NATIONAL INCOME REAL GDP GNP PPP
GDP GNP PPP DEPRECIATION NCERT UPSC
CALCULATING NATIONAL INCOME REAL GDP
NATIONAL INCOME REAL GDP GNP PPP
Measuring GDP
GDP OR Gross domestic product, measures the monetary value of final goods and services in the hands of the final user—i.e. the monetary value of final goods and services.
- It includes all of the output generated within the borders of a country.
- GDP is composed of goods and services produced for sale in the market.
- GDP also includes some production that is not sold openly, such as defense or education services provided by the government.
- Unpaid work like someone cooking or care giving at home to family members is not included in GDP, but same work outside family will be part of GDP since it is paid for.
- Illegal activities like smuggling or other black market activities are not part of GDP.
GNP - Gross national product, measures the monetary value of all final goods and services produced by the residents of a country within the borders as well as outside the country.
- GNP= GDP + Net remittances (incoming remittance – outgoing remittance)
- If an US company has a factory in India, the output of this factory would be included in Indian GDP, but in US GNP.
What Is Depreciation?
Depreciation - In the process of creating goods & services, existing stock (roads, machines, vehicles, etc.) that helped in creating them may undergo wear and tear, referred to as depreciation. Depreciation, which is a reserve that businesses set aside to account for the replacement of equipment that tends to wear down with use, is also added to the national income. All of this together constitutes a nation’s income. All depreciations cannot be added as capital may not have been set aside, i.e. government assets (are replaced via additional taxation or reallocation), fertility of land( being lost has no savings to account for), ageing population(will reduce productivity but not always replenished via new infrastructure & technological advancement)
Depreciation is an accounting way to spread the cost of a tangible or physical asset over its service life or several years. Depreciation represents how much of the asset's value has been used up in any given time period. Companies depreciate assets for both tax and accounting purposes and has several different methods to choose from.
- GDP – Depreciation (Wear & Tear) = Net Domestic Product (NDP)
- GNP – Depreciation (Wear & Tear) = Net National Product (NNP)
- Net National Product (NNP) = National income(NI) = NNP at Market prices + subsidies – Indirect taxes = NNP at Market prices - net indirect taxes
- Net indirect taxes = indirect taxes – subsidies
- Personal disposable income = personal income - personal tax payments – non tax payments
# In normal circumstances all calculations are at market prices, i.e. include inflation affected prices.
## Personal Income = National Income(NI) – Undistributed Profits – Interest payment by households or individuals – Corporate Tax + Transfer Payments
### Undistributed profits -= Are those profits that are not distributed by companies but are held back to be used for future reinvestment
GDP CALCULATION PROCESS
NATIONAL INCOME REAL GDP GNP PPP
GDP in a country is usually calculated by the national statistical agency, which in india is central statistical office Central Statistics Office (CSO), under the Ministry of Statistics and Program Implementation(MOSPI), is responsible for calculating the GDP of India, macroeconomic data gathering, and statistical record keeping, which compiles the information from a large number of sources. In making the calculations, however, most countries follow established international standards.
The international standard for measuring GDP is contained in the System of National Accounts, 1993, compiled by the International Monetary Fund, the European Commission, the Organization for Economic Cooperation and Development, the United Nations, and the World Bank.
Calculating GDP exactly is practically difficult. Large number of goods & services are bartered thereby reducing chance of being included in statistics, on the other hand a large number of goods are bought but buyers cannot be recognized or captured nor their incomes & vice versa. GDP can be calculated in three different ways but none can give a clear data, therefore adjustments need to be worked out to account for leakages:
- The production approachadds up the “value-additions” at each stage of transition of a product or service.
Value-added = sales price – cost of raw material inputs.
Example: Bread cost – Rs 20 rupees, other raw materials cost = Rs 50, sandwich sales price =Rs 300
Value-added (Rs. 230) = (Rs. 300) sales price – (Rs. 20+50) cost of raw material inputs
- The expenditure approachadds up the value of purchases made by final users—for example, the consumption of food, televisions, and medical services by households; the investments in machinery by companies; and the purchases of goods and services by the government and foreigners.
