Friday, March 8, 2013

What is GDP Gross Domestic Product

Please note that the first part of this blog says about meaning of GDP and another part given below gives my simple opinion on GDP said to be indicator of Helath of the economy and that of citizen of India.
Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time. GDP per capita is often considered an indicator of a country's standard of living;[2][3] GDP per capita is not a measure of personal income (See Standard of living and GDP). Under economic theory, GDP per capita exactly equals the gross domestic income (GDI) per capita (See Gross domestic income).

GDP is related to national accounts, a subject in macroeconomics. GDP is not to be confused with gross national product (GNP) which allocates production based on ownership.

GDP can be determined in three ways, all of which should, in principle, give the same result. They are the product (or output) approach, the income approach, and the expenditure approach.

The most direct of the three is the product approach, which sums the outputs of every class of enterprise to arrive at the total. The expenditure approach works on the principle that all of the product must be bought by somebody, therefore the value of the total product must be equal to people's total expenditures in buying things. The income approach works on the principle that the incomes of the productive factors ("producers," colloquially) must be equal to the value of their product, and determines GDP by finding the sum of all producers' incomes.

Production approach
" Market value of all final goods and services calculated during 1 year . "
The production approach is also called as Net Product or Value added method. This method consists of three stages:

Estimating the Gross Value of domestic Output in various economic activities;

Determining the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services; and finally
Deducting intermediate consumption from Gross Value to obtain the Net Value of Domestic Output.

Net Value Added = Gross Value of output – Value of Intermediate Consumption.
Value of Output = Value of the total sales of goods and services + Value of changes in the inventories.
The sum of Net Value Added in various economic activities is known as GDP at factor cost.
GDP at factor cost plus indirect taxes less subsidies on products is GDP at Producer Price.

For measuring gross output of domestic product, economic activities (i.e. industries) are classified into various sectors. After classifying economic activities, the gross output of each sector is calculated by any of the following two methods:

By multiplying the output of each sector by their respective market price and adding them together and
By collecting data on gross sales and inventories from the records of companies and adding them together
Subtracting each sector's intermediate consumption from gross output, we get sectoral Gross Value Added (GVA) at factor cost. We, then add gross value of all sectors to get GDP at factor cost. Adding indirect tax minus subsidies in GDP at factor cost, we get GDP at Producer Prices.

MY Comment 
 Ministers of UPA proudly claim that growth in GDP is better than that achieved by NDA government.
My simple views on GDP is as follows. I am neither an economist nor a financial expert. I have therefore collected the actual definition of GDP from Wikipedia and drawn following inference which is submitted before readers of this blog to add their valued comment and enlighten on it correctly and elaborately in the larger interest of common men.

If we read the methodology of GDP calculation it is observed in brief that GDP is nothing but '

" Market value of all final goods and services calculated during 1 year . "

If prices of all commodities whic helps in producing goods or in extending services  rise at  abnormally higher rate , it is natural that there will exponential rise in GDP without any real increase in quantity of goods and services produced.Therefore the more is rises in  prices , the more will be inflation , the more will be GDP and The more will be GDP growth rate.

The great economist Mr. Manmohan Singh the prime minister of the coutnry then rightly claim that price rise is the sign of prosperity.Because when price rises , GDP rises and then the government can claim that GDP growth rate is higher during 8 years of UPA rule than that in 8 years of NDA rule.Perhaps this is the reason that clever Manmohan Singh do not take any step to stop rise in prices and allows corporate to earn more and more profit.

The more corporate will earn profit , the more will they contribute in GDP. It is not necessary that income of farmer rises and it is not necessary that wages of service class people rise. It is not perturbing for Congress Party when people , poor and middle class people cry in pain caused by price rise .

Limitations and Criticisms

Simon Kuznets, the economist who developed the first comprehensive set of measures of national income, stated in his first report to the US Congress in 1934, in a section titled "Uses and Abuses of National Income Measurements":

The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification.

All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above.

In 1962, Kuznets stated

Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what.
Austrian School economist Frank Shostak has argued that GDP is an empty abstraction devoid of any link to the real world, and, therefore, has little or no value in economic analysis. Says Shostak

The GDP framework cannot tell us whether final goods and services that were produced during a particular period of time are a reflection of real wealth expansion, or a reflection of capital consumption. For instance, if a government embarks on the building of a pyramid, which adds absolutely nothing to the well-being of individuals, the GDP framework will regard this as economic growth. In reality, however, the building of the pyramid will divert real funding from wealth-generating activities, thereby stifling the production of wealth.

So what are we to make out of the periodical pronouncements that the economy, as depicted by real GDP, grew by a particular percentage? All we can say is that this percentage has nothing to do with real economic growth and that it most likely mirrors the pace of monetary pumping. We can thus conclude that the GDP framework is an empty abstraction devoid of any link to the real world.

Many environmentalists argue that GDP is a poor measure of social progress because it does not take into account harm to the environment.

India and China have the largest population in the world and hence has the greatest potential in productivity due to the fact that the value of a product is measured as the value of service that can be obtained by the holder in exchange for that product. ( Units per man hour)

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