Macroeconomics
Lecture 2: More on GDP and
Components of GDP
13-09-2024 More on GDP 2
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$3.95 trillion
Economy of India
Statistics
$3.95 trillion (nominal; 2024
GDP est.) $14.59 trillion (PPP; 2024
est.)
5th (nominal; 2024) 3rd (PPP;
GDP rank
2024)
GDP growth 8.2% (FY2023) 7.0% (FY2024)
$2,731 (nominal; 2024 est.)
GDP per capita
$10,123 (PPP; 2024 est.)
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Example of value added
Business Cost Sales Value added
Farm - 100 100
Mill 100 150 50
Baker 150 210 60
Cafe 210 235 (sandwich) 25
Total 460 695 235
Sum of value added = 235
Value added is obtained by deducting the value of all purchased inputs (from other firms) from the
value of sales
Hence Value of Final Good (Sandwich)[GDP]= sum of value added
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Value Added Video
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(both figures are in real GVA)
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Measurement of GDP
• CSO :
1. Agriculture & Mining: Primary sector
2. Manufacturing, electricity :Gas, Construction:
Secondary sector
3. Rest: Tertiary sector
Data Collection: NSSO
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Some more points about GDP
• Nowcasting of GDP may soon be
possible
[Link]
ation/532411/ewp-593-nowcasting-economic-
[Link]
9
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SOME ISSUES TO REMEMBER
• Used goods sold: GDP measures currently
produced goods. Used goods are therefore
transfers of assets that were previously
produced
• Inventories: if there is unsold stock from
current production then it is treated as if the
firm buys it (and later sells it) the buying is
treated as investment, the later selling as
disinvestment.
• Nothing happens if the unsold stock is
thrown away or simply rots (if perishable)
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SOME ISSUES TO REMEMBER
• Selling a two year old car this year does not
add to GDP (even if it was lying idle for the
last two years) remember inventory
investment and disinvestment
• If you sell your car to a used car dealer, and
he sells it for a higher price, his income from
the car (the value added service he provided)
is added to GDP. Not the value of the car
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SOME ISSUES TO REMEMBER
• Selling a stock or bond does not add to
GDP, however, the broker’s
commission does
• welfare payments, pensions are all
deemed to be transfers and interest
payment on public debt do not get
added in GDP – these payments are
not against the provision of current
services.
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SOME ISSUES TO REMEMBER
• Unpaid services are not counted
• Unreported activities and incomes
should, but cannot be counted; illegal
activities such as narcotics trade,
undisclosed cash incomes (to avoid
taxes)
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Per capita GDP
GDP
𝑃𝑃𝑃𝑃𝑃𝑃 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐 𝐺𝐺𝐺𝐺𝐺𝐺 =
Population
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Per Capita GDP (2011 Prices, Rupees Crore)
120000
100000
Per Capita GDP Y-o-Y growth rate
80000
60000 10
8
40000
6
20000
4
0
2
1950-51
1953-54
1956-57
1959-60
1962-63
1965-66
1968-69
1971-72
1974-75
1977-78
1980-81
1983-84
1986-87
1989-90
1992-93
1995-96
1998-99
2001-02
2004-05
2007-08
2010-11
2013-14
2016-17
2019-20
-20000 0
1951-52
1954-55
1957-58
1960-61
1963-64
1966-67
1969-70
1972-73
1975-76
1978-79
1981-82
1984-85
1987-88
1990-91
1993-94
1996-97
1999-00
2002-03
2005-06
2008-09
2011-12
2014-15
2017-18
2020-21
-2
-4
-6
Source: Reserve Bank of India
[Link] -8
2
Source: Reserve Bank of India
[Link]
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Key Takeaways:
Does GDP measure society’s well-being?
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Limitations of GDP…1
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[Link]
Gini: A/(A+B): ) complete inequality, 1 : one person earns all the income
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Limitations of GDP…2
It is not a measure of welfare.
It ignores social issues like
health, education, freedom
etc.
An alternate measure of Development is
used to capture economic development.
This is called the Human Development
Index.
Simple HDI takes into account social sector
indicators like health and education
indicators. But does not take into account
the extent of inequality.
Inequality adjusted human development
indices are also available from the United
Nations Development Programme (UNDP).
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0.644 in 2022, 134 out of 193 countries
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In 2022, Switzerland had
the highest HDI score at
0.967, followed by Norway
at 0.966 and Iceland at
0.959
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Another set of development indicators which
are in focus
• The Sustainable Development Goals are a universal call to action to
end poverty, protect the planet and improve the lives and prospects
of everyone, everywhere. The 17 Goals were adopted by all UN
Member States in 2015, as part of the 2030 Agenda for Sustainable
Development which set out a 15-year plan to achieve the Goals.
