Coursework: MEMP

IMT Ghaziabad
By
Dr. Manas Paul
Term I PGDM 2019-21
 National Income Accounting
• GDP
• Different measures of GDP
• Equivalence of different GDP measures
• GDP, GNP, NNP
• Some important identities
• Nominal and Real GDP
 • GDP
• Market value of final goods (both C & K) and services produced by
factors of production within the borders of the economy within a
specified time

Greece 238 GDP of select countries GDP of select regions

Australia 1,444
Russia 1,857 World 77,302
India 2,050 Advanced economies 47,044
Italy 2,148
Brazil
Emerging market and… 30,258
2,353
France 2,847 Emerging and developing Asia 14,922
United Kingdom 2,945
Euro area 13,391
Germany 3,860
Japan 4,616 Middle East and North Africa 3,182
China 10,380 ASEAN-5 2,060
United States 17,419
Emerging and developing Europe 1,901
0 5,000 10,000 15,000 20,000
0 40,000 80,000

USD BN USD BN

Source: IMT MPP, IMF WEO April 2015

http://data.worldbank.org/indicator/NY.GDP.MKTP.CD/countries/1W?display=map (Map GDP nominal USD)

http://data.worldbank.org/indicator/NY.GDP.PCAP.CD/countries?display=map (Map GDP per capita nominal USD)
GDP: Important factors to take note of

• Outcome of an economic process : Output is governed by inputs

• It’s a flow concept (Diff between income and wealth)
• Why only final goods and services? Are intermediate goods not produced
in an economy what happens to them?
• Market value… implies there has to be a price for the products… what if
some of the products does not have a market or left out market?
• Government services like administration valued at cost
• Non-market production – goods and services produced but not
exchanged for money (growing ones own food, services of household
work)
• It talks about the size of the economy but not about welfare
• Does not reflect standard of living, Education, Health, Environment, Security,
Freedom, discrimination
• It excludes parallel/under ground economy

• Does not account for the change in the composition of goods and services
over time
 GDP as an economic process

Inputs Final Product

Labour, capital, land, knowledge/

technology/entrepreneurship GDP

Owned by Consumed by
households households
GDP is a Flow Concept – i.e. incremental within a specified time period

GDP =

Wealth =
National
flow

stock
Numerical Example
The bread economy. Which has Farmer, Bread Economy transactions Rs
Miller, Baker, Consumers. One final
Farmer's input cost to produce
good is produced which is bread. Farmer wheat 0

The farmer grows wheat and sells it to the Farmers labor cost to produce
wheat 100
miller at Rs. 500. Assume that he incurs no
cost for intermediate goods. Though there Farmer's revenue from sale of
is a labour cost of Rs. 100. wheat 500

Miller Miller's input cost 500

The miller buys the wheat at Rs. 500 and
turns it into flour. He incurs a labour cost Miller's labour cost 50
of Rs. 50. He sells flour to the baker at Rs. Miller's revenue from sale of wheat 700
700.
Baker Baker's input cost 700
The baker buys the flour and employs Baker's labour cost 100
labour at a cost of Rs. 100 to make it into
a nice dough and bake it to a bread which Baker's Revenue 1000
he sells to the consumer at Rs. 1000. Consumer Buys bread 1000

What is the value of GDP in this economy?

• A: 2200 (500+700+1000)
• B: 1500 (500+1000)
• C: 1000
• D: 1700 (700+1000)
• E: 1200 (500+700)
 Intermediate goods excluded to prevent double counting
(Value Added Method)
Example of a bread economy

Assumption of

•Produces wheat
Miller •Purchases flour at Rs.
Consumers
•(assume at zero cost) 700
•Purchases wheat at •Sells bread Rs. 1000 •Purchases the bread
•Sells to miller at Rs. Rs. 500 at Rs. 1000 and
500 •VA: Rs (1000 -700) consumes as final
•Sells flour at 700
•VA*: Rs. (500-0) product
•VA: Rs. (700 – 500)

Farmer Baker

*VA = Value Added

• Wheat farmer’s final product; Flour Miller’s final product; Bread baker’s final product
• So what should be the value additions at each stage?
• Does the sum of value additions equal to GDP?
GDP : Intermediate goods, capital goods and inventories

• GDP includes final goods (consumption as well as capital goods ) & services…

• A lathe machine used by a toy maker … is it an intermediate good?

