What is Economy?
Production, distribution or trade, and consumption of
limited goods and services by different agents in a given geographical
Can be divided into various sectors:-
The Indian economy is the 10th largest in the world by nominal GDP
Most important and the fastest growing sector of Indian economy are
services. Trade, hotels, transport and communication; financing, insurance,
real estate and business services and community, social and personal
services account for more than 60 percent of GDP
Agriculture, forestry and fishing constitute around 12 percent of the output,
but employs more than 50 percent of the labour force
Manufacturing accounts for 15 percent of GDP, construction for another 8
percent and mining, quarrying, electricity, gas and water supply for the
remaining 5 percent
What is National income?
Final outcome of all economic activities of a nation valued in terms
Determinant of the business level and economic status of a
It has three different measures :-
Equal to the total expenditures for all final goods and services produced
within the country in a fixed period of time (usually a 365-day year)
known as fiscal year
Equal to the sum of the value added at every stage of production (the
intermediate stages) by all the industries within a country, plus taxes
minus the subsidies on products, in the period
Equal to the sum of the income generated by production in the country
in the period—that is, compensation of employees, taxes on production
and imports minus the subsidies
GDP adjusting by PPP
Ranks 3rd pertaining to purchasing power parity (PPP) acc. to World
Using a PPP basis is more useful when comparing generalized
differences in living standards on the whole because, PPP takes into
account the relative cost of living and the inflation rates of the countries,
rather than using just exchange rates which may distort the real
differences in income
The GDP in India expanded 0.60 percent in the third quarter of 2012 over
the previous quarter
GDP Growth Rate in India is reported by the OECD(Organisation for
Economic Co-operation and Development)
GNP and NNP
GNP: The value of all final goods and services produced during a
specific period, usually one year, plus incomes earned abroad by
he nationals minus incomes earned locally by foreigners
NNP: The measure of net output available for consumption by the
society including consumers, producers and government
NNP= GNP – depreciation
Difference between GDP, GNP, NNP
Net foreign income : factor payments received from the foreign sector
by domestic citizens and factor payments made to foreign citizens for
“Gross” word indicates no allowance for depreciation
Assume that in 2013, a country called A produced only one piece
of calculator priced at $10.00. To produce this calculator, country A
used $5.00 worth of factors of production owned by citizens of
country A and $5.00 worth of factors of production owned by
citizens of country B. Country B produced one loaf of bread priced
at $3.00. And to produce this loaf of bread, country B uses $2.00
worth of factors of produced owned by citizens of Country B and
$1.00 worth of factors of production owned by Country A.
The GDP of country A was $10.00.
Because it produced in its own country a good worth $10.00. It
does not really matter who owned the factors of production in
producing the calculator.
But what was its GNP? Country A GNP was $6.00.
Country A citizens contributed $5.00 worth of factors of production
to produce the calculator AND $1.00 worth of factors to produce the
bread in Country B.
Similarly the GDP and GNP of country B was $3.00 and $7.00
Assume that to produce the calculator, country A used a machine
worth $5.00 and the depreciation rate of that machine in 2013 was
$1.00. Since its GNP was $6.00 and depreciation was $1.00, the
NNP for country A was $5.00.
It is a visual model of the economy that shows how money
flows through markets among households and firms.
Factors of production are the inputs to the production
process. There are three basic factors of production:
land, labor, capital.
Factor market is the market where factors of production
are bought and sold such as market for labor, capital,
resources, machinery etc.
Product market - trades final goods which were produced
by means of factors of production (from factor market).
The primary activity of the economy is production or the process of creating a good or
service that can be used to satisfy human wants.
Aggregate Demand is the total amount of goods and services demanded in the
economy at a given overall price level and in a given time period.
ƒAggregate Supply is the total supply of goods and services produced within an
economy at a given overall price level in a given time period.
ƒMonetary Measure. GDP is the monetary value of the total output of goods
and services produced by an economy within a given period of time (quarterly or annual).
ƒNo Double or Multiple Counting. GDP includes only the market value of
FINAL GOODS (goods and services that are purchased for final use by consumer, not for
resale, or further processing) and ignores INTERMEDIATE GOODS (goods and
services that are purchased for resale or for further processing) altogether.
I buy your second-hand bike for 15,000
Rupees, should we including it in the
Expenditure (C) ? Nope. Because the bike
Is not ‘produced again.
Now, I buy your second-hand bike from an
auto dealer, (who gets Rs.1000 Commission)
should we include it in the (C)? Hell Yes,
because he sold his ‘service’ to me uniquely.
Every time he sells a second hand product,
although no new ‘product’ is created
but new service is delivered by him.
WHAT IF SAME 1000 RUPEE NOTE IS
I gave a note of Rs.1000 to that dealer as part of his brokerage and he gives the same Rs.1000 note
to the electricity company for his monthly bill .Same Rs.1000 note is changing hands so is our GDP =Rs.1000?
