Recall last class - GNP (Gross National Product)
GNP = GDP + NFIA
Let, II = Income from Indians residing in India
IF = Income from foreigners residing in India
NRI = Income from Non-residential Indians
So, GDP = II + IF and NFIA = NRI - IF
Hence, GNP = [II+IF] + [NRI -IF]
GNP = II + NRI, thus GNP is an indicator of the quality of goods made by Indians.
Q: When net factor income from abroad is zero, which of the following is correct?
- Gross National Product is equal to Net National Product
- Gross Domestic Product is equal to Gross National Product
- Gross Domestic Product is greater than Gross National Product
- Gross Domestic Product is equal to National Income
Answer: 2; GNP = GDP + NFIA, if NFIA = 0, GNP = GDP.
Depreciation:
- Always production comes along with wastage (say some loss in quality). It can never be zero but can be reduced by the advancement in technology. Hence less depreciation means higher quality.
- GDP shows growth but doesn't include depreciation.
Net Domestic Product (NDP):
- Identifies wastage.
- NDP = GDP - Depreciation
Net National Product (NNP):
- The purest form of National Income since it calculates income received by Indians (residing both in India and abroad) along with depreciation.
- NNP = GNP - Depreciation
- Used to calculate Per Capita Income (PCI).
- PCI = NNP / Total population.
- PCI determines if a country is a developed / developing / under-developed country.
Gross Value Added (GVA):
- Gives rupee value of goods & services after deducting the cost of inputs and raw materials used.
- Value Added = Value of output - Value of intermediate consumption.
- Determines the sector-specific growth - used to analyze the strength and weakness of sectors.
- Eliminates double counting.
Factor cost (FC) and Market price (MP):
- Cost is the expense to make a product. Price is the expense to sell the product. Hence the Factor cost is the income received by the production unit (Land, Labour, Entrepreneur, Capital) to make a product. The Market price is the factor cost along with tax to sell that product.
- MP = FC + Indirect Tax
- FC = MP - Indirect Tax
Subsidy:
A country like India has income inequalities where people below the poverty line suffer the most. In order to help them, the Government provides subsidies.
This works as follows:
- The Government provides a certain amount of money (subsidy) to the production unit for product X. Hence, FC = MP - Indirect Tax + Subsidy.
- Production Unit reduces that amount (subsidy) from the market price of product X. Hence, MP = FC + Indirect Tax - Subsidy.
Example: Let, Factor cost of product X, FC = Rs.6, Market price of product X, MP = Rs.10 and Indirect tax on product X = Rs.4
If the Government needs to reduce the market price of product X and make it available at Rs.8, first it provides Rs.2 to the production unit.
FC = 10 - 4 + 2 = 8. (Extra Rs.2 is given to production unit)
The production unit now reduces its market price.
MP = 6 + 4 - 2 = 8. (Now MP of product X is reduced to Rs.8)
GDP is taken at Market price and National Income (Net National Product) is taken at Factor cost for calculating per capita income.
Current price and Constant price:
Current price = Quantity of goods & services produced * price of goods & services in that year (say 2021).
Constant price = Quantity of goods & services produced * price of goods & service in the base year (2011 - 12).
India calculates GDP in constant market price. Constant price is known as Real GDP since it shows the real growth and its impact on people. Per Capita Real GDP = Real GDP / Total Population.
The current price is known as Nominal GDP. It is used to measure inflation.
Limitations:
- GDP vs Welfare: GDP shows the growth of the country alone while the standard of living of people doesn't match.
- Non-Monetary exchanges: Barter exchange and informal lendings (especially in rural areas) are still followed. Both undermine GDP since GDP takes only monetary exchanges.
- Non-reliable data: 85% of the population is under the unorganized sector. National income is calculated with the remaining 15-20% of the organized sector.
- Goods for self-consumption: E.g. some farmers consume crops that are cultivated by themselves which is not included in GDP.
- Black money / parallel economy: Only 1% of the population pay tax. Black money is not included in GDP.
- Environmental cost: Growth also depends on National resources but damage to natural resources is not included. Green GDP is introduced to tackle the issue. It gives the GDP after providing compensation for environmental damage. Partha Dasgupta Committee - 2013 in India. If GDP = Rs.100 and some amount has been allocated as compensation for environmental damage (say Rs.40), then Green GDP, GGDP = Rs.60.
