GDP AND GNP PROF.

KARAN BHATT
GROSS DOMESTIC PRODUCT
The most important metric that is determined by national income accounting is GDP
or the gross domestic product. GDP is defined as the total monetary or the market
value of all the final goods and services that are produced within the geographical
boundaries of a country.
GDP works as a scorecard that reflects the economic health of a country. It is
calculated on an annual basis. GDP helps in estimating the growth rate of a country.
GDP can be calculated using the three methods, which are expenditures method,
production method, and income method.
The other indicators of national income are derived from GDP.
GDP can be calculated by the following two methods:
1.Expenditure approach
2.Income approach
INCOME APPROACH
The income approach to measuring the gross domestic product (GDP) is based on
the accounting reality that all expenditures in an economy should equal the total
income generated by the production of all economic goods and services.
It also assumes that there are four major factors of production in an economy and
that all revenues must go to one of these sources.
Therefore, by adding together all of the sources of income, a quick estimate can be
made of the total production value of economic activity over a period.
Adjustments then must be made for taxes, depreciation, and foreign-factor payments.
KEY POINTS
•GDP provides a broader picture of an economy.
•The national income and product accounts (NIPA) form the basis for measuring GDP
and allows people to analyze the impact of variables, such as monetary and fiscal
policies.
WAYS TO CALCULATE GDP
GDP=Total National Income+Sales Taxes+Depreciation+Net Foreign Factor Income
Where,
Total National Income=Sum of all wages, rent, interest, and profits
Sales Taxes=Consumer taxesimposed by the governmenton the sales of goods and
services
Depreciation= cost allocated to tangible asset over its useful life
Net foreign factor income= difference between the total income that a country’s
citizen and companies generate in foreign countries, versus the foreign citizens and
companies
IMPORTANCE OF GDP
Some economists illustrate the importance of GDP by comparing its ability to provide a high-
level picture of an economy to that of a satellite in space that can survey the weather across
an entire continent.
GDP provides information to policymakers and central banks from which to judge whether
the economy is contracting or expanding, whether it needs a boost or restraint, and if a threat
such as a recession or inflation looms on the horizon.
The national income and product accounts (NIPA), which form the basis for measuring GDP,
allow policymakers, economists, and businesses to analyze the impact of variables such
as fiscal and monetary policy, and economic shocks (such as a spike in oil price), as well as
tax plans and spending plans on the overall economy and specific components of them.
Along with better-informed policies and institutions, the skillful use of national accounts by
policymakers has contributed to a significant reduction in the severity of business cycles
since the end of World War II.
ECONOMIC CYCLE AND GDP
GDP does fluctuate because of business cycles.
When the economy is booming and GDP is rising, inflationary pressures build up
rapidly as labor and productive capacity near full utilization.
This leads central bank authorities to commence a cycle of tighter monetary policy to
cool down the overheating economy and quell inflation.
As interest rates rise, companies cut back, the economy slows down, and companies
cut costs.
To break the cycle, the central bank must loosen monetary policy to stimulate
economic growth and employment until the economy is strong again
GDP IN INDIA
GROSS NATIONAL PRODUCT PROF. KARAN BHATT
GROSS NATIONAL PRODUCT
Gross national product (GNP) is an estimate of the total value of all the final
products and services turned out in a given period by the means of production owned
by a country's residents.
GNP is commonly calculated by taking the sum of personal consumption
expenditures, private domestic investment, government expenditure, net exports, and
any income earned by residents from overseas investments, minus income earned
within the domestic economy by foreign residents.
Net exports represent the difference between what a country exports minus any
imports of goods and services.
KEY POINTS
•GNP measures the output of a country's residents regardless of the location of the
actual underlying economic activity.
•Income from overseas investments by a country's residents counts in GNP, and
foreign investment within a country's borders does not.
•This is in contrast to GDP which measures economic output and income based on
location rather than nationality.
•GNP and GDP can have different values, and a large difference between a country's
GNP and GDP can suggest a great deal of integration into the global economy.
CALCULATION OF GNP
For calculating GNP, only the final goods and services are considered. Intermediate
goods are avoided as it leads to double counting.
To calculate the GNP for a nation, the following factors are considered:
1.Consumption expenditure
2.Investment
3.Government expenditure
4.Net exports (Total exports minus total imports)
5.Net income (Income earned by residents in foreign countries minus income earned
by foreigners in the country)
CALCULATION OF GNP
The mathematical formula for calculating GNP is expressed as follows:
Y=C+I+G+X +Z
Or
GNP = Consumption expenditure + Investment + Government expenditure + Net
exports + Net income
CALCULATION OF GNP
GNP considers the manufacturing of goods like equipment, machinery, agricultural
products, vehicles as well as some services like consulting, education, and health
care.
The cost of providing the services is not calculated separately as it is included in the
price of the final products.
GNP per capita is used for the calculation of GNP on a country-to-country
comparison, while it becomes problematic when a citizen holds a dual citizenship. In
that case, their income is contributed as GNP for each of the respective countries,
which leads to double counting.
IMPORTANCE OF GNP
GNP is considered as an important economic indicator by economists. It is used by
them for finding solutions to the economic issues such as poverty and inflation.
When income is calculated on the basis of per person irrespective of the location,
GNP becomes a much more reliable factor than GDP.
The information obtained from GNP is used for analysing the BoP (Balance of
Payments).
In some countries or unions, such as the European Union, economists use GNI or
gross national income.
GNP OF INDIA IN 2020