Measuring the Macroeconomic Variable

Aggregate Output
Measurement Gross Domestic Product (GDP), Gross National Product (GNP), Net
National Product (NNP), Real GDP, Nominal GDP, Price Indexes, GDP Deflator,
Inflation, Unemployment.
(Approaches of Measurement: Income Method, Output/Value Added Method,
Expenditure/Outlay Method),

What is GDP?
It is the market value of all final goods and services produced within the geographic boundary of a
country in a given period of time
Market Value:
Value of any goods and services measured in terms of how much price market is ready to pay for the
goods and services. Actually the GDP is measured in terms of nominal value.
GDP of a country can increase when number of units of the product and services produced increases
or it can also increase with the increase in price of the product and services increase.
What do you want as the citizens of a country?
All Goods and Services:
When GDP is calculated it takes into account all the goods and services that is produced in the
country irrespective of who produces it (Oranges, potatoes, tyres, cements, nursing, banking, driving
services.and much more..). The moment we produce goods, we also produce bads. Do you think
it should also be added to GDP?
Final Goods and Service:
Let us understand this with the help of an example.
Let the product in question is be a Black Jean Pant.
Before the production of jean one need to produce cotton, thread, dye, fabric etc... Cotton, thread,
dye and fabric will be the inputs for making jeans. Therefore, these are intermediary goods. While
calculating the GDP, only the market value of jean, which is meant for final use, is taken into account
Why? It is because all the value addition that happens is captured in final product called jean. If we
calculate the value of cotton, thread, dye, and fabric - we will be counting multiple times the value
creation.
Suppose, I buy a second hand car with Rs. 3,00000. Would that be considered under GDP?

Within Geographic Boundary:

The GDP includes goods and services produced inside the country irrespective of who is producing it.
For example, if Toyota is producing cars in India, the value of the cars is calculated for the GDP in
India. Similarly, JLRs car productions by Tata Motors will not be included in GDP of India.
For a Given Period of Time:
The GDP need to be calculated for a specific period time can be monthly, quarterly, annually. This is
done for judging about the progress that is being made.
Note - Complexities:
In case the final good is not produced by the end of the given period in question, then the value of
intermediary good which is the final good at the end of the period will be part of the GDP. In our
example fabrics not used for jean can be in inventory at the end of the period in question. Therefore,
this inventory will be part of the GDP for that period. However, that inventory will be used to make
jeans next period. In that case the value of inventory will be subtracted from the final output of Jean
in next period to avoid double counting.

How to Measure GDP?

GDP can be measured by three methods; expenditure method, Output/Value added Method, and
Income method. All the three methods give the same estimate. Entire expenditure is made out of
income. What is somebodys income, the same is somebody elses expenditure which is spent for
the value of a good or a service produced. If the expenditure is less than the income then the
country is saving, and otherwise the country is borrowing.
The expenditure can be on two types of goods and services.
1. Consumption goods and services: This expenditure does not affect the future income
2. Investment goods and services: This expenditure will have implications for the future income
Similarly,
The incomes are coming from factors of productions.
1.
2.
3.
4.

Land
Labour
Capital
Entrepreneurship/Innovations/Technologies

The incomes of the factors of production will match with the value of output created during the
period and also with the the expenditure of the owner of the factors of production (the economic
agents).

Expenditure approach: Who are the economic agents making the

expenditure?

1. Firms (Most of the expenditure are in investment goods)

a. Investment goods and services
b. Consumption goods and services
2. Households (Most of the expenditure are in consumption goods)
a. Investment goods and services
b. Consumption goods and services
3. Government (All the spending of government is the expenditure)
a. Investment goods and services
b. Consumption goods and services
4. Foreigner Spending (net of export and import)
a. Foreigners buying our goods and services are the exports which gives export
revenue
b. Firms, households, and government can also spend on goods and services produced
by other countries which are imports and accounts for import expenditure. These
imports can be for
i. Investment purpose
ii. Consumption purpose
The net expenditure under this head is Export - Import
Let us say the GDP is:
Y = Consumption (Household and firms consumption spending) + Investment (Households and firms
investment spending) + Government Spending (Consumption and investment spending) + Net of
Export (Export Import)

Y = C + I + G + NX
Task: Find out the proportion of each of these components in Indias GDP (2015-16). Also see if
the structure has changed over the years.

Value Added Approach:

It is a method of computing GDP that measures the economy based on the contribution of industries
and sectors to the value of the final goods.

GDP=GVAi
GVA: Gross Value added at each production unit i.
Example: 1kg wheat is sold at Rs.20, initial value addition by the farmer is 20, then the same is used
in a bakeshop & bread is sold of Rs.50, so value added by the bread maker is 50-20= Rs.30. Total
value added = 30+20=50
This approach considers all sectors of an economy like
1. Agriculture & allied services, of which:
(i) Agriculture
(ii) Forestry & logging
(iii) Fishing etc.