• It has been itself produced and is used to produced other goods (toys)…like
intermediate goods
• Not used up in the same period it is produced unlike an intermediate good
• Moreover, It adds to productive capacity…unlike an intermediate goods

A capital good is a good that is itself produced (which rules out natural resources such as
land) and is used to produce other goods; however, unlike an intermediate good, a capital
good is not used up in the same period that it is produced.

• Inventories are stocks of unsold finished goods, goods in process, and raw
materials held by firms.
• This forms a part of GDP
GDP: Change in Stocks (CIS) or inventories in Indian GDP
Exercise: What would be the impact on GDP other things remaining constant:

Buying a car on loan involves two important things:

1. Paying fees/incurring other expenditures to avail the loan facilities
2. Paying the dealer the loan money to buy the car
3. If it’s an old car, it could involve paying the broker for his services to bring the
buyer and seller together

A CIAZ ZDI+ manufactured and sold in 2017 has an on road price (excl registration)
of INR 11,76,391. Bimal a Ghaziabad resident has been looking out to buy a CIAZ
ZDI+. He has two options, going for a new car at the price mentioned above or buy
a 2014 manufactured model available through a broker at INR9,50,000.

In both these cases there would be fees for the following transactions:
1. Gaziabad: Registration INR73,276 (new car) ; Change of registration INR 15000
(old car)
2. Fees to avail bank loan INR 2500 (similar for avail loan for new or old car)
3. Pay the broker who has brought the 2nd hand deal an amount INR15,000 for his
services
What would be the impact on GDP in either case?
QUIZ: Non marketable output

Other things remaining constant a farmer in a country grows 1000 kg of Potato.

The ongoing market price of Potato is Rs. 20 per kg. He decides to sell 750kg of his
output in the market while keeping the remaining for his own use.

What would be the impact on the country’s GDP for these actions of the farmer?
Exercise: GDP is prejudiced as to where the output is produced but is blind as to
the national origin of the input.

Suppose an US Professor of Economics spent a week in IMT Ghaziabad to deliver a

series of lecture sponsored by the Government of India. How will it affect US and
Indian GDP?

How does it affect US & Indian GNP?

By the way what is GNP?

GNP of any country: Value of goods and services produced by the country’s
residents irrespective of their location.

GNP = GDP + NFIA where NIFA: Net Factor Income from Abroad

NNP = GNP – accrued capital consumption

 Measuring GDP – Equivalence of three measures

3 ways to measure GDP

• Output (O) – the value added approach

• Expenditure (E) – the value of spending on final goods

and services

• Income (Y) – the value of income paid by firms to

households in return for land, labour and capital
Refer to the excel Table
 Reason behind Equivalence of 3 ways of measuring GDP
Revenues
Household
earned by
Expenditure
business

Payment to
Household inputs by
Income business
 Circular flow in a simple one good economy economy

Economic Agents

Businesses Households

 Production of a good.  They provide labour (as well as capital

 Produce 10,000 units of the goods goods and natural resources) to the
hiring workers, using machines and business
natural resources available  There are 20,000 workers available
 Each unit of goods sells at Rs. 20  Assume there is full employment
 Total worth of (potential) output:  Each worker gets Rs. 10 for renting out their
 Rs. 20 x 10,000 = Rs. 200,000 factor of production (i.e. labour, capital,
natural resources..)
 Total income of the households:
 Rs. 10 x 20,000 = Rs. 200,000
 They spend the income to buy the 10,000
units of the goods produced
People work, produce goods and services and in the process earns income
Spends the income earned on the goods and services they produced
Implying GDP value = Total Income Generated from the activities in the economy
Total income generated = total spending by economic agents in the country
 GDP Accounting:
Spending on domestic goods and services
1. Consumption spending by households (C)
2. Investment spending (I)
3. Government spending (G)
4. Foreign demand for our net exports (NX = X-M)

