GDP PDF

Macroeconomics GDP Dr. Chandrika Raghavendra Assistant Professor (Economics) Great Lakes Institute of Management, Chennai Ponder! Do economic activities fluctuate across regions and over time?  Why are some countries exceedingly rich while othe...

Macroeconomics GDP Dr. Chandrika Raghavendra Assistant Professor (Economics) Great Lakes Institute of Management, Chennai Ponder! Do economic activities fluctuate across regions and over time?  Why are some countries exceedingly rich while others are exceedingly poor? Can we say that we are richer compared to our parents and grandparents? What causes inflation? Why is there unemployment? What is the Role of Regulatory Bodies and Government? Do you want to understand these scenarios better? Agenda GDP and its computation Real Vs Nominal GDP How are countries classified? And where India stands? Why to split GDP and ways of splitting GDP Challenges and Problems in GDP estimation  What do they indicate? Are we Economically Growing? HOW TO MEASURE THE ECONOMIC GROWTH? We often read and listen to such articles and debates By Definition GDP is Aggregate market value of Finished goods and services That are produced within a country In a particular year  ‘Aggregate Market Value’ GDP measures economy’s total output, which includes millions of products and services However, a Mahindra’s XUV700 is worth more than a Samsung’s Smart Television Therefore, it does not make sense to just add up quantities Instead, GDP uses market values to determine how much each good or service is worth and then sums the total For example- Final Goods and Services Price * Quantity = Marker Value Refrigerators 28000 * 12 million = 336 billion Pens 5 * 8.6 billion = 43 billion Added To GDP 379 billion ‘Finished Goods’ ‘Finished Services’ Are these Finished Goods? Intermediate Goods Is excluded from GDP Calculation to avoid double counting Are these Finished Goods? Capital Goods Is included in GDP Calculation as they are not a part of Final Goods Can we Include these products to compute GDP? Goods sold Is excluded in GDP Calculation as they are not produced and sold in this year Financial Securities Is excluded in GDP Calculation as they are not themselves produced goods or services  Can we Include these services to compute GDP? Services Is included in GDP Calculation as the services provided by these agents are produced in the year in which they are sold Real Estate Agent Used cars Broker Stock Market Broker  ‘within a country’ Indian worker working in Foreign worker working in India to produce goods India to produce goods and services and services India’s GDP is the market value of goods and services produced using labor and capital located in India, regardless of nationality of workers or the property owners ‘within a country’ Indian National working in US, producing Goods and Services Produced Goods and Services are counted for GDP of US, not that of India  In a simple case scenario Finished Goods and Services Market Value Sold Car 10,00,000 Water Purifier 12,000 Clothing 1,000 Rice 500 Plumber 1,500 Doctor 1,000 Dog Parlor 2,000 Total 10,18,000 GDP  Gross National Product (GNP) Counted for India Counted for US Indian worker working in A US national working in US to produce goods India to produce goods and services and services Gross national product (GNP) is the market value of all final goods and services produced by a country’s permanent residents, wherever located, in a year  ‘in a year’ Nation’s Wealth (in Trillion US $) GDP (in Billion US $) How much the nation produced in a year, not how much the nation has accumulated in its entire history National wealth refers to the value of a nation’s entire stock of assets A tractor built in 2005 and still operating today is part of India’s wealth but not part of today’s GDP ‘in a year’ Although ‘in a year’ means a financial year, in India, GDP is calculated quarterly and annually by Central Statistics Office (NSO) under the Ministry of Statistics and Program Implementation. – The annual measure of GDP encompasses a financial year- 1st April to 31st March  GDP Growth Rate GDP tells us how much a country produced in a given year The growth rate of GDP tells us how rapidly the country’s production is rising or falling over time To compute the growth rate of GDP from 2020 to 2021, for example, you need only two numbers: GDP at the end of 2020 and at the end of 2021. Compute the percentage change as- 𝑮𝑫𝑷𝟐𝟎𝟐𝟏 − 𝑮𝑫𝑷𝟐𝟎𝟐𝟎 * 100 = GDP Growth rate for 2021 𝑮𝑫𝑷𝟐𝟎𝟐𝟎 Using actual figures (in Trillions), we determine: $ 𝟑.