National Account Statistics

Hersch Sahay
Assistant Professor
Department of Economics
School of Management, Pondicherry University
 So Much Furore About GDP!

Source: Business Standard

https://www.business-standard.com/article/economy-policy/world-bank-slashes-india-s-economic-
growth-forecast-to-6-5-for-fy23-122100601103_1.html
 GDP 101

➢ Gross domestic product (GDP) is the market value of all final goods and
services produced within a country in a year.

➢ GDP per capita is GDP divided by a country’s population.

➢ Gross Domestic Product (GDP) and its gross domestic product per capita, two
statistics designed to measure the value of economic production.

➢ As a rough way of summarizing changes in economic output and the

standard of living, economists generally look to these statistics for any
country.
 Definition Deconstructed
GDP is the market value…

GDP measures an economy’s total output, which includes lakhs of different goods and services. To
measure total output, GDP uses market values to determine how much each good or service is worth
and then sums the total.

Final Good Price (per unit) Quantity Market Value

Basmati Rice Rs. 80,000 80,00,000 MT Rs. 64,000 crore

Tata Nexon Rs. 12,00,000 1,00,000 units Rs. 12,000 crore

Rs. 76,000 crore

 Definition Deconstructed
… of All Final …

➢ Intermediate Goods and Services: Some goods and services are sold to firms and then bundled or
processed with other goods or services for sale at a later stage.

➢ To avoid double counting, only the final good is included in calculation and not intermediate good.

➢ However, count the production of machinery and equipment used to produce other goods as part
of GDP

Examples:

1. A computer chip is one example of an intermediate good. If an Intel chip were counted in
GDP when it was sold to Dell, and then counted again when a consumer buys the Dell
computer, the value of the computer chip would be counted twice.

2. A tractor may help to produce soybeans, but the tractor is not part of the final product of
soybeans. Thus, both tractor production and soybean production add to GDP
 Definition Deconstructed
… Good and Services …

The output of an economy includes both goods and services. Services provide a benefit to
individuals without the production of tangible output

Final Good/Service Price (per unit) Quantity Market Value

Basmati Rice Rs. 80,000 80,00,000 MT Rs. 64,000 crore

Tata Nexon Rs. 12,00,000 1,00,000 units Rs. 12,000 crore

Men’s Haircut Rs. 120 73 crore Rs. 8,760 crore

Rs. 84,760 crore

 Definition Deconstructed
… Produced …

GDP is meant to measure production so sales of used goods are not included in GDP

Examples:

1. The sale of a used car, old houses is not included in GDP. The sale of an old car or old house
does not add to GDP because the house was not produced in the year in which it sold. Sales
of newly produced cars or newly built houses, however, are counted in GDP.

2. Stocks and bonds are claims to financial assets—they are not themselves produced goods or
services—so sales of financial assets are not counted in GDP.

Even though the sales of old houses, used goods, and financial assets do not add to GDP, the
services of real estate agents, used-car salespeople, and brokers do add to GDP because the
services provided by these agents are produced in the year in which they are sold.
 Definition Deconstructed
… within a Country …

➢ GDP of India is the market value of the goods and services produced by labour and capital
located in India, regardless of the nationality of the workers or the property owners.

➢ A citizen of Nepal who works temporarily in India adds to Indian GDP. By the same reasoning, an
Indian who works temporarily in Nepal contributes to Nepalese GDP, not to Indian GDP.

➢ 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.

➢ GDP for India (December 2021): 3,173.40 USD bn; GNP for India: 3,027.51 USD bn.
 Definition Deconstructed
… in a Year

➢ GDP tells us how much the nation produced in a year,

not how much the nation has accumulated in its
entire history.

➢ GDP is a flow concept and not a stock concept.

➢ GDP is analogous to annual wages. Wages are

not the same thing as wealth.

➢ National wealth refers to the value of a nation’s

entire stock of assets. A tractor built in 2015 and
still operating today is part of National Wealth of
the country but not part of today’s GDP.
 Real GDP vs Nominal GDP
➢ The distinction is between nominal and real measurements, concerns whether or not inflation has
distorted a given statistic.

➢ The nominal value of any economic statistic means that we measure the statistic in terms of
actual prices that exist at the time.

➢ Real variables, such as real GDP, have been adjusted for changes in prices by using the same set
of prices in all time periods.

➢ Economists usually are more interested in increases in production than increases in prices
because only increases in production are true increases in the standard of living.

