Gross Domestic Product

&
Balance of Payments

Dr.Rachanaa Datey
Founder Director –QUEST EDUSTATION
What Is GDP?

• A country’s Gross Domestic Product, or GDP, is the total monetary or market value of all
the goods and services produced within that country’s borders during a specified period.

• GDP is usually calculated annually, but it can be calculated per quarter as well.

• The government of India, for example, releases both a GDP estimate for each quarter as
well as the entire year.

• Because GDP provides a broad measurement of a country’s production, it is often

thought of as being a scorecard for a country’s economic health.
Contd..

• A country’s Gross Domestic

Product, or GDP, is the total
monetary or market value of
all the goods and services
produced within that
country’s borders during a
specified period of time.
GDP is the single standard
indicator
• Gross domestic product (GDP) is the single standard indicator used
across the globe to indicate the health of a nation's economy: one
single number that represents the monetary value of all the finished
goods and services produced within a country's borders in a specific
period.
• Gross domestic product may be easy to define but it is complex to
calculate, and different countries employ different methods.
HISTORY

• The first basic concept of

GDP was invented at the
end of the 18th century. The
modern concept was
developed by the American
economist Simon Kuznets in
1934 and adopted as the
main measure of a country's
economy at the Bretton
Woods conference in 1944.
What is the purpose of
calculating a country's GDP?

• Because GDP provides a

broad measurement of a
country’s production, it is
often thought of as being
a scorecard for a country’s
economic health
 What's one way a
country can
increase its GDP?

• Balance of trade is a key

element in the GDP formula.
When a country sells more
domestic products to foreign
nations than it buys, its GDP
increases.
Types of GDP
• There are a few different types of GDP measurements:

• Nominal GDP is the simplest representation of GDP. This is just the raw data
before any adjustments.
• GDP per Capita measures the GDP per person in a country. This metric
approximates the level of prosperity in a country. A high GDP per capita
generally correlates with a high standard of living.
• Real GDP takes into account inflation to allow for more accurate comparisons
of production over time.
• GDP Growth Rate is the increase or decrease in GDP from quarter to quarter.
Nominal (Current) GDP vs Real (Constant) GDP

• Nominal GDP (or "Current GDP") = face value of output, without any
inflation adjustment

• Real GDP (or "Constant GDP") = value of output adjusted for inflation
or deflation. It allows us to determine whether the value of output
has changed because more is being produced or simply because
prices have increased. Real GDP is used to calculate GDP growth.
What does"Domestic" stand for?
(GDP vs. GNP and GNI)
Domestic (GDP)

• "Domestic" (in "Gross Domestic Product")

indicates that the inclusion criterion is
geographical:
• Goods and services counted are those
produced within the country's border,
regardless of the nationality of the
producer.
• For example, the production of a German-
owned factory in India will be counted as
part of INDIAN GDP.
National (GNP)

• In contrast, "National" (in "Gross National Product")

indicates that the inclusion criterion is based on
citizenship (nationality):
• Goods and services are counted when produced by a
national of the country, regardless of where the
production physically takes place.
• In the example, the production of a German-owned
factory in the India will be counted as part of
Germany's GNP (Gross National Product) in addition to
being counted as part of India’s' GDP.
Gross National
Income(GNI)
• GNI (Gross National Income) is a
metric similar to GNP, since both are
based on nationality rather than
geography.
• The difference is that, when
calculating the total value, GNI uses
the income approach whereas GNP
uses the production approach to
calculate GDP.
Both GNP and GNI should theoretically
yield the same result.
What does "Product" stand
for?

• "Product" (in "Gross Domestic

Product") stands for production,
or economic output, of final
goods and services sold on the
market.
 Final goods and services sold for money.

Included
Only sales of final goods are counted,
in GDP: because the transaction concerning a good
used to make the final good

(for example, the purchase of wood used to

build a chair) is already incorporated in the
final good total value (price at which the chair
is sold).
 • unpaid work: work performed within the
family, volunteer work, etc.

Not • non-monetary compensated work

• goods not produced for sale in the
included marketplace
• bartered goods and services
in GDP: • black market
• illegal activities
• transfer payments
• sales of used goods
• intermediate goods and services that are used
to produce other final goods and services
How to calculate GDP

GDP can be calculated in three ways: using the production, expenditure, or income
approach.
All methods should give the same result.

• Production approach: sum of the “value-added” (total sales minus the value of
intermediate inputs) at each stage of production.
• Expenditure approach: sum of purchases made by final users.
• Income approach: sum of the incomes generated by production subjects.
GDP Formula

• The formula for calculating GDP with the expenditure approach is the following:

GDP = private consumption + gross private investment + government investment +

government spending + (exports – imports).

or, expressed in a formula:

GDP = C + I + G + (X – M)
 The GDP growth rate measures the
percentage change in real GDP (GDP
adjusted for inflation) from one period to
GDP another, typically as a comparison
between the most recent quarter or year
Growth and the previous one.

