GDP: Gross Domestic Product

Current Constant GDP Growth

GNP NNP
price price deflator Rate
 Gross Domestic Product (GDP) सकल घरे लू उत्पाद (2016)
Jaguar: 50k cars mfg. Exploration: Rs.701 cr.

$68 million

++ Profit
Rs.100 cr (2014)

Rs.40 cr (2016)
GDP calculation method #1= खर्ाा , the Expenditure

Final Private Consumption (C)

•Not intermediate goods like steel, rubber-> only final
product (desi Nano + imported Ferrari also counted)
•Existing House -> “rent” to yourself.
•New House purchase: No.

Investment (I)
•New House, building, capital goods/asset.
•Intermediate goods for future production.
•Capital from Share, Bond, Debenture – used in above
activities

Because if something is ‘produced’, then

someone must have spent rupees to make it or buy it
GDP calculation method #1: Consumption (C)+investment (I)

+Government “purchase” (G)

•Salaries, Procurement yes
•But, scholarship, Widow pension, Unemployment
Allowance, “UBI(!)” etc. “Transfer Payments”..No
Private final consumption (C)

+Foreigner spending in India (eXport-iMp)

•+ Google paying call centre “service”
+ Arnold Buying Desi Nano
•-- imported Ferrari
[private final consumption-walli,
because it’s produced outside India]
Because if something is ‘produced’, then
someone must have spent rupees to make it or buy it
GDP Calc: Expenditure method: GDP= C + I + G + (X – M)

+Consumption (Final)

+Investment
GDP @Constant
market prices

+Government “Purchase”
Inflation price
Foreigner’s Expenditure Or NET Export adjust with base
(eXport-iMport) year (2011)

GDP at Current Market Price

 If Government of India starts giving
universal basic income to all of its
citizens, where will it be counted in the
Mock Question for Prelims

Expenditure method of GDP calculation?

A. Government Expenditure (G)
B. Private consumption (C)
C. Investment (I)
D. All of above depending on recipient
being a govt employee, private citizen
or entrepreneur.
1. Skip 2. Attempt 3. Mark n Review
 GDP calc. Expenditure method: Book formula-> Real CSO formula?

Will explain after a few slides

Only for information.

Else bookish formula
“CIGXM” is sufficient.
PFCE: private final consumption Expenditure; GFCE: Government final consumption Expenditure
GFCF: gross fixed capital formation; CIS: change in stocks…. Then adjusted @base price (2011)
GDP Calculation: THREE Methods

Expenditure
•C + I + G + (X – M)
•Consumption, investment, Govt. purchase, Net export

Production: Gross Value Added (GVA)

•Total Value of Sale – Cost of intermediate goods

Income Method (WIPR0)

•W+I+P+R
•Wages, interest, profit, rent
 GDP calculation Method #1: Expenditure (CIGXM)
Method#2: Gross Value Added (Production method)

Intermediate Goods Total Sale

Rs.00 Rs.1 lakh Rs.5 lakh Rs. 10 lakh
Rs. 16 lakh
•Wage(W) •Wage(W) •Wage(W) Final
•Interest(I) •Interest(I) •Interest(I) product
•Profit(P) •Profit(P) •Profit(P) (-)Rs. 6 lakh Cost of
•Rent(R) •Rent(R) •Rent(R)
intermediate goods

Value = Rs. 10 lakh

1 4 5 GVA @basic price
Addition
 Suppose we only produce LPG? (hypothetical numbers)
•Iron ore-> Steel ->Cylinder| [Gas->LPG]
Rs.600 GVA @Basic price
•LPG @Basic Rs. 600 per cylinder

+Excise on mfg [CGST]

+ VAT on sale [SGST/ UT]

Rs. 700/- with tax

•PAHAL (DBT) Scheme, 2014, Petro Min.

- Rs. 300 Subsidy

•Current Market Price [GDP]

= Rs.400
 Officially, this method is
considered firmer, more
accurate than others. So if
Expenditure method shows
different GDP number=
“discrepancy” in
Expenditure method.

GDP @Constant
market prices
∑ (GVA of all goods and services produced) (official GDP)

Inflation price adjust

Subsidies with base year
Else simply say “+NET TAXES” (2011)

GDP @Current
Market Price
 GDP calculation Method #2: Gross Value Added (GVA)

GDP calculation Method #1: Expenditure (CIGXM)

If Expenditure method shows different number, it’ll be

adjusted by saying “Discrepancy”, because GVA
method is like General Dong- it can never be ‘WRONG’.
 Why this wedge (gap)?
Gap is less, because
remember “Fiscal Stimulus” so NET taxes (+tax minus
tax breaks, loan subsidies subsidies)
more= wedge (gap) is low.