➢ If we want to compare GDP over time, we should always compare real GDP.

✓ Nominal GDP for 2020-21 = Output produced in 2020-21 x Prices in 2020-21

✓ Real GDP for 2020-21 using 2011-12 prices = Output produced in 2020-21 x Prices in 2011-12
 0.00
50,00,000.00
1,00,00,000.00
1,50,00,000.00
2,00,00,000.00
1950-51 2,50,00,000.00
1952-53
1954-55
1956-57
1958-59
1960-61
1962-63
1964-65
1966-67
1968-69

Source: Database on Indian Economy, RBI

1970-71
1972-73
1974-75
1976-77
1978-79
1980-81
Constant Prices 1982-83
1984-85
1986-87
1988-89
1990-91
GDP (in Rupees Crore)

1992-93
Current Prices

1994-95
1996-97
1998-99
2000-01
Real GDP vs Nominal GDP

2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
2014-15
2016-17
2018-19
2020-21
 4
9

-6
-1
14
19
24
1950-51
1952-53
1954-55
1956-57
1958-59
1960-61
1962-63
1964-65
1966-67
1968-69
1970-71

Source: Database on Indian Economy, RBI

1972-73
1974-75
1976-77
1978-79
1980-81

Real GDP Growth

1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
Nominal GDP Growth

1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
Real GDP Growth vs Nominal GDP Growth

2014-15
2016-17
2018-19
2020-21
 GDP Deflator
The GDP Deflator is a price index that can be used to measure inflation.

𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = × 100
𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
GDP Deflator
180
160
140
120
100
80
60
40
20
0

Source: Database on Indian Economy, RBI

Circular Flow of Income and Expenditure: 2 Sector Model
Circular Flow of Income and Expenditure: Extended Model
 Measuring GDP
There are two sides to every transaction. Corresponding to the flows of money in the circular flow,
there are flows of goods and services among these sectors. Accordingly,

Ways of Measuring GDP:

✓ Value Added Method

✓ Income Method

✓ Expenditure Method
The Web of Terms
 Value Added Method of Measuring GDP
GDP = ∑ Value added at each stage of production

Value Added = Value of Output – Value of intermediate goods used in production

Examples: Production of Shirt

Farmer sells Thread maker sells Fabric Maker sells Shirt Manufacturer
Cotton at thread at rolls of fabric at sells shirts at
Rs. 100 to Rs. 200 to Fabric Rs. 400 to Shirt Rs. 600 in the
thread maker Maker Manufacturer Market

Value Added = Value Added = Value Added = Value Added =

Rs. 100 Rs. 200 – Rs. 100 = Rs. 400 – Rs. 200 = Rs. 600 – Rs. 400 =
Rs. 100 Rs. 200 Rs. 200

Gross Value Added = Rs. 100 + Rs. 100 + Rs. 200 + Rs. 200 = Rs. 600
 Gross Value Added (GVA): The Indian Case
➢ In 2015, India decided to bring the whole process of calculating National Income in conformity
with the United Nations System of National Accounts (SNA) of 2008.

➢ As per the SNA, GVA is defined as the value of output minus the value of intermediate
consumption and is a measure of the contribution to growth made by an individual producer,
industry or sector.

➢ It is the main entry on the income side of the nation’s accounting balance sheet, and from an
economics perspective represents the supply side.

➢ Prior to adopting SNA 2008, India had been measuring GDP at ‘factor cost’. Now it reports GVA
at ‘basic prices’ as the primary measure of economic output.

➢ GVA at basic prices includes net production taxes whereas, GDP at factor cost did not include any
tax or subsidy.

➢ Examples of production taxes are land revenues, stamps and registration fees, corporation tax,
tax on profession, etc. Production subsidies include subsidies to Railways, input subsidies to
farmers, subsidies to village and small industries, etc.
 Sectors Considered for Calculating GVA

1. Agriculture, Forestry & Fishing

2. Mining & Quarrying

3. Manufacturing

4. Electricity, Gas, Water Supply & Other Utility Services

5. Construction

6. Trade, Hotels, Transport, Communication And Services Related to Broadcasting

7. Financial, Real Estate & Professional Services

8. Public Administration, Defence and Other Services

 Concepts in National Account Statistics of India (GVA to GDP)
➢ GVA at Basic Prices = GDP at factor cost + Net Production Tax.

➢ GVA at Market Prices (also known as GDP)= GVA at Basic Prices + Net Product Tax.

