GDP phenomena in making, or just numbers

What GDP is all about?

Someone commented as how GDP of India is just 4%?

As the news came in that the IMF and other International Agencies are predicting a downfall in GDP of India a year back. after that everyone is commenting freely over this issue.

Nowadays anyone who reads a newspaper or watches news program regularly hears something like economic growth of India is predicted to be 5 or 6.  Few news items forecast it to be at 6 etc.   But can everyone tell what that means?

What is GDP? What does 4.7% actually represents? And increase of 2% but versus what?

And such other questions often comes to one’s mind.  There are many official definitions of GDP.  The most widely accepted definition is that it basically measures the value of all goods and services produced in the country (in a given time period). 
What economics is all about?  Does it not involve the values of things?

It is also referred to as the Gross National Income or Gross National Product. But most important thing in GDP is Gross Value Added, The GVA- It is the value of out-put less the value of intermediate consumption. The GVA is a measure of the contribution of GDP made by an individual producer, industry or sector.

in past news arena was abuzz with the report that our country is struggling to make GDP grow by 5%. certain international agencies were also predicting the worst. But they were all predicting or estimating only. Nobody was sure. These figures often undergo revisions also.

Let us assume at that any day, One has spent one hour sitting at a bus stand or on a road just staring on vehicles going here and there. After that one hour you entered a mall and on a kiosk itself ordered several items for purchase or You buy something on your Smartphone through an online shopping app.  then another one hour spent on tutoring the students or doing some part time job? or “worked online” sitting at your home.

For the first hour one has basically did nothing of any value to society. That contributed nothing to the economy and thus it contributed nothing to GDP.   While buying a pair of shoe or a shirt etc on smart phone actually did something for the society.  The company, whose product you purchased got money and thus made a profit out of it and on the way of ordering either from a Mall or from a kiosk or from a smartphone or internet there are others who profited.  The app. provided, the internet service provider, the other company/entities who are involved in producing these services and products all were benefited from the money you spent.  All such purchases are accounted in GDP.  In another hour for which one has worked on part time job, or online work done for your employer, you provided a service. Or one travel company engaged you as a guide, driver or anything likewise. Here you are providing a service that employer pays a “value” to it in form of your pay. Thus what the consumer pays covers your pay part also.

There are some measurable items utilized in GDP calculations that include sales of automobiles, Smartphone, food, financial services and even movie tickets. Thus, the higher the number the better the economy is doing.

Generally GDP can be measured in 3 ways; Output measure, Expenditure measure, Income measure.

Output or production method is used in mostly in primary sectors. But actually it is the Gross Value Added (GVA) or the value of goods and services produced by all sectors of the economy, agriculture, manufacturing, energy, construction, service sector and government.

Income method: The value of the income generated mostly in terms of profits and wages.

Many experts dislike the production approach as it does not include income. Rather, they feel that money / income each family brings home is a better way to evaluate economy.  Thus this approach measures annual income of all individuals:

     Income is culled from:

1.      Wages, salaries and supplementary labour income

2.      Corporate profits

3.      Interest and other investment income

4.      Farmers’ income

5.      Income from non-farm un incorporated businesses

On adding all these numbers adjustments such as indirect taxes(sales tax ) minus tax subsidies (tax breaks …) are added. Then depreciation on assets is added to it that gives GDP.

Expenditure method:  This is the value of goods and services purchased by households and by governments, Investments in machinery and buildings.  It also includes value of Exports minus Imports. Few experts exert that neither income nor production method is sufficient.

This approach measures all expenditures by individuals within one year.

The components of this method are:

Consumption:  as defined by purchase of durable and non durable goods and services e.g. food, rent clothes, gas etc. purchase of a new house is not included as consumption.

Investment:  means capital investment such as equipment, machinery, software, or digging coal mine.  It does not mean investments in financial products, like stocks and mutual funds.

Government’s spending is total expenditure on goods and services, including cost of govt. employee salaries, weapon purchased by military and infrastructure cost.

Net Exports are calculated by subtracting the value of imports from the value of exports.  Exports are goods that are created in this country for other nations to consume, while imports are created in other nations and consumed domestically.

