during an accounting year less of depreciation
 = -depreciation
 = +indirect tax-subsidy
 = +net indirect tax
 = -Net factor income from abroad
is defined as Cost
GDP at Factor the sum of net value added by all the producers in the domestic
territory of a country inclusive of depreciation during an accounting year.

Basis of distinction between Market price and Factor cost is Net indirect tax
(i.e. indirect taxes-subsidy)

GDP at factor cost measures the domestic output at the cost paid to the factor of
production.

(Rent+wage+interest+profit and depreciation.

= -Indirect tax+Subsidy
= -Net Indirect Tax
Or

= +Depreciation
In market price, indirect tax is already added and subsidy is already subtracted.
Hence, to calculate we need to take subtract indirect tax and add subsidy
What is the situation in which there is no difference between and . This will
be possible when indirect tax is equal to subsidy
Gross National Product at Factor Cost

Normal residents of a country during a year and net

factor income from abroad

= +Depreciation
= -Indirect tax+Subsidy
= -Net Indirect Tax
 Net National Product at Factor Cost
(or national income) is defined as the money value of all final goods and
services produced within the domestic territory of a country in an accounting
year plus net factor income from abroad.
 is defined as the sum of net value added at factor cost by normal residents
in the domestic territory of a country and net factor income from abroad in
an accounting year.
 It is the sum of domestic factor income and net factor income from abroad

= -depreciation
=
= +Net factor income from abroad
Net Domestic Product at Factor Cost

 is defined as the total factor income earned by the factor of

production. In other words, is the sum of domestic factor income.
 = -Indirect taxes+Subsidy
 = -Net Indirect Tax
 = -depreciation
Basis of distinction between gross and net is depreciation or consumption of
fixed capital.
Gross=Net+Depreciation
Net= Gross-Depreciation

 NNP=GNP-depreciation
 NDP=GDP-depreciation

 Depreciation
It is also known as consumption of fixed capital . It is the value of capital that
wears out during the period over which economic activity is being measured.
Economic Growth Vs. Development
Economic Growth Economic Development
1. Economic growth means more 1. Economic development is a process,
output. where by real percapita income of a
2. Economic growth is country increases over a longer period
quantitative in nature which is of time.
concerned only with the
2. Economic development is a long term
increase in national income.
phenomena (over night you cant
3. Economic growth used to
achieve it).
occur first followed by
economic development. 3. Economic development is measured by
4. Development is related to the real per capita income-higher the real
problem of under developed per capita income higher will be the
countries where as economic level of development
growth is related to the 4. Economic development is a broader
problem of developed concept. It not only includes the
countries. quantitative change but also includes
qualitative changes in the economy.
5. Economic development occurs with the
reduction of poverty, illiteracy,
inequality and unemployment rate
Economic Growth Vs. Development continues….

Economic Growth

Economic Development

Economic development includes both economic growth as well as social welfare.

Human Development Index(HDI)
 HDI, is a metric compiled by the United Nations and used to quantify a
country's "average achievement in three basic dimensions of human
development: a long and healthy life, knowledge and a decent standard of
living

 Prof. Mahbub–ul-Haq and Prof. A.K. Sen developed the Human

Development Index(HDI).
 HDI combines three dimensions of development a long and healthy life,
knowledge, and decent standard of living.
 A long and healthy life is measured by life expectancy index, knowledge is
measured by education index (consisting of the adult literacy index and
gross enrolment index) and a decent standard of living is measured by GDP
percapita.
 HDI score varies from 0 to 1. A score close to 1, development is very high,
and a score close to zero, development is very low.
 In 2021, the Human Development Index ranked 191 countries. It is seen
that South Sudan HDI is the lowest (sore 0.385) and Switzerland’s HDI is
the highest (sore 0.962). India’s rank is 132 and the HDI score is 0.633
 Human Development Index Rank
Rank Countries Score (2021)
1 Switzerland 0.962
2 Norway 0.961
3 Iceland 0.959
4 Hong Kong, China (SAR) 0.952
5 Australia 0.951
132 India 0.633(Medium human
development)

Rank 1 to 4 represent a very high level of Development

https://hdr.undp.org/system/files/documents/global-report-document/hdr2021-
22pdf_1.pdf
Gross National Happiness Index(GNH)
 Gross National Happiness index was first proposed by Bhutan in 1972.
 In 1972, the 4th king of Bhutan declared GNH to be more important than
GDP or GNP.
 The advocates of GNH argue that countries’ progress should be measured
in terms of happiness and not the means of GNP or GDP.
 The country Bhutan believes that “if the Government can not create
happiness for its people, there is no purpose for the government to exist”.
 There are various factors that influence happiness are income, health,
marriage, family life, living circumstances, environment, leisure etc.
The four Pillars of GNH are
(i) Sustainable and equitable socioeconomic development
(ii) Conservation of the environment
(iii) Preservation and promotion of culture
(iv) Good governance
 Problems of GNH
(1) Most of the variables are qualitative in nature
(2) Measuring happiness for a sadist is not possible
(3) International comparison of happiness is very difficult
(4) GNH index can be possible where the population size is very small. In a
country like India where the population size is huge is very difficult to
measure the country’s progress in terms of happiness
World Happiest Countries
The world happiness report in 2022 ranked 146 countries in terms of their
happiness. The index score varies from 0 to 10. A score close to 10 is happiest
country in the world and the score close to zero is the least happiest.
It is seen that Afghanistan is the least happy country (score 2.4) and Finland
is the happiest country in the world. The country Bhutan is not ranked.

Rank Countries Score(2019-2021)

1 Finland 7.82
2 Denmark 7.63
3 Iceland 7.56
4 Switzerland 7.51
5 Netherlands 7.41
72 China 5.58
136 India 3.77
Factors affecting economic growth
 Economic growth is affected by many socio-economic factors such as
population growth, energy use, trade openness, infrastructural development,
financial sector development, corruption free society and good governance
and policy, etc. Literature suggests that some of these factors, e.g.
population growth, energy use which results in CO2 emissions, and trade
openness, play controversial roles towards economic growth.
 Human resources are essential for growth, because populations are used as
inputs in the production process. Furthermore, big population size provides
larger market for the goods and services, but excessive population means
excessive human activities and excessive use of energy that result in CO2
emissions.
Thank you