➢ Net Tax = Taxes - Subsidies

➢ Net Value Added (NVA) = GVA – Depreciation (Consumption of fixed capital)

➢ Gross National Income (GNI) formerly known as Gross National Product = GDP + Net Factor
Income from Abroad (NFIA).

➢ NFIA = Factor income earned by the domestic factors of production employed in the rest of the
world – Factor income earned by the factors of production of the rest of the world employed in
the domestic economy

➢ Net National Income (NNI) formerly known as Net National Product = GNI – Depreciation.
This is also known as National Income.

➢ Per Capita Income = NNI / Population

 Income Method of Measuring GDP

Factors of Production:

➢ Labour
➢ Land
➢ Capital
➢ Entrepreneurship

Compensation (income paid to each factor):

➢ Wages
➢ Rent
➢ Interest
➢ Profit

Y = Wages + Rent + Interest + Profit

 GDP Measured by Expenditure Method
➢ All final goods and services produced within a country in a year can be consumed, invested, or
purchased by governments or foreigners.

➢ Finally, some consumed, invested, and government-purchased goods are imported.

➢ Imported goods and services are not part of home country’s GDP, so we subtract imports.

Y = C + I + G + (X – M)

C = Consumption : Private final consumption expenditure (PFCE)

I = Investment : Gross fixed capital formation + Changes in stocks + Valuables
G = Government Expenditure : Government final consumption expenditure (GFCE)
X = Exports : Exports of Goods and Services
M = Imports : Import of Goods and Services
Discrepancies
 Consumption
➢ Consumption expenditure is private spending on final goods and services. Most consumption
expenditure is made by households, such as expenditure on cars and food items.

➢ Consumption expenditure also includes expenditure on services such as health care whether the
expenditure comes from your pocket, an insurance company, or the government.

➢ We generally think of education as an investment in “human capital,” but education being a service
is considered as consumption expenditure.

Theories of Consumption:

➢ Keynesian Psychological Law of Consumption

➢ Friedman’s Permanent Income Hypothesis

➢ Modigliani’s Life Cycle Hypothesis

 Investment
➢ Investment expenditure is private expenditure on tools, plant, and equipment (capital) that are
used to produce future output.

➢ Most investment expenditure is made by businesses but an important exception is that new
home production is counted as investment.

➢ When a farmer buys a tractor, that is investment. If your institute builds new classrooms and
labs, that is investment.

➢ Buying TCS equities, however, is not investment, as this is a mere change in ownership of some
capital goods from one person to another.

Theories of Investment

➢ Neoclassical Theory of Business Fixed Investment

➢ Accelerator Theory of Investment

 Government Expenditure
➢ Government expenditure is spending done by all levels of government on final goods and services.
Government expenditure include spending on tanks, airplanes, office equipment, and roads, as well as
spending on wages for government employees (in this case the government is implicitly thought of as the
purchaser of services such as military services).

➢ This category includes both government consumption items (like toner cartridges for printers) and
government investment items (like roads and buildings).

➢ A large part of what government does is transfer money from one citizen to another citizen. Various welfare
programs such as PMJDY, PM-JAY, APY, etc. are large transfer programs. We do not include transfers in
government purchases because if we did, we would be double-counting.

✓ Example: When the senior citizen buys a television with his or her Pension received through APY or
consumes health care through PM-JAY, it is counted in the consumption portion of GDP.

➢ Another way of thinking about this is that we count only government expenditure on final goods and
services. When the government sends pension to a senior citizen, it is not purchasing a final good or
service but only transferring wealth.
 Net Exports

➢ Net exports is exports minus imports (X – M).

➢ If a nation sells more final goods and services abroad than it buys from other nations, net
exports will be positive. A nation that imports more than it exports has negative net
exports.

➢ Indian imports contribute to the GDP of other nations, the locations where that value was
produced and we don’t want to count them twice; thus in GDP for India, we include
exports from India but subtract imports purchased by India.
 Components of GDP (Constant 2011-12 prices)
16000000

14000000

12000000

10000000
Rs. Crore

8000000

6000000

4000000

2000000

PFCE GFCE Investment Net Export

Source: Database on Indian Economy, RBI

Components of GDP (Constant 2011-12 prices) for 2021-22
Discrepancies, 1.47

Investment, 35.74

GFCE, 10.70

PFCE, 56.85

Net Exports,
1 -4.77

Source: Database on Indian Economy, RBI

 Included in GDP

➢ Owners of production units supply services such as imputed rent of the owner's inhabited residence
and interest on own capital, etc.