2. Industries of which:
(i) Mining & Quarrying
(ii) Manufacturing
(iii) Electricity, Gas and Water Supply etc.
3. Services, of which:
(i) Construction
(ii) Trade
(iii) Hotels & Restaurants
(iv) Railways
(v) Other means of Transport
(vi) Storage
(vii) Communication
(viii) Banking and Insurance
(ix) Real Estates and Dwelling Business
(x) Public Administration and Defense
(xi) Other Services etc.
Organizational structure of Indian Economy: Facts to reflect on ->
Even though service sector of India is contributing highest percentage of GDP, still its sad to say
that Agriculture is still the main source of employment for around 65% of our population! Only 45% the total work force are working in organized sector!
Financial Year

Agri-culture & Allied

Industry
Services

Mining-andQuarrying

Manufacturing

Services

1951-52

51.45

16.69

2.02

9.05

29.63

1961-62

46.25

20.80

2.21

11.58

30.85

1971-72

40.47

23.97

2.23

13.02

34.14

1981-82

35.35

26.23

2.82

14.28

37.49

1991-92

28.54

27.33

3.55

14.51

43.91

2001-02

22.42

26.57

2.86

15.02

51.02

2012-13

13.68

27.03

1.98

15.24

59.29

Source: Instructors original calculation

Income Approach:

It looks at GDP in terms of who receives the income for the product exchanged. It corresponds to the
sum of the rewards to the owners of the factors of production. It is the total income earned by
factors of production owned by a countrys citizen (compensation of employees, proprietors
income, corporate profits, net interest, and rental income).

GDP=INTEREST + RENT+ WAGE + PROFIT + DEPRECIATION

Depreciation is part of GDP in the income approach. It is added in the computation of GDP because it
has been subtracted from the amount that corporations actually receive.
When GDP is measured in terms of Factor Cost it is called GDP at factor cost (GDPFC). Similarly
when GDP is measured at market price it is called GDP at market price (GDPMP)

GDPFC = GDPMP Indirect Taxes + Subsidies

Let say in an economy, 1 mobile & 1 quintal of rice is produced. The price fixed by the mobile
manufactures is Rs.5000 for the phone, and price for 1 quintal rice is Rs.2000. Then the economys
GDP will look like the following.
Mobile

Paddy

Total

GDP at Factor Cost

5000

2000

7000

Tax (10%)

500

500

30

30

1970

7470

Subsidy
Market Price

5500

Other Variants of National Outputs

GNP Gross National Product
GNP is the total market value of all final goods and services produced within a given period by
factors of production owned by a countrys citizens, regardless of where the output is produced. It
takes into account the market price of a final good or service that has been produced by a countrys
factors of production within the country and the returns to investments and other income from
abroad derived by its nationals.
GDP is the final value of goods & services produced in the economy in a financial year whereas GNP
is the final value of goods & services produced by the economy in a financial year. Now we can add
something that we had not included before - that is - what is produced by us, whether inside or
outside India, is included under GNP but if some non-Indian is producing in our country, then we
have to exclude that.

For example, if Toyota is producing cars in India, the value of the cars would NOT be included under
GNP of India. Similarly, JLRs car productions by Tata Motors will be included in GNP of India.
To put it simply,

GNP = GDP + Net Factor Income from Abroad (NFIA),

Where, NFIA is the difference between the factor income received from the rest of the world and
the payments made to factors of production to foreigners for their investments in India.

GNPFC = GDPFC + NFIA

GNPMP = GDPMP + NFIA
GNPFC = GNPMP - Taxes + Subsidies
So far we have estimated everything in gross terms; however capital goods lose their value as they
get used in the process of production. In a given period of time, the economy incurs new
investments and old investments lose some value. Therefore, one can measure the out in net terms
as well. These can be expressed;

Net Domestic Product (NDP) = GDP Depreciation

National Income = GNPFC Depreciation

Private Income = National Income Income from Domestic

Product Accruing form Government Sector + Transfer of
Income

Personal Income = Private Income Corporate Tax

Undistributed Profit

Personal Disposable Income = Personal Income Personal

Income Tax

National Disposable Income = National Income + Net

Indirect Tax + Net Transfer of Income from Rest of the
World
So far we have discussed all the concepts in terms of nominal values, however the citizens welfare is
affected by real outputs. Let us see how real GDP is estimated

Nominal vis--vis Real GDP

We can discuss the concept with the help of an example.
Let us say in 2015 the country produced 100 kg of oranges (the country only produces oranges), and
price of oranges per kg is Rs.100. Market value of the oranges is Rs.10000 (hence the GDP is
Rs.10000). If the same country produced 150Kg of oranges in 2016 and the prices of oranges in 2016
is Rs.60 per kg, the GDP of the country is Rs.7500. Though the country produced more oranges the
GDP is reported to be declined. Another possibility could be -Instead of 150kg if the country
produces same 100kg but the price rises to Rs.120/kg; would the GDP go up from Rs.1000 to
Rs.1200. Do you think GDP has gone DOWN or UP in REAL TERMS?
The difference between the real and nominal GDP is with respect to the price on which the total
amount of goods and services is multiplied. In case of nominal GDP the price is current price, and in
case of real GDP it is the GDP deflator.
To understand the concept of GDP deflator we need to understand the concept of base year. To
calculate the real GDP we need to have a base year to be fixed. In that base year the price is fixed at
100 and depending on the inflation rate the index value changes. For example if the base year is
2010, the price is 100 in that year, and price in 2016 will be compounded inflation rate over 6 years.
Let us say the index in 1016 is 140.

The GDP deflator is K = 140/100

If the nominal GDP In that case the year 2016 is 14000, then the real GDP in 2016 is;

Real GDP2016 = 14000 / K = 10000

The generalized GDP deflator formula is given by

GDP Deflator = It / 100 (Where I = WPI Index)