Only union budget 2017

+ 19.00 lakh cr (Direct indirect taxes)
- 2.72 lakh cr. Subsidies
Taper Tantrum = NET Tax will be a positive number!
Crisis Hence GDP > GVA.

First, I’ll give graph/table then I’ll read that graph and type all
info in text AGAIN= that’s how I fill 300 pages of bol-
bachchan Economy survey 2016-17. <wink wink>
 If a country’s GDP at market prices is lower
than its gross value added (GVA) by each
sector, then which of the following could be a
Mock Question for Prelims

possible explanation?
A. Presence of a large parallel black economy
in urban areas and barter system in rural
areas.
B. Economy could be undergoing a phase of
recession.
C. Subsidies to GDP ratio could be higher
than tax: GDP ratio.
D. None of the above.
1. Skip 2. Attempt 3. Mark n Review
 GVA contribution by each sector in 2016-17 (@2011, Constant prices)

1. Agriculture
2. Forestry
3. Fishing

1. mining & quarrying

2. manufacturing
3. electricity, gas, water supply &
other utility “services”
1. Trade, hotels, transport, 4. construction
communication & broadcasting
2. financial, real estate & professional
services
3. Public Administration, defense &
others
Amount in lakh crores. CSO, 31/5/17
 In CSO’s official classification of economic sectors,
Which of the following are clubbed as ‘industries
sector’?
Mock Question for Prelims

1. Real estate.
2. Water supply and other utility services
3. Construction
4. Fishing.
Answer choices
(a) 3 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2, 3 and 4
1. Skip 2. Attempt 3. Mark n Review
GDP Calculation: THREE Methods

Expenditure
• C + I + G + (X – M)
• Consumption, investment, Govt. purchase, Net export

Production: Gross Value Added (GVA)

• Total Value of Sale – Cost of intermediate goods = GVA
• + Tax MINUS Subsidies = GDP @Current Price
• Then adjust prices with base year = GDP @Constant price

Income Method (WIPR)

• W+I+P+R
• Wages, interest, profit, rent
 GDP Calc. Method #3: Income method
Sum of (WIPR “O”)
Factor Income
Labor Wages
Capital Interest | dividend

Entrepreneur Profit
Land/Building Rent
Total= GDP @Factor Cost
@income
method
(FC)
=10 lakh
@GVA method (basic price) = 10 lakh

I can illustrate with a table and hypothetical numbers, But let’s just
not waste time or mental energy on it.
 Suppose we only produce LPG? (hypothetical numbers)

•LPG @Factor cost Rs. 600 per

Rs.600 at factor cost cylinder (WIPR “O”)

+Excise on mfg [CGST]

+ VAT on sale [SGST, UT]

Rs. 700/- with tax

•PAHAL (DBT) Scheme, 2014, Petro

- Rs. 300 Subsidy Min.

•Market Price
= Rs.400
 GDP @Constant
market prices

Inflation: adjust
price with base
year (2011)
Subsidies
GDP @Current
Market Price
Book formula (WIPR) Income method CSO-Actual (2015)

Factor Income “Compensation”

salary+ Boss’
Laborer Wages contribution to SS

Mixed income,
Entrepreneur Profit operating surplus

Capital Interest Consumption of

fixed assets
during production.
Land/Building Rent on “assets”

GDP GVA
@Factor Cost @Factor Cost
 Independent of volume..
1. Farmers: loan subsidy
1. Professional Tax 3% irrespective of
2. Stamp Duty whether he produces
100kg or 1000 kg.
3. Land revenue 2. SSI, Railway Etc.

Production Production
Taxes Subsidies

CSO’s
Income Method
For
GDP computation
GDP GVA at Basic Price
 Dependent on production
VAT, Excise, 1. LPG-PAHAL
Service, 2. PDS-NSFA
Custom, GST 3. Farmer-MSP
Product Product
∑Sum of Taxes Subsidies
GVA @Basic
prices

GDP at Market Price(MP)

Inflation price adjust with
GDP @constant prices [Official]
base year (2011)
CSO: GDP Calculation reform (2015) not important
 GDP: Gross Domestic Production

Current Constant GDP Growth

GNP NNP
price price deflator Rate
 Base year: 2011 Present year: 2017
Constant Price Current Price
Rs.1 Lakh / car Rs.1.5 Lakh / car