➢ Employer contributions to a provident fund and bonus etc.

➢ Brokerage/Commission on sale/purchase of second- hand goods.

➢ Capital Formation includes things like a company buying machinery, building a flyover, and building
bridges, etc.

➢ Payment of bus fare by households, payment of phone bills, examination fees for students, etc.

➢ Government-provided services such as dispensary, education and government expenditure on

street lighting.

➢ Interest on the loan paid by commercial banks.

 Not Included in GDP
➢ Transfer Income and payments like Scholarships, Pensions etc.

➢ Sale and purchase of financial assets.

➢ Non-market trades, such as kitchen gardening, etc.

➢ Compulsory Transfer Payments like capital gain tax, interest tax, etc.

➢ Second-hand commodities, such as the sale or purchase of an old house, etc.

➢ Windfall gains like lotteries, gambling, etc.

➢ Interest on the national debt, as well as interest paid by households to commercial banks.

➢ A capital loss like the destruction of a building by flood or earthquake etc.

➢ Capital gains like Profits from a rise in the value of land, buildings, or stocks, etc.

➢ Intermediate consumption expenditure like vegetables purchased by a dairy shop, the purchase of
raw material by a firm, etc
 Limitations of GDP as a Measure
➢ Illegal Goods / Underground Economy
✓ Sale of drugs or banned items
✓ Legal goods sold “under the table” to avoid taxes also do not show up in GDP.
✓ Nations with a great deal of illegal and off-the-books activity are not as poor as they appear in
the official GDP statistics.

➢ Non-priced Production and transfer payments

✓ Non-priced production occurs when valuable goods and services are produced but no explicit
monetary payment is made.
✓ Hence, service of Women in household activities is not included in GDP.

➢ Leisure
✓ When people consume more leisure measured GDP does not rise and, in fact, it will fall if we
are not at work.

➢ Intermediate Goods / Used Goods

➢ Bads (Environmental Costs)

➢ Distribution of Income
Relative Standing of Countries Based on GDP

Source: World Economic Outlook (October 2022)

https://www.imf.org/external/datamapper/NGDPD@WEO/OEMDC/ADVEC/WEOWORLD?year=2022
 Relative Standing of Countries Based on GDP
GDP, Current Prices GDP per capita
Rank Country
(Billions of USD) (USD)
1 United States 2,5035.16 75,179.59 [7]
2 China, People's Republic of 1,8321.20 12,970.33 [70]
3 Japan 4,300.62 34,357.86 [31]
4 Germany 4,031.15 48,397.80 [20]
5 India 3,468.57 2,465.87 [144]
6 United Kingdom 3,198.47 47,317.57 [23]
7 France 2,778.09 42,330.45 [26]
8 Canada 2,200.35 56,794.02 [12]
9 Russian Federation 2,133.09 14,665.25 [66]
10 Italy 1,996.93 33,739.75 [32]
Source: World Economic Outlook (October 2022)
 Check your Skills!
➢ Surgery followed by stay in Apollo Hospital, Chennai

➢ Car Sold to you by your cousin that he was using for 3 years

➢ Car that you buy through Maruti True Value.

➢ Your friend gives you a lift to Chennai Airport and you don’t pay for it

➢ JRF scholarship received by a PhD student

➢ TATA Motors pay Rs. 100 crore to an TATA Steel to purchase steel rolls manufactured in India for its
cars.

➢ OLA buys 50 Maruti Wagon Rs to add to its fleet in Pondicherry.

➢ ITC Hotels buy 2 Mercedes S-Class Maybach manufactured in Germany for ITC Chola in Chennai.

➢ Uber Bangladesh procures 100 Maruti Wagon Rs from India to be used in Dhaka.
 Check your Skills!
➢ You buy Rs. 1,00,000 worth of equities of TCS.

➢ LIC buys Rs. 50 crore worth of equities of TCS.

➢ Central government pays Rs. 500 crore under OROP scheme to Ex-Army Personnel.

➢ Tamil Nadu government pays Rs. 1 crore to players of Indian contingent of Chess Olympiad.

➢ Karnataka government spends Rs. 1000 crore for constructing State Highway.

➢ Money paid to a tourist guide in Taj Mahal.

➢ Rs. 500 paid over and above the billed amount to LPG agency to expedite connection to your
home.

➢ Land Rover purchased by Indian Embassy in the USA for its use.

➢ Rs. 50 thousand that you received by selling your home made pickle.