𝟏𝟖−$ 𝟐.𝟔𝟕 ∗ 𝟏𝟎𝟎 = 19.1% $ 𝟐.𝟔𝟕 Thus, the growth rate for Indian GDP for 2021 was 19.1% Nominal Vs Real GDP US $ 266 Million Nominal GDP = Quantity produced * Current Price 6X Bigger!!! US $ 40 Million HOLD ON!!  Quantity → 2 Idli + 1 Vada Price → 10 Rs Year → 2006 Question here is- Can we compare these two? Quantity → 2 Idli + 1 Vada Price → 60 Rs Year → 2022 Nominal Vs Real GDP The government switched to a new base year of 2011-12 for national accounts in January 2015, replacing the previous base year of 2004-05 Real GDP using 2004-05 and 2011-12 Prices US $ 158 Million Real GDP = Quantity * Base Year Prices 2.7X Bigger US $ 59 Million Nominal GDP 6X Bigger?  Nominal Vs Real GDP Items Quantity Price Market (2020) Value Eggs 200 10 2000 Bread 100 50 5000 Butter 10 200 2000 GDP (2020) 9000 Items Quantity Price Market GDP Growth = 41.67% (2021) Value Eggs 500 12 6000 Nominal GDP Bread 80 45 3600 Butter 15 210 3150 GDP (2021) 12750  Nominal Vs Real GDP Items Quantity Price Market (2011) Value Eggs 200 05 1000 Bread 100 20 2000 Butter 10 120 1200 GDP (2021) 4200 Items Quantity Price Market GDP Growth = 40.5% (2011) Value Eggs 500 05 2500 Real GDP Bread 80 20 1600 Butter 15 120 1800 GDP (2021) 5900  Nominal Vs Real GDP If we want to compare GDP over time, we should always compare real GDP Real GDP calculations become trickier, the longer the period we compare. – In 2000, for example, what was the price of a computer? Economists and statisticians involved in calculating real GDP must worry about the value of new goods and changes in the quality of old goods. The more years that pass, the more difficult it is to determine how to adjust for those quality changes. Interpret!  GDP Deflator The GDP deflator is simply the ratio of nominal to real GDP (multiplied by 100) The GDP Deflator is a price index that can be used to measure inflation 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 GDP Deflator = ∗ 100 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 266 GDP Deflator (2021) = ∗ 100 158 GDP Deflator (2021) = 168.35 The deflator tells us that 2021 prices were about 68.35% higher (168.35 − 100) than 2011 prices India’s GDP Deflator  Choose a country of your choice – To live, if given a chance – Based on your perception of country’s economic growth and standard of living Real GDP Per Capita When comparing two period or countries GDP, another problem we face is the population difference So, we have the GDP Per Capita GDP per capita is GDP divided by a country’s population The best reflection of changing living standards  Real GDP Growth Per Capita The Real GDP Growth (2021) is (assumed to be) 16.67% [while actual was 8.7%] The Population Growth rate (2021) is 11.91% (Population in 2021 was 140.76 Crores; 2011 was 125.77 Crores) Therefore, Real GDP Per Capita = 16.67 – 11.91 = 4.76% It shows that People in India have become richer by 4.76% in 2021 compared to 2011 When compared to India, People in United States are getting richer faster as United States recorded a 10.57% of Real GDP Per Capita growth  15 countries with highest and lowest GDP Per Capita Country Name 2021 Country Name 2021 Maldives 39.84 Afghanistan -22.97 Libya 29.79 Myanmar -18.48 Monaco 22.34 Palau -13.58 Guyana 18.96 Samoa -8.71 Macao SAR, China 17.47 Lebanon -5.83 Croatia 17.38 Fiji -5.54 Aruba 17.23 Pacific island small states -4.98 Moldova 14.81 Sudan -4.48 Panama 13.83 Congo, Rep. -4.44 Belize 13.75 Chad -4.28 Bahamas 13.32 Micronesia, Fed. Sts. -4.07 Montenegro 12.81 Suriname -3.67 Ireland 12.51 Tonga -3.37 Singapore 12.20 Equatorial Guinea -3.27 St. Lucia 11.97 Haiti -3.01 (Nominal GDP Per Capita) Where Does India Stand? Country Name 2021 United Kingdom 7.13 Poland 7.28 People in India became richer Hong Kong SAR, China 7.32 compared to people in these Italy 7.33 countries Hungary 7.56 India 7.82 Estonia 7.90 Slovenia 7.92 China 8.01 People in these countries became richer compared to people in India Rwanda 8.29 Bulgaria 