Hello all... We have heard almost every other day on the news channel/other media about GDP..
But what is GDP actually.. Lets see
1) It is one of the ways of measuring the size of the economy.
2) It is defined as the market value of all final goods and services produced within a county in a given period of time.
3) It is also considered as the sum of value added at every single stage of production of all final goods and services.
4) It is the single most-used economic measure.
This was some information about GDP but talking of GDP is not suffice and we have to look in for some more terms like GNP,NIA...
What is GNP???
1) GNP is the aggregate final output of the citizens and businesses of an economy in a year.
2) This term was mainly used in US till 1980's
An important fact to note is that when NET FOREIGN INCOME is added to GDP,it will give us the GNP.
What is Net Foreign Factor Income?
Net Foreign Factor Income is the income from foreign domestic factor sources minus foreign factor incomes earned domestically.
Some Points about GDP:-
1) GDP does not measure total transactions in the economy.
2) It counts final output but not intermediate goods.
Examples of GDP so as to make it more clear.
1) Selling your two-year-old car does not add to GDP.
Selling your car to a used car dealer who then sells your car to someone else for a higher price,adds to GDP.The value of the dealer's services is added to GDP.
2) Selling a stock or bond does not add to GDP.
The stock broker's commission from the sales does add to GDP.
3)Social security payments, welfare payments, and veterans' benefits, are not included in GDP.
Only the cost of transferring is included in GDP.
4)The work of unpaid house-spouses does not appear in GDP calculations.
GDP only measures market activities so unpaid value added is not included in GDP.
There are two methods of calculating GDP: the expenditure approach and the income approach.
1)EXPENDITURE APPROACH
According to this approach, GDP is equal to the sum of the four categories of expenditures.
GDP = C + I + G + (X - M)
where: C = private consumption
I = business investment
G = government expenditures
X = exports; M = imports;
(X-M) = net exports
Consumption (C)
Economists preferred to split consumption into two parts – private and public.
Private consumptions is the expenditure by households and is treated as endogenous consumption.
Public consumption is the government spending and treated as exogenous and it can be related with macroeconomic frameworks.
When individuals receive income, they can spend it on domestic goods, save it, pay taxes, or buy foreign goods.
It includes most personal expenditures of households such as food, rent, medical expenses and so on but does not include new housing.
Thus, in general, it is payments by households for goods and services.
“C”, Consumption is the largest and most important of the flows.
It is also the most obvious way in which income received is returned to firms.
Investment (I)
“I” is defined as business investments in capital.
Examples are construction of new factory, purchase of new software, purchase of machinery and equipments.
Spending by households on new houses is also included in investments.
Unlike its general meaning, Investment in GDP meant a non-financial product purchases.
Buying financial products is categorized into savings.
Gross private investment minus depreciation will be equal to net private investment.
Government Expenditure (G)
“G” is the government expenditures on final goods and services.
It includes salaries of public servants, purchase of weapons for military, and any investment-expenditures by government.
It does not include any transfer payments such as social security or unemployment benefits.
The source of revenue generation is mainly taxes, and these taxes are either spent on goods and services or are returned to individuals in the form of transfer payments.
If the government runs a deficit, it must borrow from financial markets to make up the difference.
Net Export (X-M)
Spending on imports are subtracted from total expenditures because it escapes the system and does not add to domestic production.
Export to foreign nations are added to total expenditures.
Gross exports minus gross imports is equal to net export.
2. THE INCOME APPROACH
This is another way of measuring national income.
Income measured in this way is also called as Gross Domestic Income (GDI) or simply National Income.
By definition, GDP=GDI; but in practice these two figures may be slightly different due to measurement errors.
This is another way of measuring national income.
Income measured in this way is also called as Gross Domestic Income (GDI) or simply National Income.
By definition, GDP=GDI; but in practice these two figures may be slightly different due to measurement errors.
National Income is the total income earned by citizens and businesses in a country in one year.
It consist of employee compensation, rent, interest and profits.
The formula for GDP/GDI measured using the income approach is
GDP = Compensation of employee + Gross operating surplus + Gross mixed income + Taxes less subsidies on production and imports
Compensation of employee (COE) measures the total remuneration to employees for work done.
It includes wages and salaries as well as employer contributions to social security and other such programs.
Gross operating surplus (GOS) is the surplus due to owners of incorporated business.
It is the payments to the owners of the firm.
Gross mixed income (GMI) is the same measures as GOS, but for unincorporated business.
This often includes most small businesses.
The sum of COE, GOS and GMI is called total factor income, and measures the value of GDP at factor (basic) prices.
The difference between basic prices and final prices (those used in the expenditure calculation) is the total taxes and subsidies that the government has levied and paid on that production.
So adding taxes less subsidies on production and imports converts GDP at factor cost to GDP (I).
Another formula of GDP (I) is:
GDP (I) = R + I + SA + W
where R = rents; I = interest; P = profits
SA = statistical adjustments (corporate income taxes, dividends, undistributed corporate profits);
W = wages
GDP to National Income
National Income is all income earned by citizens of a nation and is equal to GNP.