Rs. 1L Rs. 1L Rs. 1L Rs. 1L

Nominal GDP:
Rs. 1L
3 lakh @Current Price

GDP: 3 lakh (2011) x100

Real GDP: 2 lakh
@Constant Price (2011)

𝑵𝒐𝒎𝒊𝒏𝒂𝒍 𝑮𝑫𝑷 GDP Deflator

= 𝑹𝒆𝒂𝒍 𝑮𝑫𝑷
𝑮𝑫𝑷 𝑫𝒆𝒇𝒍𝒂𝒕𝒐𝒓
CSO: GDP @ Current | nominal prices (Rs. Cr),
without adjusting for inflation with base year

16847455

15075429

2016 2017
Growth adjusted for Constant prices using GDP deflator

Year GDP (Crores) Real Growth rate

2011 8832012 00
2012 9280803 5.1%
2013 9921106 6.9%
2014 10656925 7.4%
[सघउ वृध्धिदर!]Real GDP growth rate…(constant prices 2011-12)

8 Survey projection

7.1 7.5
6.75
2015 2016 2017
Says CSO [31/5/17 release]
Sector’s “own” growth rate (%) GVA [at Constant price 2011]

Rs.100 Rs. 104

2015 2016
Agri Growth
rate: 4%
 Agriculture, fishing, forestry GVA @Basic Prices
[taxes, subsidies ignored]

4.2 4.1

1.2
-0.2
2013 2014 2015 2016
Although afterwards CSO figures in 31/5/17 say
this is 4.9% so performed better than expected. But
ignore that latest Development for Prelims’17.
industries GVA @Basic Prices [taxes, subsidies ignored]

7.4

industries
5.9 5.2
5
2013 2014 2015 2016

10.3

Services
7.8 8.9 8.8

2013 2014 2015 2016

 GDP: Gross Domestic Production

Current Constant GDP Growth

GNP NNP
price price deflator Rate
 Gross Domestic Product (GDP) सकल घरे लू उत्पाद (2016)
Jaguar: £22.208 billion Exploration: $22 billion

$68 million

Rs.40 cr (2016)
Gross Domestic “Product”-> Gross National “Product” (GNP)
Add NET Factor income Jaguar: £22.208 billion Exploration: $22 billion
(WIPR) from abroad
$68 million

++ WIPR

Rs.40 cr (2016)
 GDP + “NET”
factor income
from abroad
NET National
Product
(Market Price)
GNP (-) Depreciation

NNP(FC)
NNP - TAX
=National
(MP) +Subsidies
income

Recall, FC -> MP by doing plus tax minus subsidies, then to go from MP to FC, change the signs.
 In the GDP calculation, to obtain factor cost
from the market value, we’ve to:
A. Add subsidies and taxes.
Mock Question for Prelims

B. Add taxes and remove subsidies

C. Add depreciation and remove taxes
D. Add subsidies and remove taxes

1. Skip 2. Attempt 3. Mark n Review

 What is Net National Income? (1997)
A. Net Domestic Product at market price
B. Net Domestic Product at factor cost
C. NNP at market price
Prelim 1997

D. NNP at factor cost (right, NCERT

Class12, Macro, Page24)

1. Skip 2. Attempt 3. Mark n Review

Although now CSO defines @MP. But When in doubt, NCERT wins.
 CSO: Per capita Net National Income (@Market Price)
120,000

100,000

103219
80,000 94,130
86,454 82269
60,000 72,862 77,803
40,000

20,000

2014-15 2015-16 2016-17

Current Constant (2011)
 What is National “Disposable income”?
GDP + NET Factor Jaguar: £22.208 billion Exploration: $22 billion
income from abroad
$68 million

++ WIPR

Rs.40 cr (2016)
GDP + “NET” factor income from abroad

GNP Depreciation NNP (MP)

NET “other” Current

Transfer: gift, aid..

