Posts tagged ‘Types of GDP Calculation. Expenditure appraoch to GDP calculation’

Types of GDP Calculation

The GDP number is important as it represents a countries growth. So, if you hear that the latest GDP number is 6% then that means that the country’s economic growth for the past quarter or year. GDP is calculated by the Central Statistics Office. This information (first estimates are released thereafter revised figures are updated) is released here.

Now let’s try and understand how to calculate GDP

As per National Income Accounting there are 3 ways to compute GDP:

  • Product Wise – Total Production Basis
  • Income wise – Income Generation Basis (GDP by income approach covers only the incomes generated within the domestic economy)
  • Expenditure Wise – Expenditure incurred by resident households on consumption goods or services.

First thought comes is Product wise, Income wise and Expenditure wise data should tally but it doesn’t due to errors.

  • Product Wise approach of GDP Calculation

One can analyze which sector is contributing more to India’s GDP and which sector is facing crunch or say receding in terms of contribution. Always this calculation is what analyst prefers for GDP numbers. This model works with 3 heads and 8 subheads. See below:

We know India grew 6.5% (i.e. GDP grew at 6.5% in 2011-2012). Now let’s understand how come CSO arrived at this figure. See Below (figures in crores):

So now we know quantum of agriculture (14%), Industry (19%) and Services (67%) sector contribution to GDP.  Conventional wisdom suggests that during the early development phase of any country, expansion of output in manufactured goods precedes growth in the services sector. As a country progresses further manufacturing often takes a back seat, giving way to the services sector in terms of both output and employment, and manufacturing firms themselves become increasingly service centric in order to remain competitive. Some have argued that the decline in manufacturing and corresponding shift to services is unsupportable in the long run as services depend critically on manufacturing for their demand. Although this argument may be applicable for certain services such as retailing and transportation, it does not entirely hold for many other services.

Please note Industrial Growth is reported via Index of Industrial Production which comes every month with a lag of six weeks. (View IIP Article)

Income Approach of GDP Calculation

Income approach to simply put is addition of all incomes generated by individuals. Due to credit, sometimes payments are delayed. So this approach may not give appropriate picture. India do not present calculation based on this approach.

Expenditure approach of GDP Calculation

Below are the variables used to calculate GDP using Expenditure approach:

Private Final Consumption Expenditure (C) : Expenditure incurred by Individuals on goods and services.

Gross Fixed Capital Formation (I) : Value of Investments Done.

Govt. Expenditure (G): Money Spent by the Govt. for the economy

Net Exports (X-M): Exports – Imports

Hence GDP here will be = C + I + G + (X – M)

Below are revised estimated numbers of India’s GDP for 2011-2012 as per expenditure approach (figures in crores):

Above figure concludes that India is a consumption driven country. Analyst comment that India didn’t suffered in 2008 because of its strong consumption which can be observed in the figure.

 

 

 

 

 

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