GDP – IIP & Inflation

Jayshree Rathod (18)

Vikas Chauhan (58)
Dipal Kotak (23)
Deepali Sawakhande (51)
Mala Nanwani (38)
What is GDP?

 The GDP is defined as the market value of all final goods and services
produced within a country in a given period of tie.

 It is one of the measure of the size of the Economy..

 It is an indicator of economic health of any country.

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Measuring GDP:

 There are two principal ways of calculating GDP:

 Expenditure Approach
GDP = C + I + G + (X-M)

 Income Approach:
NI = W + R + i + PR

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Calculating GDP

Commonly the Expenditure method is used for measuring and quantifying GDP.

GDP = C + I + G+(X-M)

Where :
 C : Consumption
 I : Investment
 G : Government spending
 X : Exports
 M : Imports

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Calculation of GDP - Example

• Atoll K is small island nation. Its population total is 400, and it has 100
wage earners who earn an average of $50 per year. Each wage earner
spends $40 per year buying local goods and services and $3.00 buying
imports. The island exports a total of $800 worth of goods. The
Government tax rate is 10% and all government money is spent on
building infrastructure and supporting schools. There is only one industry
(uranium mining) on the island and it employs every wage earner. The
industry spends $600 each year on new mining equipment. What is the
GDP?

Microsoft Excel
Worksheet

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Problems With GDP calculation.

 Underground economy
– Official GDP does not take into account the underground economy,
– That is transactions contributing to production, such as illegal trade and tax-avoiding
activities, are unreported, causing GDP to be underestimated.

 Sustainability of growth
– GDP does not measure the sustainability of growth.

 Quality of goods
– People may buy cheap, low-durability goods over and over again, or they may buy high-
durability goods less often.
– It is possible that the monetary value of the items sold in the first case is higher than
that in the second case, in which case a higher GDP is simply the result of greater
inefficiency and waste.

 Non-market transactions
– GDP excludes activities that are not provided through the market, such as household
production and volunteer or unpaid services.

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Indian Economy – Facts on India GDP

 The Indian economy is the 11th largest in the world.

 Ranks 4th pertaining to purchasing power parity (PPP) acc. to World Bank

 The GDP of India in the year 2009 was US $1.25 trillion dollars .

 India is the one of the most rapidly growing economies in the world.

 The growth rate of the India GDP was 9.4% per year.

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India GDP Growth rate and sector contribution

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Who Calculates

 Central Statistical Organisation

 (CSO;http://mospi.gov.in/cso_test1.htm) collects data on GDP from which

GDP growth rate is calculated. CSO is a body which comes under Ministry
of Statistics and Programme Implementation (www.mospi.gov.in)

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Index of Industrial Production (IIP)
What is IIP…?

 The Index of Industrial Production (IIP) conveys the status of

production in the industrial sector of an economy in a given
period of time, in comparison with a fixed reference point in
the past.

 The IIP numbers, released every month in India, use 1993-94

as the base year for comparison.

 The IIP figures are an important indicator of whether

industrial activity in a country has risen or dipped.
Background in Brief -

 First attempt of compilation and release of IIP - with base

year 1937.

 To capture the changes in the industrial sector, the series

of IIP is revised from time to time by dropping obsolete
items, and adding new items and shifting the base year to
a more recent one.

 The base year of the all-India IIP which commenced in

India in 1937 was revised in 1946, 1951, 1956, 1960,
1970, 1980-81, 1993-94.

 New Series Expected : 2004-05

 150 New items will replace many obsolete items like VCR,
Typewriters etc.
IIP – Who & When

 Central Statistical Organization – Ministry of Statistics &

Program Implementation.

 The IIP estimate for a given month is released within six weeks
from that month. The data for the IIP estimate is supplied by
15 source agencies.

 Last Release – January 12, 2011.

Data Sources

Indian Bureau of Mines Central Electricity Authority

Directorate of Sugar M/o Petroleum

Salt Commissioner Railway Board

Coal Controller D/o Industrial Policy & Promotion

Tea Board Development Commissioner, SSI

Coffee Board Development Commissioner, Iron Steel

Textile Commissioner Directorate of Vanaspati

Jute Commissioner  
IIP Calculation -

The index is a simple weighted arithmetic mean of

production relatives calculated by formula :

I = (Wi Ri) / Wi

Where:
I - The Index
Ri - Production of the ith item for the month
Wi - Weight allotted to it.
Latest IIP Number Calculation: (as per IIP report dated 12th Jan 2011)

Sectoral IIP (Nov-2010)

Use Based IIP (Nov-2010)

Monthly IIP (Apr-Nov 2010)

 Scope / Coverage -

 The general scope of the IIP as recommended by the United

Nations Statistical Office (UNSO) is defined to include mining,
manufacturing, electricity, construction and gas sectors.

