What is Gross Domestic Product (GDP)? What is Gross Value Added (GVA)? How is GDP calculated in India? Deficiencies in the current GDP calculation
What is Gross Domestic Product (GDP)?
- The gross domestic product (GDP) is one of the primary indicators used to gauge the health of a country’s economy.
- It represents the total value of all goods and services produced over a specific time period, often referred to as the size of the economy.
- Usually, GDP is expressed as a comparison to the previous quarter or year. For example, if the Q3 2017 GDP of a country is up 3%, the economy of that country has grown by 3% over the third quarter.
- While quarterly growth rates are a periodic measure of how the economy is faring, annual GDP figures are often considered the benchmark for the size of the economy.
What is Gross Value Added (GVA)?
- Gross value added (GVA) is defined as the value of output less the value of intermediate consumption.
- Value added represents the contribution of labour and capital to the production process.
- When the value of taxes on products (less subsidies on products) is added, the sum of value added for all resident units gives the value of gross domestic product (GDP).
GVA + taxes on products – subsidies on products = GDP
- Thus, Gross Domestic Product (GDP) of any nation represents the sum total of gross value added (GVA) (i.e, without discounting for capital consumption or depreciation) in all the sectors of that economy during the said year after adjusting for taxes and subsidies.
How is GDP calculated in India?
- GDP can be calculated in three different ways:
- The product (or output) approach is the most direct one which calculates the total product output of each class.
- The expenditure approach calculates the total value of the products like steel, coal, fridge, TV among many other bought by an individual or consumer like you and me which should be equal to the expenditure of the things bought.
- The income approach calculates the sum of all the producers’ incomes where the incomes of the productive factors are equal to the value of their product.
- The GDP in India is calculated using two different methods:
A. Based on economic activity (at factor cost):
- The factor cost figure is calculated by collecting data for the net change in value for each sector during a particular time period. The following eight industry sectors are considered in this cost:
- Agriculture, forestry, and fishing
- Mining and quarrying
- Electricity, gas and water supply
- Trade, hotels, transport and communication
- Financing, insurance, real estate and business services
- Community, social and personal services
B. Based on expenditure (at market prices):
- The expenditure (at market prices) method involves summing the domestic expenditure on final goods and services across various streams during a particular time period.
- It includes consideration of expenses towards household consumption, net investments (i.e., capital formation), government costs, and net trade (exports minus imports).
- The expenditure approach offers a good insight into which parts contribute most to the Indian economy.
- After the revision of National Accounts statistics done by Central Statistical Organization (CSO) in January 2015, Indian GDP is now measured by using gross value added (GVA) at market price/base price, rather than factor cost.
- The relationship between GVA at Factor Cost and GVA at Basic Prices and GDP at market prices and GVA at basic prices is shown below:
GVA at factor cost + (Production taxes less Production subsidies) = GVA at basic prices
GDP at market prices = GVA at basic prices + Product taxes- Product subsidies
Deficiencies in the current GDP calculation
- The GDP calculation does not measure the depletion of natural resources.
- The current GDP measure, while accounting for increases in production, did not take into account other factors of economic activity such as the change in quality of the output due to improvements in technology, or how advances like artificial intelligence will impact employment.
- It did not incorporate the economic contributions of women in running households and maintaining account.
- It also did not have any measure of whether an increase in GDP resulted in an increase in happiness.
Note– While NITI Aayog had acknowledged that efforts must be made to ensure that GDP growth is combined with sustainability, it had so far not suggested any ways to achieve this.
- It is therefore strongly recommended to evolve indicators/parameters to gauge the environmental resource decay and replenishment efforts made to compensate the loss and also to capture these aspects in measuring GDP and other economic parameters.