GDP is the money value of everything produced within India. So brokerage service is Rs.1000 separately and the
electricity produced is also worth Rs.1000 separately. Therefore, Even as same 1000 rupee note is given to both
Total GDP=1000 brokerage+1000 electricity bill=Rs.2000
If electri.co gives that 1000 rupee note to its peon as salary, then again it has to be counted. Because peon sold
his unique service separately to the company. So in that case
Total GDP =‘Brokerage+Electric bill+peon’ salary=Rs.3000
ƒExclusion of Output Produced Abroad by Domestically Owned
Factors of Production.
GDP is the value of output produced by factors of production located within a
APPROACHESTO MEASURING THE
There are three (3) approaches to measuring GDP/GNP:
TOTALPRODUCTION =TOTALINCOME=TOTAL EXPENDITURE
is a method of computing GDP/GNP that measures the amount spent on all final goods
during a given period.
Y = C + I + G + (X-M)
is spending by households on current needs. These are expenditures on food, beverages,
tobacco, clothing and footwear, fuel, light, and water, household furnishings, household
operations, transportation/communications, and miscellaneous expenses.
Three (3) main categories:
Durable goods are goods that last a relatively long time (automobiles, furniture, and
Non durable goods are goods consumed immediately or for a short time (food,
clothing, gasoline, and cigarette)
Payment for services are things that people buy that do not involve the production of
physical items (services of doctors, lawyers, and educational institutions
is the total investment in capital such as the purchase of new housing, plants, equipment,
and inventory by the private (or non government) sector.
is expenditures by the government for final goods and services. These are spending on
weapons, salaries and wages of public school teachers, police, and other public servants.
NET EXPORTS (X-M)
is the difference between the exports (X) and imports (M). Either positive
(X>M) or negative(M>X).
Money we get from export is added.
You remember that GDP means Money value of everything we produce within India. So if
we import something, it has to be subtracted, because it is not produced within India.
So formula (for ease In remembering)
GDP = Consumer+Investor+Governernment + (eXporter – iMporter)
is a method of computing GDP/GNP that measures the economy based on the contribution of
industries and sectors to the value of the final goods.
It requires three stages of analysis:
Gross value of output from all sectors is estimated.
Intermediate consumption such as cost of materials, supplies and services used in production
final output is derived.
Then gross output is reduced by intermediate consumption to develop net production.
Gross Value Added = Gross Value of output – Value of Intermediate Consumption.
Value of Output = Value of the total sales of goods and services + Value of changes in the
Total money value of everything produced (value added at each stage)
Farmer produced Wheat and sold 100 kg of it @ 2000 Rs. (Original value)
Flour mill, purchased it, grinded it and sold the flour to baker @ 2500 Rs. (+500 value added
to previous purchase)
Baker made breads, cookies and biscuits and sold the total production @3500 Rs to its final
customers. (+1000 value added to previous purchase)
what is total ‘GDP’ here?
2000+2500+3500=8000 Rs? Hell no! You’ve to see the value added.
So, total money value of this line is: 2000+500+1000=3500.
Not all of the wheat goes into Baker’s oven. Some of it will go in making beer, some in a
normal household for making roti and so on. You’ve to track the value added in each different
Sum total of incomes of individuals living in a country during 1 year .
Another way of measuring GDP is to measure total income. If GDP is calculated this way it is
sometimes called Gross Domestic Income (GDI), or GDP(I).
An alternative method of calculating GNP using the Income Approach is “RIPSAW.”
The mnemonic “RIPSAW” breaks down as follows: GDP = R + I + P + S + A + W
R = rents
I = interests
P = profits
SA = statistical adjustments (corporate income taxes, dividends, undistributed corporate profits
W = wages
LIMITATIONS OF NATIONAL INCOME
There are certain market transactions that give rise to payments and transfers of goods
and services but are excluded from GNP accounting.
Those that do not arise to useful economic activities or ILLEGAL(drug traffic,
ƒGoods and services produced but do not appear in the market ( home activities by
Losses are not taken into account in the national income accounts (repair and
Who determine GDP?
GDP Annual Growth Rate in India is reported by the Ministry of Statistics and
Programme Implementation (MOSPI).
The Indian economy is the 10th largest in the world.
Ranks 3rd pertaining to purchasing power parity (PPP) acc. to World
The GDP of India in the year 2012 was US $1489.
Per capita income in India is $1516 at nominal and $3,652 at PPP.
On a per-capita-income basis, India ranked 141st by nominal GDP
3rd by GDP (PPP) in 2012, according to the IMF.
India is a member of BRICS.
India is the 19th-largest exporter and the 10th-largest importer in the world.
India's GDP grew by 9.3% in 2010–11; thus, the growth rate has nearly halved in
just three years.
GDP growth rose marginally to 4.8% during the quarter through March 2013, from
about 4.7% in the previous quarter.
From 1951 until 2013, India GDP Annual Growth Rate averaged 5.8 Percent
reaching an all time high of 10.2 Percent in December of 1988 and a record low of
-5.2 Percent in December of 1979.
GDP value of India represents 2.98 percent of the world economy.
