Q1.

Distinguish GDP at factor cost from GDP at market prices. Calculate the difference
between the two for India from 1980-81 to 2010-11 at current prices as well as constant
prices.
Gross Domestic Product (GDP) is the market value of all the final goods and services
produced within the domestic territory of a country. It is the sum total of the income earned
by all the people in the country including the income locally earned by the non-nationals.
GDP also equals total expenditure on the economys output of goods and services. Gross
Domestic Product is often considered the best measure of how well the economy is
performing.
It is measured by three methods:1. Income Method
According to income method, GDP is estimated by adding domestic incomes earned by all
the factors of production for their factor-services during a year.
2. Expenditure Method
According to income method, GDP is the sum total of all the final expenditures on various
goods and services, within the domestic territory of a country, during a year. In the estimation
of final expenditure, we include households expenditure, firms expenditure and
governments expenditure. The main components of final expenditure are Private Final
Expenditure(C), Final Investment Expenditure (I), Government Expenditure on Final Goods
and Services (G) and Net Exports(X-M).
3. Value Added Method
This method measures the value of goods and services produced. This enables us to
understand the performance of an economy in terms of the targets set before.
Market Price is the price paid by the buyer of a commodity in the market. On the other hand,
Factor Cost is the cost paid by the producer to the factors of production for their contribution
in the production of the commodity. The difference between Market Price and Factor Cost
arises due to indirect taxes and subsidies. To find out Factor Cost, Indirect taxes are
subtracted from Market Price and Subsidies are added.
Thus,

Factor Cost = Market Prices Indirect Taxes + Subsidies

GDP at Market Prices (GDPMP) measures the value of goods and services at their market
prices. In order to calculate the market value of a commodity the quantity of a commodity is
multiplied by its price. Market Value = Quantity * Price
Thus, the sum total of value of various goods and services is GDPMP.
GDP at Factor Cost (GDPFC) is the sum total of gross earnings of the people within the
domestic territory of a country during a year. In India GDP is measured at Factor Cost not at
Market Price.

Nominal GDP (Current Prices)

Year
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

GDP at Factor
cost
132520
155158
173337
202750
227694
254427
283681
321589
383790
442134
515023
594168
681517
792150
925239
1083289
1260710
1401934
1616082
1786526
1925017
2097726
2261415
2538170
2971464
3389621
3952241
4581422
5282086
6133230
7306990

GDP at Market
Price
145370
170805
191059
222485
249268
281330
314816
357861
424531
487684
569624
654729
752591
865805
1015764
1191813
1378617
1527158
1751199
1952036
2102314
2278952
2454561
2754620
3242209
3692485
4293672
4986426
5582623
6550271
7875627

NIT
12850
15647
17722
19735
21574
26903
31135
36272
40741
45550
54601
60561
71074
73655
90525
108524
117907
125224
135117
165510
177297
181226
193146
216450
270745
302864
341431
405004
300537
417041
568637

Nominal GDP (Current Prices)

9000000
8000000
7000000
6000000
5000000
4000000

GDP FC

3000000

GDP MP
NIT

2000000
1000000
0

Real GDP (Constant Prices)

Year
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

GDP at Factor
Cost
641921
678033
697861
752669
782484
815049
850217
880267
969702
1029178
1083572
1099072
1158025
1223816
1302076
1396974
1508378
1573263
1678410
1786525
1864301
1972606
2048286
2222758
2971464
3254216
3566011
3898958
4162509
4493743
4877842

GDP at market
Price
695361
737078
762622
818288
849573
894041
936671
973739
1067582
1131111
1193650
1206346
1272457
1333123
1421821
1529453
1645037
1711735
1817752
1952035
2030711
2136651
2217133
2402727
3242209
3544348
3872974
4253184
4462967
4869317
5298129

NIT
53440
59045
64761
65619
67089
78992
86454
93472
97880
101933
110078
107274
114432
109307
119745
132479
136659
138472
139342
165510
166410
164045
168847
179969
270745
290132
306963
354226
300458
375574
420287

Real GDP (Constant Prices)

