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DAILY
CLASS NOTES
INDIAN ECONOMY

Lecture – 02
Gross Domestic Product
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Gross Domestic Product

Concept of GDP and GNP:

❖ Gross Domestic Product (GDP) means the total amount of goods and services made within the boundary of a
country and it doesn't matter who made it, but it has to be within the boundary.
❖ In India, the Ministry of Statistics and Program Implementation (MoSPI) calculates GDP quarterly.
❖ Gross National Product (GNP) means the total monetary value of goods and services made by the nationals
or citizens of a country anywhere on this globe.
GNP= GDP + Net Factor income from abroad
❖ Net Factor income from abroad is the difference between the factor income of Indians from abroad and the
factor income of foreigners from India.
Base Year:
❖ It is the year whose prices are being used to calculate the real Gross Domestic Product (GDP).
Which year should be considered as Base Year?
❖ It has to be nearby (not very old) and should be a normal/stable year (no major ups and downs, no new
reforms, no war or economic crisis) in that year.
❖ A revision in the base year is essential for better policy-making. It is meant to track structural changes in an
economy and improve or update macroeconomic indicators that reflect the economic performance of a country.
❖ India has now subscribed to
➢ The System of National Accounts (SNA) 2008 was evolved by the United Nations (to maintain a
similar pattern while calculating in different countries for better comparison).
➢ The International Monetary Fund’s (IMF) Special Data Dissemination Standard (SDDS).
❖ India used to change the Base year every ten years from 1949 till 1980-81, but after that, India started
changing the Base year every five years.
❖ This practice was broken in 2009-10 because that year was not considered a normal year as it succeeded in
the global slowdown of 2008. Hence, the next Base year was fixed for 2011-12.
❖ Next time the revision in the Base year was supposed to happen in 2019-20 but it didn’t happen and India is
still using 2011-12 as the Base year.
Important Definitions:
❖ Basic Price: It is the price at which factor cost is adjusted with production taxes and production subsidy.
❖ Market Price: It is the price under which the Basic price is added with the product tax and product
subsidies (at which consumers purchase the product).
❖ Factor Cost: It is the cost that includes the cost of production of Land, Labour, Capital, and Entrepreneur.
❖ Depreciation: It is a part of the capital that gets consumed during the year due to wear and tear. It does
not become part of anybody’s income.
❖ Gross: It indicates that the products are counted regardless of their subsequent use. When depreciation is
deducted from the Gross value then it becomes the Net amount.
➢ Net Domestic Product at Market Prices (NDP) = Gross Domestic Product (GDP) - Depreciation.
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Nominal and Real GDP:

❖ Real growth means when the growth in the country only shows an increase in quantity and to know the real
growth in the country the prices for both years need to be concerned.
❖ Nominal growth means an increase in quantity as well as an increase in prices. Under nominal growth, we
are supposed to take the current year price and current year quantity for both the year concerned to know the
growth in the country.
❖ Real growth rate provides the actual picture of the country that shows how well the country is doing.
❖ The main purpose of calculating real GDP in the country is to provide the information about real growth
rate while on the other hand, the size of the country is provided with the help of the nominal GDP of the
country.
❖ As per the current nominal GDP of a country we are the fifth largest country at a global level.
The problem of Double Counting:
❖ Gross Domestic Product (GDP): It is defined as the current value of all final goods and services produced in
a nation in a year.
❖ But what are the Final Goods?
➢ Individuals who calculate GDP must avoid the mistake of double counting, which is counting output more
than once as it travels through the stages of production.
➢ For Example: What would happen if government statisticians first counted the value of tires produced
by a tire manufacturing company and then counted the value of a new car sold by an automaker that
contains those tires? The value of the tires would have been counted twice because the price of the car
includes the value of the tires.
➢ To avoid this problem, which would overstate the size of the economy, government statisticians count
just the value of final goods and services in the chain of production that is sold for consumption,
investment, government, and trade purposes.
❖ Intermediate goods, which are goods that go into the production of other goods, are excluded from GDP
calculation. This means that in the example above only the value of the car would be counted.
❖ The problem of double counting can be solved either by calculating the value of the final output or by taking
the value added by each firm.
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