GDP=C+G+I+NX
Where: C=Consumption (goods & services)
G=Government spending (Taxes collected & loans taken from banks)
I=Investment (Investment by companies & individuals across assets)
NX=Net of exports(exports-imports)
The income approach -- The income approach represents a kind of middle ground between the two other approaches to calculating GDP. The income approach calculates the income earned by all the factors of production in an economy, including the wages paid to labor, the rent earned by land, the return on capital in the form of interest, and corporate profits. Sums up the incomes generated in the process of production—i.e. Salary of employees and profits of companies.
The income approach factors reducing GDP to the extent of indirect business taxes.
Nominal vs. Purchasing Power Parity
NATIONAL INCOME REAL GDP GNP PPP
What Is Nominal GDP? – refers to exchange rate GDP, it simply is converting the GDP in home currency in another currency particularly US$, to compare different country GDP’s.
What Is Purchasing Power Parity?
Purchasing power parity (PPP) is a GDP conversion metric used to compare economic productivity and standards of living between countries.
Since income levels define material happiness & exchange rate is not reliable metric exchange goods between countries, therefore PPP is used to compare different currencies through a "basket of goods" approach. That is, PPP is the exchange rate at which one nation's currency would be converted into another to purchase the same amounts of a large group of products or buying goods of all countries at prices prevailing in one country in its currency.
PPP recalculates a country's GDP as if it were being priced in the US.
Above concept, is used to find a multiple which can nullify the price difference created by exchange rate between two currencies, thereby making price of a basket of goods same in both countries.
GDP Purchasing Power Parity (PPP)
While not exactly GDP, economists & policy planners look at PPP to see how one country’s GDP measures up in US dollars. Since US dollars are widely used in international transactions & is also less volatile, it gives a fair idea of real output, real income, and living standards.
Relation between exchange rate & PPP
The US dollar is currently trading at Rs 85 Indian rupees. If a person buys a pen in india. He can buy ten pens for Rs 85, which means each pen costs him US$0.10 in India. However, if the same pen would cost him US$0.5 in the US.
The PPP exchange rate for a pen would be 0.5/0.1 = 5
Comparing GDPs of two countries
Nominal GDP is measured in the currency of the country under consideration. While comparing the value of output in two countries using different currencies one can use Exchange rate or PPP. Nominal GDP is calculated by converting the value of GDP of each country into U.S. dollars and then compares them. The PPP GDP is calculated by using the multiple that allows for purchase of the same amount of goods and services in each country. This multiple is mostly developed in comparison to US$.
PPP finds its greatest use in macroeconomic studies as you compare GDP. As you know, countries have their own currencies. Therefore, the GDP disclosed can be skewed.
According to December, 2023 IMF data, India’s nominal GDP stands at US$ 3.7trillion or 3700 billion, placing India at 5th globally at only 15% of USA in 1st place & 10% less than Japan. By PPP calculation India’s GDP IN Dec, 2023 stood at US$13.1 trillion or 13, 100 billion, i.e. 50% of US GDP & double that of Japan.
Market and PPP-based exchange rates to U.S. dollar in emerging market and developing countries differ by a multiple of 2 and 4. This is because non-traded goods and services like hair cut tend to be cheaper in low-income than in high-income countries even when the cost of tradable goods, such as software’s, hardware’s, machines, etc. across two countries is the same.
- In rich & developed countries, nominal (market) and PPP exchange rates tend to be much closer.
- Developing & poor countries have a higher estimated PPP GDP as compared to nominal or exchange rate GDP.
GDP LIMITATIONS
What GDP does not reveal
Quality of life - GDP is not a measure of the overall standard of living or well-being of a country. Although GDP per capita may increase but it is no guarantee whether the average citizen in a country is better or worse off, it does not capture the negative cost of development such as environmental damage or other external costs such as noise Or the reduction of leisure time or the depletion of nonrenewable natural resources.
PPP may still provide imperfect picture because of the following,
- Tariff effect: Tariffs can change the price of imported goods.
- Difficult to estimate: The estimation of PPP is complicated as products across countries do not differ at a constant price level.
- Transport Costs: create difference in cost for similar products.
- Tax differences: different taxes in different countries can affect prices in other countries because they may go into inputs.