Indian Economy and Growth Measurements, UNACADEMY
What is an economu? The economy is the large set of inter-related production and consumption activities that aid in determining how scarce resources are allocated. This is also known as an economic system Economic Growth: Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another
How can the capacity of an economy be measured? This capacity of an economy can be meas,ured through different indicators. 1. Gross Domestic Product (GDP): It is defined as the total market value of all final goods and services produced within the country in a given period of time- usually a year. In estimating GDP, only final marketable goods and services are considered. The value of intermediate goods is a part of the final goods and services and so is not counted separately as it amounts to double counting and exaggerates the value of output.
Gross National Product (GNP): In calculating GDP, we are not taking into account the income earned by citizens of India working abroad. So, we need to find a way to take into account the earnings made by Indians abroad or by the factors of production owned by Indians. Also we must deduct the earnings of the foreigners who are working within our domestic economy or the payments to the factors of production owned by the foreigners.
GNP GDP + Net Factor Income from Abroad
(Net factor income from abroad- Factor income earned by the domestic factors of production employed in the rest of the world - Factor income earned by the factors of production of the rest of the world employed in the domestic economy)
3. Net Domestic Product (NDP): Net Domestic Product GDP - depreciation 4. Net National Product (NNP): Net National Product = GNP-Depreciation
Factor Cost: Factor costs are the actual production costs at which goods and services are produced by firms and industries in an economy. They are the cost of all factors of production such as land, labor, capital, energy, raw materials like steel, etc that are used to produce a given quantity of output in an economy. Also called factor gate costs since all the costs that are incurred to produce a given quantity of goods and services take place behind the factory gates.
Market Price: It refers to the actual transacted price and thus includes the indirect taxes which a government levies. Thus there are two changes we make to the factor cost to arrive at the Market Price. We need to add the indirect taxes and subtract the subsidies given by the government Once a product is produced and it leaves the factory gate, Market Price comes into play during the billing process, where the indirect taxes levied by the government are added and this is the final cost the consumer has to pay for the product. Subsidies are subtracted because it reduces the cost of production and thus the consumer has to pay less.
National Income: We have seen four indicators which are used to measure the capacity of an economy. Any of these indicators can be considered as National Income of a country. For example, In India we calculate GDP and this is taken to be our National Income. So, it varies from one country to another Economic Growth Rate An economic growth rate is a measure of economic growth from one period to another in percentage terms. In India we measure Economic Growth Rate by measuring the rate of change of GDP from one year to another.
a. Current prices (Nominal GDP) GDP is calculated at b. Constant prices (Real GDP) Nominal GDP: Nominal GDP refers to the current year production of final goods and services valued at current year prices. Real GDP: If this measure is adjusted for inflation; it is expressed in real terms
Base Year: It is a specific year against which the economic growth is measured. It is allocated a value of 100 in an index. The estimates at the prevailing prices of the current year are termed as "at current prices", while those prepared at base year prices are termed "at constant prices". The base year is changed periodically to take into account the structural changes which take place in the economy New Base Year 2011-12: The Ministry of Statistics & Programme Implementation has released the new series of national accounts, revising the base year from 2004-05 to 2011-12. Other changes: GDP will now onwards be calculated at Market Prices instead of the calculating GDP at factor cost
GDP Deflator: Notice that the ratio of nominal GDP to real GDP gives us an idea of how the prices have moved from the base year (the year whose prices are being used to calculate the real GDP) to the current year. In the calculation of real and nominal GDP of the current year, the volume of production is fixed. Therefore, if these measures differ it is only due to change in the price level between the base year and the current year. The ratio of nominal to real GDP is a well known index of prices. This is called GDP Deflator.
Other concepts Per Capita Income (PCI Per Capita Income (PCI) is per capita GDP i.e. GDP divided by midyear population of the corresponding year. Similarly, per capita GNP can also be calculated Purchasing Power Parity (PPP): There are two ways to measure GDP (total income of a country) of different countries and compare them. One way, called GDP at exchange rate, is when the currencies of all countries are converted into USD (United States Dollar). The second way is GDP (PPP) or GDP at Purchasing Power Parity (PPP)
Transfer payments: It refers to payments made by government to individuals for which there is no economic activity in return by these individuals. Examples include pensions, scholarships, etc Personal Income: Personal Income (PI) NI - Undistributed profits Net interest payments made by households Corporate tax + Transfer payments to the households from the government and firms Personal Disposable Income (PDI): Personal Disposable Income is the part of the aggregate income which belongs to the households. They may decide to consume a part of it, and save the rest. Personal Disposable Income (PDI) E PI Personal tax payments Non-tax payments
India's GDP by various reports/financial institutions: 1. Economic Survey 2016-17: The survey projects the economy to grow in the range of 6.75% to 7.5% in fiscal year 2017-18 in the post demonetization year. It says that the adverse impact of demonetization on GDP growth will be transitional. 2. International Monetary Fund: Update: July, 2017 The World Economic Outlook (WEO) is a survey conducted and published by the International Monetary Fund. The International Monetary Fund (IMF) kept its outlook for India GDP growth rate unchanged at 7.2% in 2017-18 and 7.7% in 2018-19.
3. World Bank: Update: June, 2017 The Global Economic Prospects Report is published by the World Bank. It is published annually and partly updated two times a year. World Bank in its latest Global Economic Prospects Report projects India's growth to 7.5% in 2018 and 7.7% in 2019. Asian Development Bank: Update: April, 2017 The Asian Development Outlook is an annual publication (available online and in print) produced by the Asian Development Bank (ADB). India's economy is set to grow at 7.4% in the current fiscal year 2017-18 against 7.1% in the previous year, on the back of pick-up in consumption demand and higher public investment.
7. FICCI India's economy is set to grow by a robust 7.4% in the current fiscal, backed by the agriculture sector which is estimated to clock 3.5% growth and improvement in the performance of the industry and services sector. However, the economists participating in the Economic Outlook Survey brought out by industry body FICCI have forecast the country's gross domestic product (GDP) growth for 2016-17 to be between 6.6% and 7.1%, with some even anticipating the fourth quarter (January-March) economic growth to be lower than the previous quarter numbers.
Can GDP symbol ize the overall development of a country ? The following arguments make us realize the fact that GDP alone cannot symbolize the development of a country 1. Distribution of GDP - how uniform is it: If the GDP of the country is rising, the welfare may not rise as a consequence. This is because the rise in GDP may be concentrated in the hands of very few individuals or firms. 2. Unaccounted activities: Many activities in an economy are not evaluated in monetary terms. For example, the domestic services women perform at home are not paid for. 3. Does not take into account the overall social development of a nation. For that purpose, we need to look at other indicators like Human Development Index as well. Only when there is inclusive development, a country is said to prosper.
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