Part 1: [Economy] 3 Methods of calculating GDP ( Source

Mrunal )
what are these income,production and expenditure methods
in calulating GDP?how do terms like NNP, NDP,
GNP,GDP,NNPFC,NNPMP DIFFER FROM EACH
OTHER. what is difference between gdp at constant prices
and current prices.
GDP (Gross Domestic Product) means,
Money value of everything you produce within your country.
(Domestic=within country).
Everything means products and services.
GNP (Gross National Product) means,
The Money value of everything you produce within your
country PLUS your income from abroad. Anil Kapoor goes
to America, get 5 million dollar$ to play baddie in Mission
Impossible 4, but sends that money to India = counted in
Indias GNP.
But with same logic, Cricket Coach Gary Kirsten gets 50
lakh rupees from BCCI, and sends it to his family in
S.Africa, youve to deduct it from Indias GNP. (South
Africans will count it in their GNP)
Similarly, Americans will subtract the dollar value of Anil
Kapoors remittance to India while counting their GNP.
So, whatll be the (stupid) formula?
Gross National production=Money value of everything
produced within India+Incoming money from outsideOutgoing money to abroad.
Or you can simply say
GNP = GDP + incoming money from abroad Outgoing
money to abroad.
Part 2 : How GDP calculated and what is are these income,

production and expenditure methods.

GDP is calculated by three methods.
Theoretically all three of them should give same final
number, but in reality there will be slight difference between
each of them.
#A: EXPENDITURE METHOD OF COUNTING GDP
Here you count the money spent by everyone.
So How to make a technical formula? Ask yourself, where
is the money changing hands? There are five components of
that.
#1: CONSUMPTION BY PRIVATE CITIZENS [C]
like you and me buying (overpriced) daal, vegetables and
milk (courtesy: Sharad Pawar).
I buy your second-hand bike for 15,000 Rupees, should we
including it in the consumer Expenditure (C) ? Nope.
Because the bike Is not produced again.
When you had bought that bike for Rs.30000, 10 years ago,
we had counted that money in that years GDP. So second
hand-product sale money cannot be counted in this years
GDP.
Now, I buy your second-hand bike from an auto dealer, (who
gets Rs.1000 Commission) should we include it in the (C)?
Hell Yes, because he sold his service to me uniquely. Every
time he sells a second hand product, although no new
product is created but new service is delivered by him.
WHAT IF SAME 1000 RUPEE NOTE IS CHANGING
HANDS?

I gave a note of Rs.1000 to that dealer as part of his

brokerage (dalaali) and he gives the same Rs.1000 note to the
electricity company for his monthly bill.
Same Rs.1000 note is changing hands so is our GDP
=Rs.1000? Nope. GDP is the money value of everything
produced within India. So brokerage service is Rs.1000
separately and the electricity produced is also worth Rs.1000
separately. Therefore, Even as same 1000 rupee note is given
to both parties.
Total GDP=1000 brokeage+1000 electricity bill=Rs.2000
If electri.co gives that 1000 rupee note to its peon as salary,
then again it has to be counted. Because peon sold his unique
service separately to the company. So in that case
Total GDP =Brokerge+Electric bill+peon^ salary=Rs.3000
#2: Investment [I]
People investing in sharemarket, putting money in banks etc.
#3: Government spending [G]
Like buying (overpriced) sports equipment from Kalmaadis
associates during Common wealth games. Government
paying salary to staff, buying new tanks and
missiles..everything.
#4, 5 :Export & Import [X & M]
Money we get from export is added.
You remember that GDP means Money value of everything
we produce within India. So if we import something, it has to
be subtracted, because it is not produced within India.
So formula (for ease In remembering)

GDP = Consumer+Investor+Governer + (eXporter

iMporter)
Technically correct formula:
GDP(Expenditure)=C+I+G+(X-M)

#B: Income Method of counting gdp

Here you count everyones income. But some people may be
running business in credit (udhaari), sometimes payments
are delayed. So may not give the full picture for the given
year.
#C: Production method of counting gdp
Total money value of everything produced (value added at
each stage)
Farmer produced Wheat and sold 100 kg of it @ 2000 Rs.
(Original value)
Flour mill, purchased it, grinded it and sold the flour to
baker @ 2500 Rs. (+500 value added to previous purchase)
Baker made breads, cookies and biscuits and sold the total
production @3500 Rs to its final customers. (+1000 value
added to previous purchase)
what is total GDP here?
2000+2500+3500=8000 Rs? Hell no! Youve to see the value
added.
So, total money value of this line is: 2000+500+1000=3500.

