Some Basic Concepts of Economy
Some Basic Concepts
What is Gross Value Added (GVA)?
- It is a measure of total output and income in the economy.
- It provides the rupee value for the amount of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into the production of those goods and services.
- It also gives sector-specific picture like what is the growth in an area, industry or sector of an economy.
- At the macro level, from national accounting perspective, it is the sum of a country’s GDP and net of subsidies and taxes in the economy.
- When measured from the production side, it is a balancing item of the national accounts.
What is Gross Domestic Product (GDP)?
- It gives the economic output from the consumers’ side.
- It is the sum of private consumption, gross investment in the economy, government investment, government spending and net foreign trade (difference between exports and imports).
What is the difference between the two?
- While GVA gives a picture of the state of economic activity from the producers’ side or supply side, the GDP gives the picture from the consumers’ side or demand perspective.
- Both measures need not match because of the difference in treatment of net taxes.
Why did policy makers decide to also give weight to GVA?
- A sector-wise breakdown provided by the GVA measure can better help the policymakers to decide which sectors need incentives/stimulus or vice versa.
- Some consider GVA as a better gauge of the economy because a sharp increase in the output, only due to higher tax collections which could be on account of better compliance or coverage, may distort the real output situation.
Which of the two measures is considered more appropriate gauge of the economy?
- A sector-wise breakdown provided by the GVA measure helps policymakers decide which sectors need incentives or stimulus and accordingly formulate sector specific policies.
- But GDP is a key measure when it comes to making cross-country analysis and comparing the incomes of different economies.