To go from GDP to National Income-
add net foreign factor income
subtract depreciation from GDP
subtract indirect business taxes from GDP.
Other National Income Terms
Personal Income (PI) is the national income plus net transfer payments from government minus amount attributed but not received.
PI = NI + transfer payments from government + Net non-business interest income – Corporate retained earnings – Social security taxes
Disposable personal income (DPI) is personal income minus personal income taxes and payroll taxes.
DPI is what people have readily available to spend.
DPI = PI – Personal taxes
GDP figures are used to make comparisons among countries and to measure economic welfare over time.
GDP gives a measure of economic size and power.
Per capita GDP is another measure often used to compare nations' GDP.
Because of differences in non-market activities, per capita GDP can be a poor measure of the various living standards in various nations.
Purchasing power parity is used to get around the problems of per capita GDP.
Purchase power parity adjusts for different relative prices among nations before making comparisons.
Just because GDP rose does not mean welfare rose – it could be only prices rose.
Comparing output over time is best done with real output which is nominal output adjusted for inflation.
Nominal GDP is GDP calculated at existing prices.
Real GDP is nominal GDP adjusted for inflation.
Real GDP is important to society because it measures what is really produced.
Real GDP is arrived at by dividing nominal GDP by the GDP deflator.
Limitations of national income accounting include the following:
Measurement problems exist.
GDP measures economic activity, not welfare.
Subcategories are often interdependent.
GDP Measures Market Activity, Not Welfare
GDP measures only market activity but it does not measures the welfare or standard of living.
For example, a country which exported 100 percent of its production and imported nothing would still have a high GDP, but a very poor standard of living.
One main problem in estimating GDP growth over time is that the purchasing power of money varies in different proportion for different goods, so when GDP is deflated over time, its growth can vary greatly depending on the basket of goods used and the relative proportions used to deflate the GDP figure.
Official GDP estimates may not take into account the Black Market, where the money spent is not registered; and non-monetary economy where no money comes into play at all, resulting in inaccurate or abnormally low GDP.
It ignores domestic, volunteer or unpaid work.
Although cross-border comparison of GDP is better done by PPP method but even this method is not very reliable because it does not take into account the quality of local goods produced.
GDP does not take disparity in incomes between the rich and poor.
Inspite of these limitations, GDP is still very popular measure of economic growth of a country.
The Gross/Genuine Progress Indicator (GPI) is an alternative measure to GDP.
The GPI tries to measure pollution, education, health concerns, as well as GDP.
Bhutan have advocated Gross National Happiness (GNH) as a standard of living, and claims to be the world’s happiest nation.
But what is GDP actually.. Lets see
1) It is one of the ways of measuring the size of the economy.
2) It is defined as the market value of all final goods and services produced within a county in a given period of time.
3) It is also considered as the sum of value added at every single stage of production of all final goods and services.
4) It is the single most-used economic measure.
This was some information about GDP but talking of GDP is not suffice and we have to look in for some more terms like GNP,NIA...
What is GNP???
1) GNP is the aggregate final output of the citizens and businesses of an economy in a year.
2) This term was mainly used in US till 1980's
An important fact to note is that when NET FOREIGN INCOME is added to GDP,it will give us the GNP.
What is Net Foreign Factor Income?
Net Foreign Factor Income is the income from foreign domestic factor sources minus foreign factor incomes earned domestically.
Some Points about GDP:-
1) GDP does not measure total transactions in the economy.
2) It counts final output but not intermediate goods.
Examples of GDP so as to make it more clear.
1) Selling your two-year-old car does not add to GDP.
Selling your car to a used car dealer who then sells your car to someone else for a higher price,adds to GDP.The value of the dealer's services is added to GDP.
2) Selling a stock or bond does not add to GDP.
The stock broker's commission from the sales does add to GDP.
3)Social security payments, welfare payments, and veterans' benefits, are not included in GDP.
Only the cost of transferring is included in GDP.
4)The work of unpaid house-spouses does not appear in GDP calculations.
GDP only measures market activities so unpaid value added is not included in GDP.
There are two methods of calculating GDP: the expenditure approach and the income approach.
1)EXPENDITURE APPROACH
According to this approach, GDP is equal to the sum of the four categories of expenditures.
GDP = C + I + G + (X - M)
where: C = private consumption
I = business investment
G = government expenditures
X = exports; M = imports;
(X-M) = net exports
Consumption (C)
Economists preferred to split consumption into two parts – private and public.
Private consumptions is the expenditure by households and is treated as endogenous consumption.
Public consumption is the government spending and treated as exogenous and it can be related with macroeconomic frameworks.
When individuals receive income, they can spend it on domestic goods, save it, pay taxes, or buy foreign goods.
It includes most personal expenditures of households such as food, rent, medical expenses and so on but does not include new housing.
Thus, in general, it is payments by households for goods and services.
“C”, Consumption is the largest and most important of the flows.
It is also the most obvious way in which income received is returned to firms.
Investment (I)
“I” is defined as business investments in capital.
Examples are construction of new factory, purchase of new software, purchase of machinery and equipments.