National Disposable
income
 NCERT
Class12
Macro
Ch. 2
If time then
read
Else ignore.
CSO’s real
formulas
are
different.
But ignore
for exams.
 GDP: Gross Domestic Production

Current Constant GDP Growth

GNP NNP
price price deflator Rate
 GDP growth: Demonetization (Notebandhi) की असर, the effect
SBN: 15 lakh cr.
Value wise 86% of
currency notes

M V P
Money Velocity of Y
Price Level (Real GDP)
Supply Money (GDP Deflator)

M V
Money Velocity of Nominal GDP
Supply Money 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃
𝐺𝐷𝑃 𝑑𝑒𝑓𝑙𝑎𝑡𝑜𝑟 =
Think of GDP Expenditure method: if 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃
someone produced, someone purchased.
 Effect of Demonetization?
[Assume figures adjusted @constant prices 2011]
FY16 (2015-16)

Q1: 100 Q2: 100 Q3: 100 Q4: 100

FY17 (2016-17)

Q1: 107 Q2: 107 Q3: 90 Q4: 95

Quarterly growth rate for 2016-17

7% 7% -10% -5%
Negative growth rate in two
successive quarters = RECESSION
And some critiques (from you know which newspaper)
were writhing in ‘excitement’
Negative growth
rate in two
quarters =
recession

Double
dip
One
dip
 GDP growth: Demonetization (Notebandhi) की असर, the effect
Growth rate in 2016-17
compared to previous quarter in 2015-16
Unorganized and informal sector
data not captured in CSO. So, it’ll
not reflect (MIT Economists)

7.4
Can’t be this
7.2 high!!

Q1 Q2 Q3 Q4
 Hypothetical numbers, and Technically incorrect ofcourse…
Money
Velocity Price level Real GDP
supply x = x fall
(V) (Inflation) (Y)
(M)
Q3-15 100 x 5 = 1.25 X 400 0
Q3-16 50 x 2* = 0.8 X 125 -69%
*Critiques thought this would happen….
But actually 50
1. Cash withdrawl x
limits: 3.5 will
people = spend1.24 X 141.129[कंजूस
very parsimoniously -65%
ी से ]
2. Rs.2000/- note: merchants
Informal credit, not accepting for change problem.
3. Bank deposit▲, rural
bartering area:
system Price levels
and cheque, card,remained
NEFT acceptance
digital payments. So “firm”, due to global
velocity, not crude oil prices ▲.
‘extremely’ down.
Some experts: ▲

If inflation had completely 𝑴 ▼∗ 𝑽(? ) ▼

fallen then large GDP fall 𝒀 ▼=
𝑷 ? ▼
Let’s understand it in a much simpler manner. Suppose a coaching
“sir” has Rs.100 as black money & Rs.100 note demonetized
Declare 100 as Declare Rs. 100 as income from
black money in fake “new” admission & deposit
PMGKY • -15 as service tax (+KKC+SBC)
•- 50% [Tax + penalty]
Rs. 85 left
Left Rs.50 only • Minus Rs.10: fake purchase chalk duster
• Minus Rs. 15: PMJDY as ‘fake salary’ to
poor man (you keep Rs.2 as commission)
• 60 Rs. “Taxable income / profit”
• 30% income / corporation tax on that..
Left 42 rupees (officially) +
10+[15-2]=65 (in reality!)
GDP (expenditure method) = Consumption + Investment + …+ (CIGXM)

Projector: Excise+VAT
[Investment]

Chair, Table
Excise+VAT
[Investment]

• Indirect tax collection depending on how much

fake invoicing/sales/purchase
• Direct tax collection ought to rise [on how much
Admission = Service Tax profit/income “claimed”
[Consumption]
• GDP (expenditure method)
 Advance Tax: Indirect tax collection in Q3-2016 (lakh Cr.)
Option A: Option B:
Declare as Black Money Declare as fake sales, purchase, income
50% (Tax + penalty) [direct, indirect tax] = still >50% left

6.3 5.52
16
5.04

4.93

Q3-2015 Q3-2016 Q3-2015 Q3-2016

Expenditure method: GDP= C + I + G + (X – M)
Q3: Advance Tax collection
+Consumption (Final) rose. Meaning bizmen
inflated earning to convert
black to white.

Projector, chair, table: steel,

+Investment wood…inventories (++)
advance tax collection

+Government Also overstated / overinflated,

“Purchase” says the critiques

Foreign Expenditure
(Export-Import)
 Many factors behind Q4
fall. Overall 7.1% is good!
Demonetization= “Short
term challenge, Long
term benefit.”

7.2 7.4 7 7.1

6.1
See! Demonetization
hurt economy! Look
@Q4 Growth Rate!

Q1 Q2 Q3 Q4 FY17
New GDP data came in 2nd / 3rd June 2017: I think UPSC
Prelim paper already set. So not doing more analysis.
(ENTIRE)
Growth rate Q4-
We’ll come back to this for Mains. 2016
Jan-March’17 over
Jan-March’16
 2016 UPSC 2016 2015
Prelims GS
1 38/100
Current Q.