Studies have shown that over the past 20 years, annual GDP
growth over 2.5% has caused a 0.5% drop in unemployment for
every percentage point over 2.5%.
GDP in India is reported by the The World Bank Group. Historically, from
1960 until 2011, India’s GDP averaged 368.8 USD Billion reaching an all
time high of 1848.0 USD Billion in December of 2011 and a record low of
36.6 USD Billion in December of 1960.
GDP per capita PPP
GDP per capita in India was last recorded at 3649.53 US dollars in 2011,
when adjusted by purchasing power parity (PPP). The GDP per Capita, in
India, when adjusted by Purchasing Power Parity is equivalent to 17
percent of the world's average.
Historically, from 1980 until 2011, India’s GDP per capita PPP averaged
1446.4 USD reaching an all time high of 3649.5 USD in December of 2011
and a record low of 419.9 USD in December of 1980. The GDP per capita
PPP is obtained by dividing the country’s gross domestic product, adjusted
by purchasing power parity, by the total population.
GDP Annual Growth Rate
Historically, from 1951 until 2012, India’s GDP Annual Growth Rate
averaged 5.9 Percent reaching an all time high of 10.2 Percent in December
of 1988 and a record low of -5.2 Percent in December of 1979. Simply, the
GDP value excludes indirect taxes (VAT) paid to the government and
includes the original value of products without accounting for government
subsidies. GDP Annual Growth Rate in India is reported by the Ministry of
Statistics and Programme Implementation.
The inflation rate in India was recorded at 7.18 percent in December of
Inflation Rate in India is reported by the Ministry of Statistics and
Programme Implementation. Historically, from 1969 until 2012, India Inflation
Rate averaged 7.75 Percent reaching an all time high of 34.68 Percent in
September of 1974 and a record low of -11.31 Percent in May of 1976.
For 2013-14, the CSO has projected a growth rate of 4.6 per cent in agriculture and
allied sectors, up from 1.4 per cent a year earlier.
Manufacturing, however, is expected to register a contraction of 0.2 per cent in this
financial year compared with growth of 1.1 per cent in the previous year.
the services sector, including finance, insurance, real estate and business services
sectors, is likely to grow 11.2 per cent this year compared with 10.9 per cent in 2012-
Ratings agency Crisil said on Wednesday that India will witness a GDP growth
rate of 6 per cent for the fiscal 2014-15, up from an estimated 4.8 per cent in the
current fiscal. This will be aided by an expected continuation of the reform
process, the implementation of stalled projects, debottlenecking of the mining
sector and a recovery in industry on higher external demand, it said.
Goldman Sachs predicted that
"from 2007 to 2020, India's GDP per capita in US$ terms will quadruple", and that the
Indian economy will surpass the United States (in US$) by 2043.
In spite of the high growth rate, the report stated that India would continue to remain
a low-income country for decades to come
could be a "motor for the world economy" if it fulfills its growth potential. World growth
has since slowed substantially.
Limitations of GDP
GDP excludes activities that are not provided through the market, such as household
production and volunteer or unpaid services.
As a result, GDP is understated. Unpaid work conducted on Free and Open Source
Software (such as Linux) contribute nothing to GDP, but it was estimated that it would
have cost more than a billion US dollars for a commercial company to develop
Sustainability of growth
GDP does not measure the sustainability of growth.
Limitations of GDP
Official GDP does not take into account the underground economy,
That is transactions contributing to production, such as illegal trade and tax-avoiding
activities, are unreported, causing GDP to be underestimated.
Quality of goods
GDP sees the total production’s amount. It does not look into the quality of product.
GDP is not always reflective of increases in social welfare
a. Decrease in crime rate – not considered
as increase in output and is not reflected in GDP
b. Increase in leisure – may be associated with decrease in GDP
(less time is spent on producing output)
GDP does not measure the effects of redistributive policies
It does not distinguish between in which most output goes to a few people and the case in which
output is evenly divided among all people.
GDP is also neutral about the kinds of goods an economy produces
People may buy cheap, low-durability goods over and over again, or they may buy high-durability
goods less often.
It is possible that the monetary value of the items sold in the first case is higher than that in the
second case, in which case a higher GDP is simply the result of greater inefficiency and waste
GDP seldom reflects losses or social ills.
GDP accounting rules DO NOT ADJUST for production that POLLUTES the
THE MORE PRODUCTION there is, the LARGER the GDP, regardless of how
much pollution results in the process.
Alternatives to GDP
Human development index (HDI)
up until 2009 report HDI used GDP as a part of its calculation and then factors in
indicators of life expectancy and education levels. In 2010 the GDP component has been
replaced with GNI.
Genuine progress indicator (GPI) or Index of Sustainable Economic Welfare (ISEW) –
The GPI and the ISEW attempt to address many of the above criticisms by taking the same
raw information supplied for GDP and then adjust for income distribution, add for the value of
household and volunteer work, and subtract for crime and pollution.
Gross national happiness (GNH)
Happy Planet Index –
OECD Better Life Index
Composite Wealth Indicators
Future Orientation Index
World Governance Index
Social Progress Index