1. WHAT IS GDP?
•Gross domestic product is the monetary value of all
finished goods and services made within a country
during a specific period.
•GDP provides an economic snapshot of a country, used
to estimate the size of an economy and its growth rate.
•GDP can be calculated in three ways, using expenditures,
production, or incomes and it can be adjusted for
inflation and population to provide deeper insights.
•Real GDP takes into account the effects of inflation while
nominal GDP does not.
•Though it has limitations, GDP is a key tool to guide
policymakers, investors, and businesses in strategic
decision-making.
2. TYPES OF GDP
● NOMINAL GDP
Nominal GDP is an assessment of
economic production in an economy that
includes current prices in its calculation. In
other words, it doesn’t strip out inflation or
the pace of rising prices, which can inflate
the growth figure.
● REAL GDP
is an inflation-adjusted measure that
reflects the number of goods and services
produced by an economy in a given year,
with prices held constant from year to year
to separate out the impact of inflation or
deflation from the trend in output over time.
Since GDP is based on the monetary
value of goods and services, it is subject to
inflation.
3. METHODS TO CALCULATE GDP
1. VALUE ADDED METHOD-
The production, or value added, approach consists of calculating an industry or sector's output
and subtracting its intermediate consumption (the goods and services used to produce the output)
to derive its value added
Gross Value Added= Value of Output – Value of Intermediate Goods
Where,
Value of Output = Sales (Domestic Sales+Exports) + Change in Stock (Closing- Opening)
GDP (Market Price) = Gross Value Added
Additionally, if we want to calculate National Income from this than,
NNP(Factor Cost)=GDP(Market Price)-Depreciation+ NFIA- NIT(Indirect Tax- Subsidies)
4.
5. METHODS TO CALCULATE GDP
2. Expenditure Method
This begins with money spent on goods & services. This measures the total expenditure incurred by all entities
on goods and services within the domestic boundaries of a country
Mathematically, GDP(Market Price) = C + I + G + (EX-IM)
Where,
C: Private Final Consumption Expenditure, i.e. when consumers spend money to buy various goods and services. For example –
food, gas bill, car etc.
I: Investment Expenditure, i.e. when businesses spend money as they invest in their business activities. For example, buying
land, machinery etc.
G: Government Final Expenditure, i.e. when the government spends money on various development activities and
(EX-IM): Exports minus Imports, i.e. Net Exports that is We include the exports to other countries in the calculation of GDP and
subtract the imports from other countries to our country.
6. METHODS TO CALCULATE GDP
3. Income Method: Under the income approach method, we calculate the income earned by all
the factors of production in an economy i.e. Land, Labour, Capital and Entrepreneurship.
Compensation of Employees
1. Wages and Salaries in Cash
2. Wages and Salaries in Kind
3. Employers Contribution to Social Security
Operating Surplus
1. Rent
2. Royalty
3. Interest
4. Profit (Dividend, Retained Earings, Undistributed Profit)
Mixed Income of Self Employed
Income Method will give us NDP (Factor Cost) ,So
GDP(Market Price)= NDP(Factor cost) +NIT +Depreciation.
7. GDP DEFLATOR
• GDP Deflator is also known as GDP Price Deflator or Implicit Price Deflator
• It measures the impact of inflation on the GDP of an economy during a period of one specific fiscal
year
• Deflator is a factor by which Normal GDP is adjusted to calculate real GDP
• GDP Deflator: Nominal GDP * 100
Real GDP
8. ● It ignores the value of informal or unrecorded economic activity
● It is geographically limited in a globally open economy
● It emphasizes material output without considering overall well-being
● It ignores business-to-business activity
● It counts costs and waste as economic benefits
LIMITATIONS OF GDP
9.
10. WHAT IS PURCHASING POWER PARITY?
Purchasing power parities is a
theory or a tool used to determine
the exchange rate of currencies
while comparing the cost of living
and wealth across nations
worldwide.
It is based on the law of one price
(LoOP) but an aggregate price of
identical products.
11. FUNCTIONS OF PPP
•Exchange rate determination
•Comparison of living standards
•Trade competitiveness
•Investment decisions
•Inflation targeting
12. TYPES OF PURCHASING
POWER PARITY
This theory states that
the exchange rate
between two
currencies should be
equal to the ratio of the
price levels of a basket
of goods and services
in each country.
This theory suggests that
the rate of change in the
exchange rate between two
currencies should be equal
to the difference in the
inflation rates of the two
countries.
It takes into account changes in the real interest rate, which is the nominal
interest rate adjusted for inflation.
13. Pd = Sd/f x Pf
HOW TO CALCULATE PURCHASING
POWER PARITY
Purchasing power parity works under the law of one price. Thus, for a bundle of goods, the
partner country’s price must be equal to the domestic price after adjusting for the exchange rate.
Mathematically, we can calculate it with the following formula:
•Pd represents the domestic price of a good or service
•Sd represents the spot exchange rate, which is the price of one unit of domestic currency
in terms of foreign currency
•f represents the forward exchange rate, which is the expected price of one unit of
domestic currency in terms of foreign currency at a future date
•Pf represents the foreign price of the same good or service
14. THANK YOU
Conclusion:
The Purchasing Power Parity (PPP) concept is a fundamental economic theory that helps
to compare the relative prices of goods and services between different countries.
PPP accounts for the differences in the cost of living and inflation rates across countries,
and provides a more accurate way to compare the standard of living, exchange rates, and
economic performance of different countries.