Spending by households on new houses is also included in investments.
Unlike its general meaning, Investment in GDP meant a non-financial product purchases.
Buying financial products is categorized into savings.
Gross private investment minus depreciation will be equal to net private investment.
Government Expenditure (G)
“G” is the government expenditures on final goods and services.
It includes salaries of public servants, purchase of weapons for military, and any investment-expenditures by government.
It does not include any transfer payments such as social security or unemployment benefits.
The source of revenue generation is mainly taxes, and these taxes are either spent on goods and services or are returned to individuals in the form of transfer payments.
If the government runs a deficit, it must borrow from financial markets to make up the difference.
Net Export (X-M)
Spending on imports are subtracted from total expenditures because it escapes the system and does not add to domestic production.
Export to foreign nations are added to total expenditures.
Gross exports minus gross imports is equal to net export.
2. THE INCOME APPROACH
This is another way of measuring national income.
Income measured in this way is also called as Gross Domestic Income (GDI) or simply National Income.
By definition, GDP=GDI; but in practice these two figures may be slightly different due to measurement errors.
This is another way of measuring national income.
Income measured in this way is also called as Gross Domestic Income (GDI) or simply National Income.
By definition, GDP=GDI; but in practice these two figures may be slightly different due to measurement errors.
National Income is the total income earned by citizens and businesses in a country in one year.
It consist of employee compensation, rent, interest and profits.
The formula for GDP/GDI measured using the income approach is
GDP = Compensation of employee + Gross operating surplus + Gross mixed income + Taxes less subsidies on production and imports
Compensation of employee (COE) measures the total remuneration to employees for work done.
It includes wages and salaries as well as employer contributions to social security and other such programs.
Gross operating surplus (GOS) is the surplus due to owners of incorporated business.
It is the payments to the owners of the firm.
Gross mixed income (GMI) is the same measures as GOS, but for unincorporated business.
This often includes most small businesses.
The sum of COE, GOS and GMI is called total factor income, and measures the value of GDP at factor (basic) prices.
The difference between basic prices and final prices (those used in the expenditure calculation) is the total taxes and subsidies that the government has levied and paid on that production.
So adding taxes less subsidies on production and imports converts GDP at factor cost to GDP (I).
Another formula of GDP (I) is:
GDP (I) = R + I + SA + W
where R = rents; I = interest; P = profits
SA = statistical adjustments (corporate income taxes, dividends, undistributed corporate profits);
W = wages
GDP to National Income
National Income is all income earned by citizens of a nation and is equal to GNP.
To go from GDP to National Income-
add net foreign factor income
subtract depreciation from GDP
subtract indirect business taxes from GDP.
Other National Income Terms
Personal Income (PI) is the national income plus net transfer payments from government minus amount attributed but not received.
PI = NI + transfer payments from government + Net non-business interest income – Corporate retained earnings – Social security taxes
Disposable personal income (DPI) is personal income minus personal income taxes and payroll taxes.
DPI is what people have readily available to spend.
DPI = PI – Personal taxes
GDP figures are used to make comparisons among countries and to measure economic welfare over time.
GDP gives a measure of economic size and power.
Per capita GDP is another measure often used to compare nations' GDP.
Because of differences in non-market activities, per capita GDP can be a poor measure of the various living standards in various nations.
Purchasing power parity is used to get around the problems of per capita GDP.
Purchase power parity adjusts for different relative prices among nations before making comparisons.
Just because GDP rose does not mean welfare rose – it could be only prices rose.
Comparing output over time is best done with real output which is nominal output adjusted for inflation.
Nominal GDP is GDP calculated at existing prices.
Real GDP is nominal GDP adjusted for inflation.
Real GDP is important to society because it measures what is really produced.
Real GDP is arrived at by dividing nominal GDP by the GDP deflator.
Limitations of national income accounting include the following:
Measurement problems exist.
GDP measures economic activity, not welfare.
Subcategories are often interdependent.
GDP Measures Market Activity, Not Welfare
GDP measures only market activity but it does not measures the welfare or standard of living.
For example, a country which exported 100 percent of its production and imported nothing would still have a high GDP, but a very poor standard of living.
One main problem in estimating GDP growth over time is that the purchasing power of money varies in different proportion for different goods, so when GDP is deflated over time, its growth can vary greatly depending on the basket of goods used and the relative proportions used to deflate the GDP figure.
Official GDP estimates may not take into account the Black Market, where the money spent is not registered; and non-monetary economy where no money comes into play at all, resulting in inaccurate or abnormally low GDP.
It ignores domestic, volunteer or unpaid work.
Although cross-border comparison of GDP is better done by PPP method but even this method is not very reliable because it does not take into account the quality of local goods produced.
GDP does not take disparity in incomes between the rich and poor.
Inspite of these limitations, GDP is still very popular measure of economic growth of a country.
The Gross/Genuine Progress Indicator (GPI) is an alternative measure to GDP.
The GPI tries to measure pollution, education, health concerns, as well as GDP.
Bhutan have advocated Gross National Happiness (GNH) as a standard of living, and claims to be the world’s happiest nation.
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