However, the production method is the one that is used most often. Other thing of importance it that while we use these data as an indicator, The value of what is produced generally goes up over time due to inflation etc. So, we have to adjust for that when comparing GDP for previous years. That’s why often the term “real GDP” is heard, with the real referring to the value of dollar or rupee or the currency that is adjusted to account for inflation.

Looking at the data available in the website of MOSPI, The Ministry of Statistics and Programme Implementation there are various pages of information on GDP. One page gives state-wise data on GSDP at Current prices!, one page gives state-wise data of GSDP at constant prices. Similarly there are few other pages giving data such as NSDP at current and constant prices, Per Capita NSDP at current and constant prices.

Now which page is to be seen in relation to which comment of someone regarding the GDP??

Thus there is so much of data, but if one wishes to find out something about the GDP then he or she has to get the data for that context only. 

The economic growth is now days linked to the GDP figures. Now the awareness about the word GDP has grown up and very fast. That too emerging from much unconnected arena, when there were lots of public discussions were on the topic of politics and election, lot of people started talking of GDP!!

Looking at current prices, it only gives a picture of all events at the prevailing prices during the current time (year). Everyone must have heard the news that rupee has come down in comparison to dollar!! or some news says that rupee has strengthened against the dollar!!

Few years back one dollar was equivalent to 45 rupees approx. but now it is about 63 rupees. Thus at the current price the value of rupee has come down. Let us see another example do you know what a person could have bought in one rupee 40 years back. And he cannot buy same thing in the current year, but why? Since the value decreased (depreciation is another term people always know about?) or the inflation?

Thus can we say that value in the current year cannot indicate the growth in actual terms?

Therefore the concept of BASE YEAR is often talked about whenever the economic growth is compared.  This tells the growth at the rate or value on the basis of BASE YEAR prices. Or the real growth.

Till this year the base year was 2004-05.

On 29th January 2010 the base year was changed from 1999-2000 to 2004-05. In January 2006 base year was changed from 1993-94 to 1999-2000.

First base was 1948-49. that was shifted to 1960-61 in August 1967. Similarly it has been done regularly.

On January 2015 the base year has again been shifted to 2011-12.

The estimates at the prevailing prices of the current year are termed as "at current prices", while those estimates prepared at the base year prices are termed "at constant prices". The comparison of the estimates at constant prices, which means "in real terms" over the years give measure of real growth.

The growth rate of All India is 11.54% at current prices for the year 2013-14. but at constant prices 4.74%

GSDP % Growth	2009-10	2010-11	2011-12	2012-13	2013-14
All India
Current prices	15.18	18.66	15.77	11.88	11.54
constant prices	8.59	8.91	6.69	4.47	4.74
A & N Islands
current prices	18.39	5.41	14.99	12.80	9.18
constant prices	13.20	7.86	7.89	7.55	5.11

  Now just see that when at all India level growth % was struggling to keep economic growth at 4 or 5% at that same time Bihar posted 10.73% and Pudduchery at 11.65% growth in 2012-13.   There were 23 states which posted their growth more than 5% but still at all India level the growth was posted as 4.47%.

Goa posted 20% in 2011-12, Sikkim posted 73.61% in 2009-10. thus there are cases of extreme also.  Some people confront me on the issue of per capita income. If we look at the data, the per capita growth in 2013-14, there is 30.47% increase in Pudduchery at current prices whereas at constant prices it was 10.38% only. Meghalaya shows an increase of 10.10% in 2013-14.

Almost 13 states posted increase in per capita income as more than 5% in 2013-14. MP(9.64%), Maharastra(8.36%) increase in the per capita income.

On 31 January 2015 Ministry of Statistics has released new series of National accounts, revising the base year from 2004-05 to 2011-12.

In this revision some changes in methodology of compilation have also brought into. so as to increase the coverage, this will result in more and more awareness about GDP.

Thus think about what these figures are and what is their value in our life?? How do they affect us, in any way??

Next i will try to connect with the monthly per-capita household expenditure and such other data.