Rate
It can be a positive or negative number
(negative growth rate, indicating economic
contraction).
 GDP per capita is calculated by
dividing nominal GDP by the total
population of a country.
GDP per It expresses the average economic
capita output (or income) per person in
the country.

The population number is the

average (or mid-year) population
for the same year as the GDP figure
How Is the GDP of India
Calculated?
Contd..
• India's Central Statistic Office calculates the nation's gross domestic
product (GDP).
• India's GDP is calculated with two different methods, one based on
economic activity (at factor cost), and the second on expenditure (at
market prices).
• The factor cost method assesses the performance of eight different
industries.
• The expenditure-based method indicates how different areas of the
economy are performing, such as trade, investments, and personal
consumption.
Contd..
• The Central Statistics Office coordinates with various federal and state
government agencies and departments to collect and compile the
data required to calculate the GDP and other statistics.
• For example, data points specific to manufacturing, crop yields, or
commodities—which are used for the Wholesale Price Index (WPI)
and Customer Price Index (CPI) calculations—are gathered and
calibrated by the Price Monitoring Cell in the Department of
Consumer Affairs under the Ministry of Consumer Affairs.
 • Similarly, production-related data
used for calculating Industrial
Production Index (IPI) is sourced
from the Industrial Statistics Unit
Contd.. of the Department of Industrial
Policy and Promotion under the
Ministry of Commerce and
Industry.
Timelines for India's GDP

• Each quarter’s data are released with a lag of two months

from the last working day of the quarter. Annual GDP data is
released on May 31, with a lag of two months. (The financial
year in India follows an April-to-March schedule.)
• The first figures released are quarterly estimates.
• As more and more accurate data sets become available, the
calculated figures are revised to final numbers.
Where Does India Derive Most of Its Gross Domestic Product
(GDP) From?

Sector-wise GDP of India

Source- Ministry of Statistics and Programme Implementation (12,13)
Date 06 Apr 2024

• The services sector is the largest sector of India. Gross Value Added
(GVA) at current prices for the services sector is estimated at 146.35
lakh crore INR in 2023-24. The services sector accounts for 54.86% of
total India's GVA of 266.78 lakh crore Indian rupees. With GVA of Rs.
73.50 lakh crore, the Industry sector contributes 27.55%. While
Agriculture and allied sector share 17.59%.
Contd
• Share of primary (comprising
agriculture, forestry, fishing, and
mining & quarrying), secondary
(comprising manufacturing,
electricity, gas, water supply & other
utility services, and construction),
and tertiary (services) sectors have
been estimated as 19.56 percent,
25.58 percent, and 54.86 percent.
Contd..

• The Agriculture sector's contribution to the

Indian economy is much higher than the world's
average (6.4%). The industry and services
sector's contribution is lower than the world's
average 30% for the Industry sector and 63% for
the Services sector.
 The Asian Development Bank
(ADB) forecasts India's GDP
growth to moderate to 7.5% in
2022-23 from an estimated 8.9%
in 2021-22 but will pick up to
reach 8% in 2023-2024.
BALANCE OF PAYMENTS
 What Is the Balance of
Payments (BOP)?

• The BALANCE OF PAYMENTS (BOP), also

known as the BALANCE OF
INTERNATIONAL PAYMENTS, is a
statement of all transactions made
between entities in one country and the
rest of the world over a defined period,
such as a quarter or a year.
Contd..
• It summarizes all transactions that a
country's individuals, companies,
and government bodies complete
with individuals, companies, and
government bodies outside the
country.
In simple words…

• The balance of payments summarises the economic transactions

of an economy with the rest of the world. These transactions
include exports and imports of goods, services and financial
assets, along with transfer payments (like foreign aid).
 The balance of payments includes both the current account
The and capital account.

balance The current account includes a nation's net trade in goods

of and services, its net earnings on cross-border investments,

and its net transfer payments.

payment The capital account consists of a nation's transactions in

financial instruments and central bank reserves.
s
includes The sum of all transactions recorded in the balance of
payments should be zero; however, exchange rate
- fluctuations and differences in accounting practices may
hinder this in practice.
 The balance of payments (BOP)
transactions consist of imports and
Understandi exports of goods, services, and
ng the capital, as well as transfer payments,
such as foreign aid and remittances.
Balance of
Payments
(BOP) A country's balance of payments and
its net international investment
position together constitute its
international accounts.
The two accounts--The current account and the capital
account.

