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GDP Estimation and its relevance

as a measure of growth of Indian


Economy
- Athik Ahmed B (51)
AvinashYadav (65)
Moonis PP (71)
Reshma Rani (75)
Vikramaditya Dutta (88)
GDP

Economic growth is the increase in the inflation-adjusted market value of


the goods and services produced by an economy over time.

It is conventionally measured as the percent rate of increase in real gross


domestic product, or real GDP

GDP or gross domestic product, is the market value of all final goods and
services produced in a country in a given time period.
GDP estimation

GDP is calculated by ministry of statistics and programme implementation


The two most common ways to measure GDP per capita are nominal and
purchasing power parity (abbreviated PPP).
Nominal is an attempt at an absolute measure, a sort of immovable
standard that remains the same from country to country. It is the original
concept of GDP.
PPP is an attempt at a relative measure, taking factors of each country into
consideration in order to put a number on a persons standard of living
within that country.
GDP is estimated by the following methods

Production approach
Income approach
Expenditure approach
Production approach

This method of compiling GDP leads to counting the production by sector


of activity.

Calculated by
Estimating the gross value of domestic output out of the many various
economic activities;
Determine the [intermediate consumption], i.e., the cost of material,
supplies and services used to produce final goods or services.
Deduct intermediate consumption from gross value to obtain the gross
value added.
Income approach
The second way of estimating GDP is to use "the sum of primary incomes
distributed by resident producer units"
This method measures GDP by adding incomes that firms pay households for
factors of production they hire - wages for labour, interest for capital, rent for
land and profits for entrepreneurship

Excluding
Transfer payments
Private transfers of money from one individual to another
Income not registered with the tax authorities .This is known as the shadow
economy.
Income from people in jobs and in self-
employment (e.g. wages and salaries)
+
Profits of private sector businesses
+
Rent income from the ownership of land
=
Gross Domestic product
Expenditure method

The third way to estimate GDP is to calculate the sum of the final uses
of goods and services (all uses except intermediate consumption)
measured in purchasers' prices.
Y = C + I + G + (X M)
C Consumption
I- Income
G- Government expenditures
X- Export
M- Import
Relationship Between Macro Indicators
Measure of economic growth
We use real GDP to calculate the economic growth rate. The economic
growth rate is the percentage change in the quantity of goods and
services produced from one year to the next.

We measure economic growth so we can make:


Economic welfare comparisons
International welfare comparisons
Business cycle forecasts
Economic Welfare Comparisons

Economic welfare measures the nations overall state of economic well-


being.
Real GDP is not a perfect measure of economic welfare for seven reasons

Quality improvements tend to be neglected in calculating real GDP so


the inflation rate is overstated and real GDP understated.
Real GDP does not include household production, that is, productive
activities done in and around the house by members of the household.
Real GDP, as measured, omits the underground economy
Health and life expectancy are not directly included in real GDP.
Leisure time, a valuable component of an individuals welfare, is not
included in real GDP.

Environmental damage is not deducted from real GDP.


Political freedom and social justice are not included in real GDP.
International Comparisons

1. Real GDP is used to compare economic welfare in one country with that in
another.
Two special problems arise in making these comparisons.
Real GDP of one country must be converted into the same currency units as
the real GDP of the other country, so an exchange rate must be used.
The same prices should be used to value the goods and services in the
countries being compared, but often are not.
2. Using the exchange rate to compare GDP in one country with GDP in
another country is problematic because prices of particular products in
one country may be much less or much more than in the other country.
Using the exchange rate to value Chinese GDP in dollars leads to an
estimate that U.S. real GDP per person was 69 times Chinese real GDP
per person.
Business Cycle Forecasts

Real GDP is used to measure business cycle fluctuations.


These fluctuations are probably accurately timed but the changes in
real GDP probably overstate the changes in total production and
peoples welfare caused by business cycles
Decline in GDP growth rate is good news for Indian economy

The declining GDP growth rate may not be actually a bad news for the
government and Indian economy. Demonetisation seems to have
curbed the use of black money in the sectors that have been hit
harder.
India has officially lost the tag of the fastest growing economy to
China as the March quarter registered a growth rate of 6.1 per cent
much below than expected 7.1 per cent. The GDP growth was 8 per
cent in 2015-16 and 7.5 per cent in the previous year.
Falling GDP might have wiped out black money
The findings of Ambit Capital Research ,quote that about 30 lakh crore
or 20 per cent of the GDP constitutes India's 'black economy'. The same
report said that about 30 per cent of real estate and construction sector is
funded by black money.

Silver lining for economy


It is expected that with demonetisation and amended laws aimed at
curbing black money, a greater portion of unorganised pockets of
economy will make a shift to formal economy, which may see better
figures in the next quarter and fiscal year.
DRAWBACKS AND LIMITATIONS

It does not account for the underground economy


It is an imperfect measure in some cases Gross National Product (GNP),
which measures output from the citizens and companies of a particular nation
regardless of their location, is viewed as a better measure of output than GDP.
It emphasizes economic output without considering economic well-being
GDP growth alone cannot measure a nation's development or its citizens' well-
being. For example, a nation may be experiencing rapid GDP growth, but this
may impose significant cost to society in terms of environmental impact and
increase in income disparity.
GDP does not take into account profits earned in a nation by overseas
companies that are remitted back to foreign investors. This can overstate a
country's actual economic output.
Conclusion

The GDP of India has grown from a merge 93.7 billion rupees in 1950 to about
410006.4 billion rupees in 2006 growing at a rate more than 8 per cent.
Today, India is recognized for its quality of high technology software services
capability throughout the world.
India has good foreign exchange reserves and fiscal deficit is under control.
BSE Sensex, which is the barometer of Indian economy, is soaring at about
15,000 points a growth of about 700 per cent from 2002 to 2007.
Foreign Direct Investment (FDI) is a record high in India after the economy
was opened up during 1990s.
References

https://www.tutor2u.net/economics/reference/measuring-national-income-
gdp
https://www.investopedia.com/articles/investing/121213/gdp-and-its-
importance.asp
https://en.wikipedia.org/wiki/Economy_of_India
https://www.ibef.org/economy/indian-economy-overview
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