8.52 (Nominal GDP Per Capita)  https://data.worldbank.org/indicator/NY.GDP.PCAP.KD.ZG?view=map&year=2021 Use this link and compare the country, where you thought you want to live, with India to infer whether you are better off in India* *only based on GDP per capita Growth data  Gross National Income (GNI) GNI = GDP + (Income Received From Abroad – Income Paid to Other Countries) (OR) GNI = GDP + Net Income from Abroad Where, Net Income from Abroad includes incomes like remittances sent home by workers abroad, profits from investments outside the country, and deducts any payments made to foreign investors To stabilize GNI data for international comparisons, the Atlas method is often used, which smooths out fluctuations caused by volatile exchange rates by taking a three-year moving average of exchange rates adjusted for inflation  Gross National Income (GNI) Per Capita GNI per capita (GNI divided by population) gives an indication of the average income and potential living standards in a country GNI is a more comprehensive measure for economic development compared to GDP, as it considers all income residents earn, not just what’s produced domestically Income Group GNI per Capita (USD) Country Examples Low-income countries < $1,135 Afghanistan, Chad, Malawi Lower-middle-income countries $1,136 - $4,465 India, Nigeria, Kenya Upper-middle-income countries $4,466 - $13,845 Brazil, South Africa, China High-income countries >$13,846 United States, Germany, Japan US$ 2540 (2023)  India Targets to become an UPPER MIDDLE INCOME GROUP COUNTRY According to India Ratings and Research (Ind-Ra), the country is projected to achieve this status between fiscal years 2033 and 2036, with a per capita income reaching approximately $4,466 to $13,845. Crisil forecasts that India could attain upper- middle-income status by 2031, with the economy expected to double to $7 trillion by that time  Policy Steps towards India’s UPPER MIDDLE INCOME GROUP Target Personal Tax Rates Ta ate 0 5 Powered by Bing Australian Bureau of Sta s cs, GeoNames, icroso , Navinfo, pen Places, penStreet ap, verture aps unda on, TomTom, enrin Source: https://tradingeconomics.com/country-list/personal-income-tax-rate Source: World Bank Database  Policy Steps towards India’s UPPER MIDDLE INCOME GROUP Target Mode Infrastructure Freight Key Players Movement Road 63.73 lac km 3.5 trillion ton - Trucks, Buses, Cars km Rail 1.08 lac km 0.82 trillion ton- Indian Railways km Water 12 major, 200 1180 million Inland waterways, + non-major metric ton Costal shipping ports Air 131 airports 2068 million ton Airlines –km Policy Steps towards India’s UPPER MIDDLE INCOME GROUP Target Policy Steps towards India’s UPPER MIDDLE INCOME GROUP Target  Policy Steps towards India’s UPPER MIDDLE INCOME GROUP Target Other initiatives include- – Education and Skill Development – Healthcare Improvements – Modernization and Diversification of Agriculture – Financial Inclusion and Digital Economy – Trade and Investment Policies for export promotion and attracting FDI – Sustainable Development and Green Economy related initiatives and regulations  Splitting GDP Another way of understanding GDP is to study its components and analyse how they fit together The two common ways of splitting GDP: 1. National spending approach to GDP [Expenditure method]: Y = C + I + G + NX 2. Factor income approach to GDP [Income method]: Y = Wages + Rent + Interest + Profit  National spending approach to GDP Y = C + I + G + NX Split GDP into – Where, – Consumption (C), - Y = GDP (the market value all final goods and services) – Investment (I), - C = The market value of consumption goods and – Government purchases (G) and services – Exports minus imports (NX) (= - I = The market value of investment goods, also Net Exports) called capital goods - G = The market value of government purchases India applies this approach to - NX = Net exports, defined as the market value of estimate GDP exports minus the market value of imports Consumption of Goods and Services These are classified into consumer durables, semi-durables, non-durables and services  Con_Exp (US$) 5E+11 1E+12 2E+12 3E+12 0 1.5E+12 2.5E+12 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 India Year 1990 1992 1994 1996 1998 