Economic Territory: Geographical territory administered by a government within which persons, goods and capital circulate freely. Includes:
- Political frontiers including territorial waters & air space.
- Embassies, consulates, military bases, etc. located abroad. (Excluding those located within the political frontiers).
- Ships, aircrafts etc., operated by residents between two or more countries. For ex., Air India’s services between different countries
- Fishing vessels, oil & natural gas rigs and floating platforms operated by residents of the country in the international waters or engaged in extraction in areas where the country has exclusive rights of operation.
NORMAL RESIDENTS’ VS INDIAN CITIZENS
- Normal Resident: Person who ordinarily resides in a country and whose center of economic interest also lies in that country. Include both nationals (such as Indians living in India) and foreigners (non-nationals living in India).
- Citizens: Include Indian nationals living within India as well as outside India.
GDP VS GNP
- Resident: Economic concept; Person or an institution whose center of economic interest lies in the economic territory of the country in which he lives.
- Citizens: Legal Concept
- GDP calculation: All Residents (Includes foreign Residents within India & excludes Indian Citizens outside India.)
- GNP Calculation: All the citizens (Includes all Indian Citizens both inside as well as outside India)
SCOPE OF GOODS COVERED
- Covers all Final Goods; does not cover Intermediate Goods since it leads to double accounting.
- Does not include sale of secondhand Goods; but services offered on such sales considered.
- Includes even those Goods that are not marketed but produced for self-consumption.
- Includes even those Goods that remain unsold; considered as addition to Inventories/ Investment.
SCOPE OF SERVICES COVERED
- Covers all services which are produced within the Country.
- Does not include non-marketable services such as household chores, care for elderly etc.
- Exception: Imputed rent of building that is owned and occupied by owners themselves.
TRANSFER PAYMENTS
- National Income should consider only the factor incomes i.e., income earned through the provision of factors of production. Hence, transfer payments i.e., old age pensions, education grants, unemployment benefits, gifts not included in the GDP Calculation.
- Similarly, remittances also not accounted.
PRODUCTION VS PRODUCT TAXES
- Production Taxes: Taxes paid on land, labour, assets such as Land revenue, stamp duty, Registration fee, Professional tax. Not taxed on per unit of product.
- Product Taxes: Taxes paid on per unit of product such as GST, Excise Duty, Customs duty etc.
PRODUCTION VS PRODUCT SUBSIDIES
- Production Subsidies: Subsidies to the entire enterprise and not specific to product. Examples include Subsidies to Railways, Farmers, Small scale Industries etc.
- Product Subsidies: Product specific subsidies such as Food, LPG, Kerosene, Fertilisers etc.
FACTOR COST VS BASIC PRICE VS MARKET PRICE
GDP is calculated by considering 3 different prices
Factor Cost: Cost of factors of Production such as land, Labour & Capital.
Basic Price (Price expected to be received by Producer): Factor Cost + Production Taxes- Production Subsidies
Market Price (Price expected to be paid by consumer): Basic Price+ Product Taxes- Product Subsidies.
GDP at Market price= GDP at Basic price + Product Taxes- Product Subsidies
Or
GDP at Market Price= GDP at Factor Cost + Production Taxes+ Product Taxes – (Production Subsidies + Product Subsidies)
Or
GDP at Market price = GDP at Factor Cost + Indirect Taxes – Subsidies
METHODS FOR GDP CALCULATION
EXPENDITURE METHOD
GDP = PFCE+ GFCE + GCF + (X-M)
Private Final Consumption Expenditure (PFCE): Expenditure incurred by the households on Goods and Services (only Marketable services).
What it includes?
- Expenditure incurred by Residents within India.
- Expenditure incurred by Residents outside India (Say, Tourism, Education accounted as Imports)
- Expenditure incurred by non-residents within Economic territory of India considered as Exports
Government Final Consumption Expenditure Compensation of employees (wages and salaries + pensions) + Net purchase of goods and services + Consumption of fixed capital (CFC). Note: Excludes the transfer payment.
Gross Capital Formation (GCF)
Calculated as Gross Fixed Capital Formation (GFCF) + Changes in Stocks + Net acquisition of valuables.
Gross Fixed Capital Formation (GFCF) comprises of
- Construction and Maintenance of fixed assets such Infrastructure such as Dwellings, Roads, Railways etc.
- Machinery and Equipment (3) Intellectual Property Rights such as R&D, Software etc.
- Cultivated biological resources - Increment in Livestock and Plantation.
Exports (X) & Imports (M): Imports need to be subtracted since National Income should consider Goods & Services produced within Economic territory.
GDP BY INCOME METHOD
Compensation of employees (CE): Total remuneration in cash or in-kind payable by employers to employees for the work done. Direct social transfers such as payments for sickness, educational grants and pensions are also imputed to compensation of employees.
Operating Surplus (OS): Operating surplus for Organised sector: Retained Earnings + Dividend + Interest on Capital
Mixed Income (MI): Mixed Income for Unorganised/ Household sector: Difficult to differentiate between Employment income (Wages) & Profits (Operating Surplus)
Consumption of Fixed Assets: Rent on land, Buildings and other structures
GVA at Basic Prices = (CE+ OS/MI+ CFA) + Production Taxes – Production Subsidies
GDP = GVA at Basic Prices + Product Taxes – Product Subsidies
GDP BY PRODUCTION METHOD
Gross Value Added (GVA) = Value of Output- Value of Intermediate Consumption.
GDP at Market Price = GDP at basic Price + Product Taxes – Product Subsidies
NOMINAL GDP VS REAL GDP
Nominal GDP: Refers to GDP at current market prices i.e., the GDP is calculated as per the market prices for the year for which the GDP is calculated.
Real GDP: Refers to GDP at base year prices i.e., GDP is calculated as per market prices in the base year. Thus, the Real GDP negates the inflation in goods and services.
In case of high rate of inflation, nominal GDP would be quite higher than real GDP. However, in case of deflation, real GDP would be higher than nominal GDP.
GDP VS GNP
GNP = GDP + Income earned by Indians outside India – Income earned by Foreigners within India
GNP = GDP + Net Factor Income from abroad (NFIA).
CHANGES IN GDP ESTIMATION
- Change in the base year from 2004-05 to 2011-12.
- Change in the GDP estimation from the GDP at Factor Cost to GDP at Market Prices
- Change in the database for capturing economic activity from RBI's database to the MCA-21 database of the Ministry of Corporate Affairs. This database is used for two purposes:
- Estimate the production of goods and services in the organized sector based upon the tax returns
- Extrapolate the production of goods and services in the unorganized sector based upon the organized sector activity.