• Today, progress is being made in many places, but, overall, action to
meet the Goals is not yet advancing at the speed or scale required.
2020 needs to usher in a decade of ambitious action to deliver the
Goals by 2030.
[Link]
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But there are examples on the contrary too…
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Few points
• 1934 proposed by Simon Kuznet (1971 Nobel)
• . GDP: A Brief But Affectionate History, : Coyle Diane (2014)
• 1972: Bhutan King conceptualized: Gross National Happiness
• HDI: The first Human Development Report was published in 1990 by the
Pakistani economist Mahbub ul Haq and Indian Nobel laureate Amartya
Sen.
• China: Green GDP, New Zealand: Living Standard Framework
• Incorporating Inequality: 2009 By Amartya Sen, Stiglitz, Jean Paul Fitoussi
• Beyond GDP: Joseph E. Stiglitz, Jean-Paul Fitoussi and Martine Durand , set up by OECD (2018)
• 2021: United Nations: SDG (17 Goals) including Green GDP.
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How is GDP related to a nation’s total income and spending?
What are the components of GDP
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The Circular-Flow Diagram
• a simple depiction of the macroeconomy
• illustrates GDP in terms of spending, revenue,
factor payments, and income
• Preliminaries:
• Factors of production are inputs like labor, land, capital, and natural resources.
• Factor payments are payments to the factors of production (e.g., wages, rent).
Household Sector Firms Sector
Households provide the factors of production Firms pay wages,
(labour, land, and capital) to the firms through the
rent, and profit to the
markets for factors of production. The firms will
then use these factors of production to produce households for their
goods and services to be sold in the markets for supply of the factors
goods and services. The households will then buy of production in the
these goods and services from the firms through
the market for goods and services. market for factors of
production.
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The Circular-Flow Diagram
• Households will use these income to spend on goods and services supplied
by the firms in the market for goods and services.
• When households spend money on these goods and services, firms will
earn a revenue which can then be reinvested to obtain more factors of
production.
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The Circular-Flow Diagram
Households:
own the factors of production,
sell/rent them to firms for income
buy and consume goods & services
Households
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The Circular-Flow Diagram
Firms
Firms:
buy/hire factors of production,
use them to produce goods and
services
sell goods & services
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The Circular-Flow Diagram
Markets for
G&S Goods &
G&S
sold Services bought
Firms Households
Factors of Labor, land,
production Markets for capital
Factors of
Production More on GDP
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In this diagram, the red arrows represent flows of goods & services (including services of the factors of production in the lower half of the diagram). 33
The Circular-Flow Diagram
Revenue (=GDP) Spending (=GDP)
Markets for
G&S Goods &
G&S
sold Services bought
Firms Households
Factors of Labor, land,
production Markets for capital
Factors of
Wages, rent, Production Income (=GDP)
profit (=GDP) More on GDP
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In this diagram, the green arrows represent flows of income/payments. The red arrows represent flows of goods & services (including services of the factors 34
of production in the lower half of the diagram).
THE INCOME APPROACH
• The income approach is the bottom half of the circular flow,
calculating income in terms of factor costs
Everything a firm produces, when sold, becomes revenues to the firm.
Businesses use revenues to pay their bills: Wages and salaries for labor,
interest and dividends for capital, rent for land, profit to the
entrepreneur, etc.
This is why the terms GDP and national income are sometimes used
interchangeably. The total value of a nation’s output is equal to the
total value of a nation’s income.
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Income Approach
INCOME METHOD>∑rewards for these factors= Domestic income
GDP at factor cost (GVA)=Domestic Income(or NDP at factor cost)+ Depreciation
Suppose factor cost per unit=10 INR, if taxes of 2 INR, then market price=12, so to get
Income ( true measure of contribution to national income)= GDP (Market value)- Items lakhs
(Taxes-subsidies)- Depreciation (has to be set aside) Sales by Firm A 100
Sales by Firm B 200
GVA (A)={100-40+(20-25)-30}=25 Purchases from Firm B by A 40
Purchases from Firm A by B 60
GVA (B)= { 200-60+(35-45)-30}=100 Closing Stock of Firm A 20
[ no depreciation] , hence GDP at factor cost (GVA)=125 = Domestic Income Closing Stock of Firm B 35
Opening Stock of Firm A 25
Opening Stock of Firm B 45
• Income available for spending or saving Indirect Taxes paid by both 30
Firms
• Earning from Production activities: A fraction goes to Govt due to income taxes
• However, households also get some transfer income
• DI=NDP+ net income from abroad+ Transfer-taxes
• DI≡ Consumption ©+ Savings (S) (Identity)
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Readings
• Suggested reading on Human development index –The link in the slides
• Read Chapter 3 of your textbook (3.3). We will deal with these in more detail.
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