2000 2002 2004 India’s Consumption Expenditure 2006 2008 2010 2012 2014 2016 2018 2020 2022 India’s Vs China’s Private Consumption Expenditure- What can you infer? India’s Consumption in comparison with some Developed Economies  India’s Consumption in comparison with BRICS Nations Consumption Expenditure (% of GDP) 70 60 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Sum of India Sum of South Africa Sum of Russian Federation Sum of China Sum of Brazil  Factors impacting Consumption Income Job opportunities Access to Credit Govt. Policies Cultural factors Inflation Price Investment Investment: Additions to the physical stock of capital during a period of time Classification of Investments Business Fixed Investment Inventory Investment (or change in stock) Residential Construction Investment Public Investment  India’s Investments Investments (% of GDP) 45.00 41.95 39.00 39.26 39.79 39.59 40.00 38.42 38.35 37.43 35.10 34.02 34.27 35.00 32.12 32.34 30.84 30.98 31.18 29.91 30.25 30.17 30.22 30.00 27.90 25.68 25.00 20.00 15.00 10.00 5.00 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 India’s Investments in comparison with some Developed Economies  India’s Investments in comparison with BRICS Nations Investments (% of GDP) 50 45 40 35 30 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Sum of India Sum of China Sum of Brazil Sum of Russian Federation Sum of South Africa  Factors impacting Investment Interest Rates Business Risk Access to Credit Govt. Policies Technological Advancement Market Potential and Economic Market size Condition  Government Purchases Consumption Investment  Government Purchases in India Government Purchases (% of GDP) 14.00 11.95 11.76 12.09 12.00 11.31 11.46 10.88 11.01 11.08 10.82 10.96 11.13 10.54 10.68 10.44 10.77 10.40 10.37 10.30 10.43 10.31 9.80 9.86 10.00 8.00 6.00 4.00 2.00 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 India’s Government Purchases in comparison with some Developed Economies  India’s Government Purchases in comparison with BRICS Nations Government Purchases (% of GDP) 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Sum of India Sum of South Africa Sum of Russian Federation Sum of China Sum of Brazil  Factors impacting Govt. Purchases Population Size Political Priority World Economic Conditions Govt. Policies Budget Deficit & Public Debt Social Needs Govt. Income Economic Condition  Net Exports (Net Exports is Exports minus Imports) We deduct imports from exports, because, the goods imported by India from China, is already added to China’s GDP. – This is because, the purpose of the GDP measure is to evaluate domestic production Exports > Imports → A positive Net Exports Exports < Imports → A negative Net Exports  India’s Net Exports Net Exports (% of GDP) 0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020-0.392021 -0.70 -1.00 -0.91 -0.88 -0.98 -1.79 -1.77 -2.00 -2.30 -2.58 -2.49 -2.79 -3.00 -2.98 -2.99 -3.19 -3.16 -3.76 -4.00 -4.09 -4.45 -5.00 -5.17 -5.47 -6.00 -6.54 -6.72 -7.00 -8.00 India’s Net Exports in comparison with some Developed Economies  India’s Net Exports in comparison with BRICS Nations Net Exports (% of GDP) 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 -5 -10 Sum of India Sum of Russian Federation Sum of South Africa Sum of Brazil Sum of China  Factors impacting Positive Net Exports Comparative Exchange Rates Advantage World Economic Conditions Trade Policies Technological Advancement Global Demand Infrastructure and Logistics Factor Income Approach Y = Employee compensation + Rent + Interest + Profit Circular Flow of Income: Case of a Simple economy Households Receive Wages + Rent + Interest+ Profit = GDP as per Factor Income Approach Firms Spend  Why Split? Economists who study business fluctuations, for example, are often interested in splitting GDP according to the national spending identity because consumption, investment, government purchases, and net exports behave differently over time. Economists are interested in understanding the causes and consequences of these differences The factor income approach is useful if we are thinking about how economic growth is divided between employee compensation, rent, interest, and profits. It turns out, for example, that the largest payment