Also known as COMPONENTS OF DEMAND in the

economy
As per the circular flow of National Income:
Value of GDP = C+I+G+NX
Y = C+I+G+NX Fundamental National Income Identity
 C = Consumption
• Consumption = purchases of
goods and services by the
household sector
– Includes spending on durable
(ex. Cars), non-durable (ex.
Food), and services (ex. Medical
services)
– Consumption is the primary
component of demand
• Consumption as a share of
GDP varies by country
– For India it is ~ 59%
of GDP
 G = Government Spending
• National defense expenditures
• Infrastructure spending (Roads, etc)
• Salaries of Govt Employees
• Transfer payments
– Transfers to economically backward sections of
society
– Unemployment benefits
– Social Security: Health and Medical Insurance
I = Investments & NX = Net Exports
• Investment = additions to the physical stock of
capital (i.e. building machinery, construction ,
additions to inventories)
• NX = Exports (X) – Imports (M)

• NX can be >, <, or = 0

India : NX has mostly been negative  trade deficit
 IMPORTANT IDENTITIES
• Economic system with G, Trade, Savings &
Investments
Disposable Income YD = Y – TA +TR…..(1)
How will the disposable income be allocated?
YD = C + S …….(2)
From 1 & 2: Y –TA+TR = C+S
Using Fundamental Identity

C+I+G+(X-M) –TA+TR = C+S

S-I = (G+TR-TA)+(X-M)
Example: GDP accounting

Following National Income accounts for hypothetical country

Rs. Crore
GDP 6000
Gross Investment 800
Net Investment 200
Consumption 4000
Govt purchases of goods and services 1100
Government budget surplus 30

1. What is NDP?
2. How much is net exports?
3. Government taxes minus transfers?
4. Disposable personal Income?
5. Saving?
GDP: Nominal or Real?

• What is meant by GDP 2014-15?

• What is meant by GDP 2014-15 at 2011-12 prices and current prices
Indian GDP: The base year of national accounts were revised in the following
chronological order:

 Shift in the reference year for measuring the real growth

 Updating surveys and studies
 Incorporating conceptual changes, as recommended by the international
guidelines
 Incorporate statistical changes like revisions in the methodology of data
compilation
 Adoption of latest classification systems and inclusion of new and recent
data sources
 Incorporate changes in the presentation of estimates to improve ease of
understanding for analysis and facilitate international comparability
 GDP at factor cost and GVA at basic price

In the revision of National Accounts statistics done by Central Statistical Organization

(CSO) in January 2015, it was decided that sector-wise wise estimates of Gross Value
Added (GVA) will be given at basic prices instead of factor cost as per the UN
System of National Accounts (SNA).
GVA at factor cost + (Production taxes less Production subsidies) = GVA at basic prices

GDP at market prices = GVA at basic prices + Product taxes- Product subsidies

Production taxes & Production subsidies are paid or received with relation to production and
are independent of the volume of actual production.
…i.e. land revenues, stamps and registration fees and tax on profession.
Production subsidies include subsidies to Railways, input subsidies to farmers, subsidies to village
and small industries, administrative subsidies to corporations or cooperatives, etc.

Product taxes or subsidies are paid or received on per unit of product.

Example – GST (subsuming excise tax, sales tax, service tax) and import and export duties.
Product subsidies include food, petroleum and fertilizer subsidies, interest subsidies given to
farmers, households, etc. through banks.

Reading material: India to change the way it measures growth_ live mint 29 Jan 2015
 Growth & Contribution to growth

No GDP Period 1 Period 2 YoY % Contribution to Contrib.