 Due to constraints of data availability the present general IIP

constitutes of mining, manufacturing (organised and
unorganised) and electricity.
Index Structure -
 Usage and Importance -

 Used by the planners, the state and the central government and
at different levels for different policy decisions and other
purposes.
 Used by the government for preparation of state income
estimates of manufacturing sector.
 Used by many countries in the annual and quarterly national
accounts.
 The monthly IIP helps many countries to use it as a reference
series in the compilation of cyclical indicators which helps to
predict the future turning points in business cycle.
 Investors can use the IIP of various industries to examine the
growth in the respective industry
Performance Of IIP -
 Demand for Cons. durable
goods increased because of
stimulus packages such as duty
reductions and sixth pay
commission
 Basic and Interim Goods
though account for a
significant portion of IIP could
not affect it because of its
insignificant growth
 Decrease in the capital goods
and consumer non-durables
bought a decrease in
manufacturing due to their
significant contribution
Performance Of IIP

 Though electricity has

increased but it had no
impact on IIP due to its very
low weigtage in it
 Factory prod. is likely to
increase further as FM Pranab
Mukherjee projected high
government spending in
infrastructure and eased
some of the tax burden on
companies and consumers
 The manufacturing sector
declined overall together with
the mining which led to a fall
in the IIP
Growth-rate change over-time

 IIP was seen to perform

very well during previous
years but it slumped down
in the year 2009 because
of economic slowdown.
 Manufacturing was seen
performing consistently
since previous years but it
started falling down and
ultimately reached a
negative in March’09
 Mining and Electricity are
both the sectors which
have been doing well in
previous years and are
expected to continue the
trend in the coming years
What is Inflation ?
 Variations in Inflation -

Deflation - Hyperinflation -

Stagflation - Reflation -
Causes of Inflation -

 Demand – Pull Inflation

 Cost – Push Inflation

Impact of Inflation -

 Interest Rates

 Investments

 Unemployment

 GDP
Some terms -

 Whole–Sale Price Index (WPI) - WPI is the index that is used to measure the

change in the average price level of goods traded in wholesale market.

 WPI uses a sample set of 435 commodities for inflation calculation

 The selected commodities are supposed to represent various strata of the
economy and are supposed to give a comprehensive WPI value for the
economy.
 WPI is available for every week
 It has a time lag of two weeks, which means WPI of the week two weeks
back will be available now
Some terms -

 Consumer Price Index (CPI) - The Consumer Price Index (CPI) is a

measure of the average change in prices over time of goods and services
purchased by households.

 The CPI is calculated by compiling the CPI for 4 sections –

 Consumer Price Index for Industrial Workers (CPI-IW),
 Consumer Price Index for Agricultural Labour (CPI-AL),
 Consumer Price Index for Rural Labour (CPI-RL) and
 Consumer Price Index for Urban Non-Manual Employees (CPI-UNME).

 The time lag for CPI is around 1 year .

How is WPI calculated -
How is inflation calculated -

 (WPI of end of year – WPI of beginning of year)/WPI of beginning of year x 100

 For example, WPI on Jan 1st 1980 is 106.09
and WPI of Jan 1st 1981 is 109.72
then inflation rate for the year 1981 is -

(109.72 – 106.09)/106.09 x 100 = 3.42%

 The inflation rate for the year 1981 is 3.42%.

 Since WPI figures are available every week,

Inflation for a particular week, is calculated based on the above method using WPI of
the given week and WPI of the week one year before.

(which usually means inflation for a period of one year ended on the given week)
Current Changes -

 The base year against which the price rise is measured has been
advanced by a decade from 1993-94 to 2004-05.

 The new WPI series now measures a total of 676 items, an improvement by
241 items from the previous list comprising of 435 items only. Making the
total to 676 commodities.

 The new WPI index now also includes the more commonly used items such
as refrigerator, washing machine, microwave oven, computer and Television
sets – which have now turned into basic needs, from wants.

 Even Consumer items widely used by middle class such ice-cream, mineral
water, readymade and instant food products, canned meat, leather products,
dish antenna and even precious metals like gold and silver finds its place in
the new index.
Inflation Figures and trend -

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2006 4.37 4.57 4.57 4.65 5.92 7.27 6.33 5.94 6.40 6.91 5.95 6.53

2007 6.72 7.56 6.72 6.66 6.61 5.70 6.45 7.25 6.39 5.51 5.51 5.51

2008 5.51 5.47 7.87 7.81 7.75 7.69 8.33 9.02 9.77 10.45 10.45 9.7

2009 10.45 9.63 8.03 8.7 8.63 9.29 11.89 11.72 11.64 11.49 13.51 14.97

2010 16.22 14.86 14.86 13.33 13.91 13.73 11.25 9.88 9.82 9.7 8.33 8.43

2011 17.26                      
Measures to Curb Inflation -

 Monetary Measures

• Control of Bank Rate

• Cash Reserve Ratio
• Statutory Liquidity Rate
• Repo Rate and
• Reverse Repo Rate

 Fiscal Measures

• Public Burrowing
• Public Revenue
• Public Expenditures

Realistic Measures

• Price Control Policy

Thank you !!