how India figures out GDP

GDP is a single number that attempts to gauge the economic output of a region, in addition to measuring the growth of an economy during a particular time period.

Gross Domestic Product — three oft-heard words from investors, politicians and bureaucrats. It is ‘GDP growth' that is touted as evidence every time we sell the India growth story to those abroad or when we want to justify fancy growth projections for any sector. So, what is the GDP figure all about and why does the number get fawned and fussed over?

What is GDP?
Gross Domestic Product or GDP is a measure of the total monetary value of all the goods produced or services rendered within a country's boundaries. It is basically a single number that captures the economic output of a country.

Growth is largely measured in terms of the growth in output which happens through increasing demand and productivity in various sectors such as agriculture, manufacturing, services, and so on. This also enables one to gauge growth and shortcomings or potential in individual sectors.

Measuring GDP

Before delving into the anatomy of GDP, how are statements such as
‘India is a $1.4-trillion economy' or ‘US is a $14-trillion economy' arrived at?

There are three ways to approach this —

• Expenditure-based approach; 
• Income-based approach; and 
• Sector-based approach. 

The first approach attempts to sum up the total amount of money, spent purchasing goods and services within the country and adding to it the sums invested. In the domestic context, GDP at market prices is arrived through this approach.

The second approach, also called the factor-cost approach, looks to sum up the total cost of producing goods and services by breaking it up into various components- the wages paid to workers, rent cost incurred and profits made by producers of goods and services.

The third sector-based approach involves summing up the value of output of individual sectors comprising the economy and adding indirect taxes to that number. All three approaches should theoretically yield a similar GDP number. .

In India, we use both the expenditure and sector-based approaches to arrive at GDP values. The GDP at market prices is arrived at by adding the values of private consumption, government consumption, investments and net imports made by the country (by virtue of importing more than exporting). The sector-based GDP breaks down the number into the activity of sectors such as agriculture, forestry, fishing, manufacturing, construction, service sectors, among others.
                  A lion's share of India's GDP is accounted for by the services sector which constitutes 55 per cent; industry (manufacturing) follows with about 28 per cent; agriculture which contributes to over 58 per cent of the workforce, chips in with just under 17 per cent of GDP.

Real and nominal GDP

How does GDP grow - GDP growth is the percentage increase in GDP, usually compared to the similar period of the previous year. But this number can be influenced not only by changes in the volume of output produced but also by how prices of various goods and services changed. Hence, the concept of Real and Nominal GDP.

While Real GDP is the change in the actual output, Nominal GDP measures changes in both volume output and prices of goods and services. For example, a country that produced 100 widgets that were sold at a Rs 2 apiece in one year and, in the next year, produced and sold 102 widgets at Rs 3 a piece (due to increased demand for widgets or increased cost of producing one) will register a nominal GDP growth of 53 per cent (Rs.306 divided by Rs.200).

However, this is not an accurate reflection of how output moved over the period. On a real basis, the country produced only 2 per cent more widgets. In practise, the real output is arrived at by applying a GDP ‘deflator' to a country's nominal GDP to make the figure more comparable to previous time periods. This helps us gauge how a country's output or demand has increased or decreased minus the effect of prices. In India, the deflator used for adjusting the “market price GDP'' approach is the Consumer Price Index, while the deflator used to arrive at the GDP based on the sector approach is the Wholesale Price Index.

For those of you who wondered how the mix-up in GDP calculations that made the headlines last week actually transpired, the problem was with the GDP deflator.

Last week's the ‘market price' GDP growth whose initial estimate at 3.7 per cent for the first quarter of the year, was later corrected, after it was found to be erroneous due to the application of an ‘inappropriate' deflator to convert the nominal GDP into real GDP.

The correction involved upward revisions in our estimates of private consumption, government consumption as well as investments and net imports. Following this the ‘market price' GDP growth was upped from 3.7 per cent revised to 10 per cent. Our sector-based GDP growth, also referred to as the headline GDP growth, stood at 8.8 per cent.

Source: The Hindu