in GDP is to labor. Economists are interested in understanding what drives the relative sizes of these shares It also helps to have more than one way of counting GDP because different methods are subject to different errors No way of splitting GDP is better than another The income approach to GDP give the same answer (in theory!) as the spending approach (In practice, the answers are close but differ because of accounting errors and data omissions)  Challenges: GDP Estimation Data Availability and timeliness Quality Adjustments - International guidelines and standards: International organizations such as the United Nations System of National Accounts (SNA) and the International Monetary Fund (IMF) provide guidelines and standards for quality adjustments in GDP estimation. These guidelines help ensure consistency and comparability across countries in accounting for quality changes. Here are some key aspects of the IMF guidelines regarding quality adjustments- – Hedonic pricing: Hedonic pricing is a widely used method for quality adjustment. It involves breaking down the price of a product or service into its various characteristics or attributes. The prices of these attributes are then estimated separately, allowing for the identification of price changes associated with changes in quality. By comparing the price changes of similar products with differing qualities, adjustments can be made to reflect quality improvements. – Expert judgment: In cases where explicit quality indicators are not readily available, the IMF acknowledges the importance of expert judgment. Experts can provide assessments and insights into the significance of quality changes and assist in making quality adjustments based on their knowledge and experience. – Other methods include The Producer Price Index which tracks the average changes in prices received by domestic producers for their output of goods and services over time, Explicit quality indicators including technical specifications, performance measures, or other quantifiable characteristics that can help assess the changes in quality.  Challenges: GDP Estimation Problem of Double Counting- Some key measures and methods used to avoid double counting in GDP – Value-added approach: The value-added approach focuses on capturing the incremental value created at each stage of production. Instead of counting the total value of intermediate goods and services, only the value added at each stage is considered. This approach ensures that the final value of a good or service is counted only once in GDP calculations. Example- NMDC* Mining of TATA Steel TTK Prestige Iron Ore Manufactures Steel Manufactures Kitchen 1,000 (2022) 2,500 (2022) Appliances 3,000 (2022) GDP (2022) = Value added by the NMDC + Value added by the TATA Steel + Value added by the TTK Prestige = 1000 + 1500 + 500 *NMDC- National Mineral Development Corp = 3000  Problems with GDP as a measure of output and wealth Do we know the market value of all goods and services? More generally, the size of the shadow economy in Latin America is estimated at 41% of officially measured GDP; while it is 17.89% in India, 10% in US, Cocaine Smuggled Goods and Services Prostitution Service 20% in Western Europe Prostitution is legal in the Netherlands and prostitution revenues are Counterfeit DVDs Goods sold under the table Pornography included in the to avoid taxes Netherlands’ GDP; while it is illegal in India Problems with GDP as a measure of output and wealth GDP does not count Non-priced Production Problems with GDP as a measure of output and wealth GDP Does Not Count Bad  Problems with GDP as a measure of output and wealth GDP Does Not Measure the Distribution of Income Source: https://www.theindiaforum.in/article/does-india-have-inequality-problem  Summary We understood – GDP and its computation GDP Growth Rate and its computation Nominal Vs. Real GDP GDP Per Capita How to estimate GDP, GDP per capita, GDP Growth rate? GNI Per Capita and Country Classification; When and how India is heading towards Upper Middle Group Countries category? How to Split GDP? What are the different approaches to Split GDP? 1. National Spending approach 2. Factor Income approach Why GDP is not a good measure of income and wealth?