Not all of the wheat goes into Bakers oven. Some of it will go
in making beer, some in a normal household for making roti
and so on. Youve to track the value added in each different
line.
Part 3: [Economy Q] GDP at Factor cost and Market price
(GDPFC & GDPMP), NNPFC,NNPMP
GDP at Factor cost means, money value of everything
produced in India, without counting Government's role in it.
i.e. indirect tax and subsidies.
Example#1: Subsidy
1 kg. Urea fertilizer's original-price is 500 Rs.
When it reaches the local supplier, Government is giving
10% subsidy. So farmer purchases it @ (500-50)=Rs. 450
GDP @ Factor cost= 500 [i.e. without Government's
involvement]
GDP @ Market price= 450 [with Government's involvement]
Example#2: Tax
Box of 10 Blank DVDs =Rs.100 +10% VAT so final
M.R.P.=Rs.110
GDP @ Factor cost=Rs.100 (Real value of those dvds)
GDP@ Market price=Rs.110
How will you calculate GDPMP if GDPFC is given, & vice
versa?
GDP@Market price=GDP@ Factor price+Government
involvement

Now, Government involvement=+Indirect taxes-subsidies

So finally,
GDP@Market price=GDP@Factor cost+Indirect taxsubsidies
Or doing the reverse,
GDP@Factor cost=GDP@market price-Indirect
tax+subsidies
GDP @ Factor Cost and Market Price for same Urea and
Blank DVDs
As you can see, Factor cost= Original or real value of
something.
So at marketprice, even when Government is giving subsidy,
the manufacturer still receives the original price. E.g.
although farmer pays Rs.450, still manufacturer gets Rs.500
so we 'add' subsidy when converting MP to FC.
Similarly, even when customer pays MRP of DVD is 110, the
DVD-manufacturer is still getting 100 Rs. So we 'deduct' the
indirect tax(VAT) while converting MP to FC.
Similarly
NNPFC and NNPMP
GNP = everything produced inside India + Anil Kapoor's
income from Hollywood - Gary Kirsten's remittance to
S.Africa
So, what is Net National product @ Factor cost, and
@Market price.
Net = Gross minus depreciation.

So NNP=GNP minus depreciation.

And factor cost, market price, just as explained above..with
and without Government intervention.
GDP - Depreciation = NET Domestic Product
GNP- Depreciation = Net National Product (NNP)
Problem with GDP:GDP doesn't count negative things associated with market
activities.
For Example, if you chop down trees to make furniture, &
export it, then India's GDP value will increase.
But as you know cutting down trees = bad for environment :
but this is negative thing is not counted in GDP. same can be
applied for making medicinal drugs/ chemicals but rivers /
atmosphere getting polluted in the process and so on....
GDP is a concept evolved during & after WW2, when
situation was different.
Thus GDP is outdated, and we need to look @ other things
like Human Development index, etc.

*What is Depreciation ?
When you're making some product (mobile phone)
or providing some service (internet, travelbus etc.)
Then you need to use machines to produce it.
And that machinery has wear and tear cost. (annual
Maintenance, service, repair costs)
That cost of repair / maintenance of machinery etc. is called

Depreciation.
What's the use of Depreciation ?
You'll get income deduction for depreciation.
for Example, Govt. of India provided depreciation of 50%
for commercial vehicles purchased on or between JanuaryMarch 2009
that means suppose you're a businessman with a car worth
10 Lakh rs. for your business purpose.
so 50% depreciation value of 10 Lakh. = 5 LaKh Rs.
and for that you don't have to pay tax
e.g. if you were in the 30% tax bracket then you don't have
to pay
5 LaKh X 30 / 100 = 1.5 Lakh Rs. to Govt. as income tax. <
you don't have to pay that money.