GROSS DOMESTIC PRODUCT (GDP):DECIPHERING THE INCOME FROM DIFFERENT PERSPECTIVES

 

National Income Concept:

• National Income is the total monetary value of all final goods and services produced by the country in certain year.
•  It is basically the total amount of income accruing to a country from economic activities in a year’s time. 
• There are multiple methods of calculating National income depending upon the methodology adopted . 
• It can be GDP (FC),GDP (MP),GNP (FC),GNP (MP),NDP (FC),NDP (MP)  ,NNP (FC) and NNP (MP). 
• Several factors affect the national income of a country like all the four factors of production ie land, labour, capital and entrepreneurship, level of technology, Political stability and nature of government.

MEASURES OF NATIONAL INCOME:

GDP (GROSS DOMESTIC PRODUCT):

Gross- Gross means total goods and services in monetary terms.

Domestic: Goods and services produced in the domestic territory of country. 

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• The concept of domestic territory (economic territory) is different from the geographical or political territory of a country.
•  Domestic territory includes the Political frontiers of the country including its territorial waters, Ships, and aircrafts operated by the residents of the country between two or more countries ,Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of the country in the international waters, Embassies, consulates and military establishments of the country located in other countries.
• It excludes all embassies, consulates and military establishments of other countries and offices of international organization located in India.

Product: 

• Final values of Goods and Services and not the intermediate goods.
• It is to be understood that Transfer Income is not included in GDP.

CONCLUSIVELY GDP is :

• GDP represents the aggregate monetary value of goods and services, produced in the domestic territory of country in a specified time frame accounted without duplication. 
• All goods and services produced during the period have to be included whether they are marketed i.e., exchanged for money or bartered or produced for own use. 
• However, certain other activities like services of house-wives are excluded from production mainly due to the problem of measurement. 
• Also excluded are illegal activities such as smuggling, black marketing,barter system as there is no monetization of the process ,sale  and purchase of shares and bonds in secondary market (No production activity but only exchange of funds) and sale /purchase of second hand vehicle  etc.

                                 

What constitutes GDP in this figure ?

In this figure ,any transactions at D-mart and Haldiram's are part of GDP as there is payment of taxes while transactions at local grocery shop and dhaba are not part of GDP as there is no tax payment to the government.

Gross National Product (GNP):

GNP represents the aggregate value of goods and services, produced by the Nationals of a country. 

Where,

National: It includes  incomes of all citizens whether living within the country or living abroad.

GNP = GDP + Net factor income from abroad .

Net factor income from abroad =

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.

In the picture ,it is clear that income earned by foreign actor acting in india constitutes GDP while Indian actors earning abroad are part of GNP.

Net Domestic Product (NDP):

*Net: Term “Net” takes depreciation into account.

* Where Depreciation=Consumption of capital in a year due to wear and tear. NDP for FY 2023-24 is Rs 260 trillion .

• Any product part of GDP goes depreciation in due course of time and it should be taken into account while calculating the income of the country. 
• NDP takes this depreciation factor into account. 
• NDP represents the aggregate value of goods and services, produced in the domestic territory of country, taking depreciation into account in a specified time frame.

  

                                                        NDP=GDP-Depreciation

Net National Product (NNP):

NNP represents the aggregate value of goods and services, produced by the nationals of a country, taking depreciation into account, in a specified time frame. 

Transfer Payments:

• A payment made by the government to individuals for whom there is no economic activity is produced in return. 
• These are not part of GDP as this is one way transfer and these payments are done without any economic addition to the economy in lieu.
• For example: Old Age Pensions, Scholarship etc.

UNDERSTANDING THE YEAR ON YEAR VS QUARTER TO QUARTER  CONUNDRUM:

In India, the GDP is calculated on year on year basis while in many countries like USA, it is calculated on quarter on quarter basis.

Hence, while we compare Q1FY20 with Q1FY19, other countries may compare Q2 of 2024(i.e. April-June) with Q1 (Jan-March) of the same year ie 2024 .