• The balance of payments divides

transactions into two accounts:
• Sometimes the capital account is called
the financial account, with a separate,
usually very small, capital account listed
separately.
• The current account includes
transactions in goods, services,
investment income, and current
transfers.
 • The capital account, broadly defined, includes transactions in financial instruments
and central bank reserves.
Contd… • Narrowly defined, it includes only transactions in financial instruments.
The current account is included in calculations of national output, while the capital
account is not.
 • Funds entering a country from a
foreign source are booked as credit
and recorded in the BOP.
For • Outflows from a country are
recorded as debits in the BOP.
example: • Let’s say Japan exports 100 cars to
India. Japan books the export of
the 100 cars as a debit in the BOP,
while India books the imports as a
credit in the BOP.
What is the Formula for Balance of Payments?

• The formula for calculating the balance of payments is current account +

capital account + financial account + balancing item = 0.
 • The sum of all transactions recorded in the
IMPORTANT balance of payments must be zero, as long
as the capital account is defined broadly.
• The reason is that every credit appearing in
the current account has a corresponding
debit in the capital account, and vice-versa.
Why is the
Balance of • The BOP of a country reveals its financial
and economic status.
Payment • A BOP statement can be used to determine
(BOP) vital whether the country’s currency value is
appreciating or depreciating.
for a
• The BOP statement helps the government to
country? decide on fiscal and trade policies.
• It provides important information to analyse
and understand the economic dealings with
other countries.
The importance of the balance of payments

The balance of payments helps any country determine if its

currency’s value is appreciating or depreciating.

It provides almost accurate information on the commercial and/or

financial performance of the external sector of an economy.

Balance of payments helps to monitor the import-export

transactions in a given period.
Contd..

It analyses the export growth potential of a country. It helps the government make
sustainable fiscal and trade policies and strategies.

BoP helps to analyze macroeconomic policies to preserve the external balance of

the national economy. It also contributes to correcting temporary and structural
imbalances that may arise in the external accounts of a given economy.

It allows us to analyze the relations of a country with other countries in a certain

period. This way, you can see how some accounts relate to others.
Elements of
a Balance of • There are three components of the balance
of payment viz current account, capital
Payment account, and financial account.
• The total of the current account must
balance with the total of capital and
financial accounts in ideal situations.
Illustration

• If, for the year 2018, the value of exported goods from India is Rs. 80
lakh and the value of imported items to India is 100 lakh, then India
has a trade deficit of Rs. 20 lakh for the year 2018.
• The BOP statement acts as an economic indicator to identify the trade
deficit or surplus situation.
• Analysing and understanding the BOP of a country goes beyond just
deducting the outflows of funds from inflows.
• As mentioned above, there are various components of BOP and
fluctuations in these accounts, which provide a clear indication of
which economic sector needs to be developed.
What is the importance of the Balance of Payments in
India?

• The importance of the balance of payment in India can be determined from

the following points:

• It monitors the transaction of all the imports and exports of services and
goods for a given period.
• It helps the government analyse a particular industry’s export growth
potential and formulate policies to sustain it.
• It gives the government a comprehensive perspective on a different range of
import and export tariffs.
• The government then increases and decreases the tax to discourage
imports and encourage export, individually, and self-sufficiency.
QUICK RECAP
BoP Surplus Balanced BoP BoP Deficit

Credit Side > Debit Side Credit Side = Debit Side Credit Side < Debit Side
Current Account Balanced Current
Current Account Deficit
Surplus Account

Receipts > Payments Receipts = Payments Receipts < Payments

FAQs
• What does the Balance of Payments consist of?
The Balance of Payments consists of three main components - the
current account, the capital account, and the financial account.

• What does the current account of the Balance of Payments include?

The current account includes the trade balance (exports and imports of
goods and services), net income from abroad (such as wages and
investments), and net transfers (remittances, foreign aid, etc.).
FAQs
• What does the financial account of the Balance of Payments include?
The financial account tracks transactions involving financial assets,
including direct investment, portfolio investment, reserve assets, and
other investment flows.

• Why is the Balance of Payments important?

The Balance of Payments is crucial for understanding a country's
economic relationships with the rest of the world and its overall
external financial position.
FAQs
• What does a surplus in the Balance of Payments mean?
A surplus in the Balance of Payments occurs when a country's receipts
from exports, income, and transfers exceed its payments for imports,
income, and transfers.
• What does a deficit in the Balance of Payments mean?
A deficit in the Balance of Payments happens when a country's
payments for imports, income, and transfers exceed its receipts from
exports, income, and transfers.