1 2 2 1 2

2
From an
individual
month, max 3
current MCQ
3 1

This accounts for 15/38 current Qs. Remaining- mostly from 2015
but difficult to ascertain date due to ‘continuous news’. And Some from 2014, 13
 2017 2016
? ? ? It doesn’t mean ? ? ?
UPSC examiners
are “outdated”.
But they’ve to
? take into account ? ? ?
aspirants who’re
from
geographically
and
economically ? ? ?
“distant” area.
Current Affairs
are imp. But
24/7 उसकी
हाय-हाय मत
करो.
? ? ?
1. On that logic…the “MAXIMUM LATEST” current Affairs for UPSC Prelim 2017: April…may be Max May
W1 (well, still I’ve covered GST till then.)
2. If at all “backbreaking”: still max. may be 3 MCQs / per month- logic se… I’ve ignored latest
developments of GDP, Trump’s Paris EXIT, GST ball by ball etc. and so on….to prevent your ‘study load
and stress’ before prelims.
 +TAX -SUBSIDIES
GVA = Nominal GDP▲
(overestimate) (underestimate)

𝑁𝑜𝑚𝑖𝑛𝑎𝑙 Critiques of CSO

𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 = 1. RajanBhai
𝑅𝑒𝑎𝑙 2. CEA Arvind S.
Taper Tantrum Crisis: still mfg. GVA was 3. Prof. Angus
Nominal
“shown”high. Not aligned with ground realities
Deaton
∴ Real GDP = (Noble’15)
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟
Nominal/ GDP deflator Real GDP @Constant Prices
110/1.2 91 How GDP is
overestimated
110/1.1 (underest.) 100
 CSO updates GDP deflator quarterly.
But we can’t use WPI, since 1) services inflation not counted
2) GDP final market value: ‘retail’ prices not wholesale 

But we can’t use CPI, since

1) Imported goods inflation
counted. [difficult to remove]
2) Not all the goods-services
produced, are consumed by
‘retail’ customers.
3) doesn’t count intermediate
goods inflation, and assigns
fixed weights to final
goods/services irrespective of
level of production.

GDP deflator doesn’t have the deficiency of WPI/CPI. That’s why we use GDP deflator.
PS: Remember: Inverse relation between Inflation vs real GDP Growth Rate. (hence WPI deflated
GDP growth rate looks so high!)
But, why does CSO overestimate GDP or underestimate Deflator?

Lack of expert staff, Ruling party

faulty collection “success” of policies
methods BOND RATING

FRBM: Fiscal deficit IMF: SDR Quota,

3% of GDP, if GDP is Voting powers
large, govt gets more decided on GDP
legroom for schemes (Size of economy*)
Criticism: 1) Demonetization effect capture ? 2) overestimated GDP
3) GDP doesn’t cover following:

Non-Marketed
Underground Economy Barter Exchanges
Activities

Income Inequality
•90+0+0=90
Opportunity cost •30+30+30=90
-ve Externality •World Bank’s Gini
•UNDP’s HDR: 5 index
coefficient
 If GDP doesn’t cover all these, then what to do? (2017, March)

UN World Happiness Day on March 20.

UN’s Sustainable Development Solutions Network (SDSN): index

Social
Generosity
Healthy support Freedom to
GDP per [did u Corruption
Life [friends, make life
capita donate Perception
expectancy relatives choices
money?]
helped?]

GPSC: one
Nakal-mafia in
exam cycle, &
SSC-CGL &
1) Norway China, BRICS , its litigation
14) USA Bihar board
2) Denmark SAARC[!] 5-10 years.
exams 


155: CAR [most But why is India so unhappy?

122) India
bogus in hunger,
[▼118]
HDR report also]
 Gross National Happiness
• ‘79: King coined the term
• 2008: Bhutan adopted the
word in new Constitution as
sort of “DPSP”

• 2016: Madhya Pradesh first state to setup Happiness

Department, inspired from Bhutan. Prevent suicide,
measure junta’s happiness with ministries
• 2017, June: Maharashtra also considering
Economy: 6 pillars + theory + current + BES17 (pre cum Mains)

1.Banking, Fin, Insur. 2.Budget 3.BoP

•V1:c3,4 •V1:c2,3, 6,9,11(GST),13 •V1c:5

11 pages bol-bachchan ► 12 slides

33 pages bol-bachchan ► 13 slides
4.Sectors 5.Infra 6.HRD
•V1c:7(Textile),11(trade) •v1c:12, 14; Budget^Rail •V1c:10