6000000

5000000

4000000

3000000

GDP FC
GDP MP

2000000

1000000

NIT

Q2. What is the difference between gross domestic product (GDP) and gross national
product (GNP)? Which is higher for India and why? Calculate the difference from 1980-81 to
2010-11. Do it for both current and constant prices.
Gross Domestic Product (GDP), we include only the goods and services produced within the
domestic territory of a country. It includes the incomes locally earned by the non-nationals
and excludes the incomes received by the resident nationals from abroad.
Gross National Product (GNP) is the value of goods and services produced by all the normal
residents of a country during a year.
GNP is Gross Domestic Product plus net factor income from abroad.
OR
GNP is the money value of all final goods and services produced in the domestic territory of
a country during a year plus net factor income from abroad (NFIA).
GNP = GDP + NFIA
Net Factor Income from Abroad (NFIA) - It is the income earned from abroad for rendering
factor services by the normal residents of the country to the rest of the world and the income
paid for the factor services rendered by non residents (foreign residents) in the domestic
territory of a country. NFIA has the following three components:
1. Net compensation of employees from abroad.
2. Net property and entrepreneurial income (rent, interest, profits and dividends) from
abroad.
3. Net retained earnings of resident companies working in foreign countries.
NFIA = Factor income earned by the domestic factors of production employed in the rest of
the world minus Factor income earned by the factors of production of the rest of the world
employed in the domestic economic.
It means, that wages earned by Indians (working as doctors, engineers, technicians, masons,
nurses etc.) in foreign countries is added to GDP of India whereas the wages paid to the
foreigners who are working in India will be subtracted. Similarly, if Indian individuals and
companies earn rent, interest and profits from their assets, investments and factories in
foreign countries, it is added to Indias GDP, whereas the rent, interest and profit earned by
foreign individuals and companies in India will be subtracted.
Consider an example:Suppose an Indian engineer is working in England and earning wages. It will form part of
Englands GDP because this income is generated in the domestic territory of England. But
the wages earned by Indian engineer in England will be added to Indias GDP in order to
estimate Indias GNP. Thus, the wages earned by Indian engineer in England will form part
of Indias GDP because it is income earned from abroad.

For India, GDP is higher than GNP. It is because the Net Factor Income Paid by our country
to rest of the world is more than the Net Factor Income received by us. So, our NFIA comes
out to be negative which is added to GDP to arrive at GNP.
In India the difference between GDP and GNP has increased considerably after 1991 as India
underwent economic reforms. Gates for Foreign Direct Investment were opened and lots of
foreign firms started investing in our country. Even today lots of MNCs do business in India.
The profits earned by them are added to our GDP but when it comes to calculating GNP,
these profits are deducted from GDP as Net Factor Income to Abroad. On the other hand,
Indian Nationals living Abroad do earn some income which is added to our GDP but this
income is not enough to offset the payments made to the rest of the world.
Hence, Indias GDP is higher than GNP.

At Current Prices:

Year
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

GNP(Factor
Cost)
132865
155198
172703
201806
226270
252998
281876
318970
379294
436403
507487
584091
669872
780070
912156
1069805
1247628
1388729
1601114
1771095
1902284
2077658
2517462
2949089
3363505
3919007
4560910
5249163
6095230
7241026

GDP(Factor
Cost)
132520
155158
173337
202750
227694
254427
283681
321589
383790
442134
515023
594168
681517
792150
925239
1083289
1260710
1401934
1616082
1786526
1925017
2097726
2538170
2971464
3389621
3952241
4581422
5282086
6133230
7306990

NFIA
345
40
-634
-944
-1424
-1429
-1805
-2619
-4496
-5731
-7536
-10077
-11645
-12080
-13083
-13484
-13082
-13205
-14968
-15431
-22733
-20068
-20708
-22375
-26116
-33234
-20512
-32923
-38000
-65964

At Current Prices:

8000000
7000000
6000000
5000000
4000000

GNP FC
GDP FC

3000000
NFIA
2000000
1000000
0
-1000000

At Constant Prices

Year
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

GNP(Factor
Cost)
641919
676994
694277
748695
776951
809521
844053
871991
957879
1016494
1067694
1082459
1141240
1208545
1286594
1380321
1492406
1560236
1664570
1771094
1841873
1952467
2203258
2949089
3229296
3536496
3881779
4137125
4464854
4834759

GDP(Factor
Cost)
641921
678033
697861
752669
782484
815049
850217
880267
969702
1029178
1083572
1099072
1158025
1223816
1302076
1396974
1508378
1573263
1678410
1786525
1864301
1972606
2222758
2971464
3254216
3566011
3898958
4162509
4493743
4877842

NFIA
-2
-1039
-3584
-3974
-5533
-5528
-6164
-8276
-11823
-12684
-15878
-16613
-16785
-15271
-15482
-16653
-15972
-13027
-13840
-15431
-22428
-20139
-19500
-22375
-24920
-29515
-17179
-25384
-28889
-43083

-1000000
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

At Constant Prices

6000000

5000000

4000000

3000000

2000000

1000000

GNP FC
GDP FC
NFIA