Pdn side A B GDP Growth (%) to GVA
????
=(B-A)/(Pd1 GDP)

1 AGRI 18 27 50 9
2 INDUSTRY 27 40 48 13
3 SERVICES 50 77 54 27
4 = 1+2+3 GVA 95 144 52

5 NET TAX 5 6 20 1

6 = 4+5 GDP MKT Sum of all contributions

PRICES 100 150 50
=50
 • Inflation
• Rate of Change in prices (generally annual rate of change)

Inflation

GDP deflator WPI inflation PPI inflation CPI inflation

No definite Defined commodity Defined commodity Definite commodity
commodity basket basket basket bundle

Perception of Price of bulk Sellers perspective Consumers

Agg prices transactions perspective

CPI: Consumer Price Index: Movement of a wtd basket of goods faced by an average consumer – Measures
average retail price faced by the consumer (used to adjust income and expenditure streams for changes in the
cost of living )

WPI: Wholesale Price Index: Movement of a wtd basket of wholesale prices – Measure of price of bulk
transactions at a primary stage in domestic economy. It includes excise duty as well as transport costs

PPI: Producer Price Index: Measures the average selling prices received by domestic producers of goods and
services – doesn’t incorporate sales and excise tax (used to deflate revenue streams to measure real output)
 Real GDP – Measured at a base year price

Indian GDP Nominal Indian GDP Real

Rs crore Rs Crore
FY12 8832012 8832012
FY13 9988540 9280803
FY14 11345056 9921106
FY15 12541208 10643983
Source: CSO, press release May 29 2015
 GDP( Nom) 
GDPDeflato r    X 100  Measure _ of _ Agg _ Pr ice _ level
 GDP(Re al ) 

What does this data say about growth and inflation?

How does it reflect in the high frequency quarterly data?

Does it have any policy implication?

Discussion: Ten takeaways for the Reserve Bank from the GDP data
Economic growth slows to 7% in the June 2015 quarter
 GDP deflator Inflation

Indian GDP Nominal Indian GDP Real

(base FY12) (Base 2012)

Rs crore Rs Crore

FY12 8832012 8832012

FY13 9988540 9280803

FY14 11345056 9921106

FY15 12541208 10643983

Find GDP deflator inflation from FY13 to FY15

 GDP deflator Inflation

GDP Deflator
Indian GDP Nominal Indian GDP Real (Nominal/Real)
Rs crore Rs Crore (Nominal/Real)x100

Deflator
FY12 8832012 8832012 100.000000 inflation
FY13 9988540 9280803 107.625816 7.6%

FY14 11345056 9921106 114.352734 6.3%

FY15 12541208 10643983 117.82439 3.0%

Can we get GDP deflator inflation at FY14 or FY15 prices?

Can we compute GDP and hence growth at FY14 or FY15 prices?
 WPI or CPI Which is a better measure of inflation in India
Increased relevance of CPI
WPI was in focus earlier
• Until 2011, there was no single CPI,
representative of the whole country.
There were three or four CPI
measures, relevant for different
segments of population.
• WPI was earlier available with a
shorter lag only a 2-week delay
compared with CPI inflation which
came with a 2-month lag.
Final Take:
RBI has been using consumer price
inflation as its nominal anchor since
Raghuram Rajan took charge of Indian
monetary affairs in September 2013, and
the new monetary policy framework it has
signed with the finance ministry has
formalized this policy shift.
But rising relevance of CPI
• Now there is one representative measure of retail inflation (combined
CPI)
• CPI monthly inflation data released couple of days prior to WPI
inflation data for the same month.
• WPI excludes prices of services (such as education, healthcare, and
rents which account for nearly 60 per cent of GDP) – does not reflect
domestic supply side situation
• The new CPI (combined) measure assigns nearly 40%weightage on
services - hence a better reflector of demand side pressures in the
economy, than wholesale prices.
• WPI assigns nearly 15% and 10.7% weightage for the fuel group and
metal and metal products group, respectively. Any sharp movements
in international prices of fuels and metals lead to sharp changes in WPI
which make it difficult to gauge the underlying inflationary pressures.
• Retail inflation is an indicator of the underlying demand situation in
the economy. In a strong demand environment, retailers pass on the
entire increase in wholesale prices or even more to their end-
consumers, if demand remains weak, retailers witness pressure on
margins.