Management of GDP Measurement

Current Affairs GDP Calculation

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MBA Aspirants are expected to know the health of a country’s economy. GDP is often indicated as one of the crucial factor. This general awareness article will help MBA Aspirants preparing on current topics like GDP will help them in WAT/ Essay/ GD and PI also.

Read Current Affairs Topic: Management of GDP Measurement

In order to measure the strength of a country’s economy, use of national income is most widespread among the available alternatives. National income refers to total value of all the final goods and services produced in a country in an accounting year. In India, the Central Statistical Organization (CSO) is responsible for publishing of annual data on national income. There are many concepts of national income of which prominent ones are Gross Domestic Product (GDP), Gross National Product (GNP), Net Domestic Product (NDP) and Net National Product (NNP).

GDP is the final value of all the goods and services produced within the boundaries of a country in an accounting year. When net factor income from abroad is added to GDP, it becomes GNP. The net factor income accounts for the income receipts from export and expenditure for exports. If a country is having trade surplus, then GNP will be higher than GDP and if there is trade deficit, GDP will be higher than GNP. When depreciation is factored out of GDP and GNP, it will become NDP and NNP respectively.

All the aforesaid concepts are measured on the basis of current prices and constant prices as well as on the basis of market price and factor cost. The GDP at market price is the sum of market price of all final goods and services produced in an accounting year while the GDP at factor cost is the sum of income accruing to all the factors of production. In the economic theory, there are four factors of production – land, labour, capital and entrepreneur. Rent is the income of land owner, wage is the income of labour, interest is the income of capital provider and profit is the income of entrepreneur. GDP at factor cost is calculated by subtracting the indirect taxes and adding the subsidies to the GDP at market price. 

GDP at current prices is calculated on the basis of prices prevailing at the time of GDP measurement while GDP at constant price is calculated with respect to a base year. The present base year for the GDP is 2011-12. Prior to this, the GDP at constant prices was calculated with base year at 2004-05. Base year revision exercises are undertaken as per the internationally accepted practice to capture the changing structure of the economy. According to the Ministry of Statistics and Programme Implementation, the new base year for GDP is tentatively pegged 2017-18. Every five year, CSO changes the base year in order to better align it with the changing economic structure. GDP at constant prices provides a better picture of the economy because it also factors out the inflation.  

Every economy is divided into a formal and informal sector. While the data for formal sector is readily available but it is quite a daunting task to calculate the income from informal sector. In India, the extent of informal sector can be surmised from the fact that only 10% of India’s over 470 million workforces is in the formal sector. A large informal sector also impacts the government in terms of revenue foregone because the unit’s operating in the informal sector stay out of the government’s fiscal revenue net. Demonetization announced by the government on November 8, 2016 and the introduction of GST in July 2017 are expected to formalise the large chunk of informal sector. The change of base year from 2011-12 to 2016-17 would also include the informal sector in the future GDP calculations and thus will provide a better picture of the national income.

In January 2015, the Ministry of Statistics and Programme Implementation brought about two changes in the methodology of GDP calculation which increased the growth rate of fiscal year 2013-14 to 6.9% from 4.7%. The first change was made in the base year from 2004-05 to 2011-12 while the second change was made in methodology. Earlier the GDP in India was measured by Gross Value Added (GVA) at factor cost but in 2015, methodology was changed to GVA at market price. When indirect taxes are higher than subsidies, the GDP at market price will always be higher than the GDP at factor cost. In this manner, the GDP growth rate of 2013-14 suddenly increased from as per the old methodology 4.7% to 6.9% by virtue of new methodology.  

Many political analysts criticised the tweaking of GDP methodology because it will make the GDP growth rates in UPA and NDA era incomparable but the new methodology has brought the Indian GDP calculations more in line with global practise. A favourable growth rate will also help in attracting the global investors.   

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