TOPIC - 1

 
How Do We Measure an Economy’s
Performance?
Topic Outline:
q       How economics is defined
q       Factors of production
q       Two sector model
q       Circular flow of income
q       GNP – a comprehensive measure
q       Definition of GNP
q       Guidelines of UNSNA
q       What is an SNA activity?
q       Two approaches to measuring the GNP
q       Deflating with price index
q       Nominal and real GNP
q       Other related indicators
q       GNP vs. GDP
q       Is GNP / GDP useful indicator?
 
 

Economics Defined
“Economics is defined as a science that deals with
allocation of scarce means towards the satisfaction
of unlimited human wants”
 
   
 Resources
 

Property Resources Human

Resources

Land Capital Manual Entrepreneurial

 The Two-Sector Model

Exp.on Goods & Services

Goods & Services

Household Business
Sector Sector

Land, Labour,Capital & Org

Rent, Wages and salaries,

Interest and profit
  
Gross National Product

“It is the market value of final goods

and services produced by a country
during a given period of time”
 Guidelines for estimating
GNP
 Avoid double or multiple counting
 Consider commodities and services
produced during that year
 Include depreciation
 Include all productive activities – both
marketed and non-marketed
 Exclude all unproductive transactions
 Exclude all underground transactions
 The Three Sectors of an Economy
 
1. Agriculture & allied services
of which:
(i)       Agriculture
(ii)      Forestry & logging
(iii)     Fishing
2. Industries
of which:
(i)       Mining & Quarrying
(ii)      Manufacturing
(iii) Electricity, Gas and Water Supply
3. Services
of which:
 
(i)  Construction
(ii)   Trade
(iii)   Hotels & Restaurants
(iv)    Railways
(v)     Other means of Transport
(vi)    Storage
(vii)   Communication
(viii)  Banking and Insurance
(ix)     Real Estates and Dwelling Business
(x)      Public Administration and Defense
(xi)     Other Services
 Approaches to Measuring GNP

Expenditure Approach Amount (bn. Income Approach Amount (bn.

Rs.) Rs.)

Aggregate Personal 3740 Rental value (actual 12

Consumption and imputed)
Expenditure

Gross Domestic Private 886 Wages and salaries 3364

Investment

Govt. Expenditure on 414 Interest 480

goods and services

Net value of exports - 40 Profits 307

Why doesn’t the total match?!

 Here it is!!
Expenditure Approach Amount (bn. Income Approach Amount (bn.
Rs.) Rs.)
Aggregate Personal 3740 Rental value (actual and 12
Consumption Expenditure imputed)

Gross Domestic Private 886 Wages and salaries 3364

Investment

Govt. Expenditure on 414 Interest 480

goods and services

Net value of exports - 40 Profits 307

  Indirect Business Taxes 500

Depreciation 337

Total 5000 Total 5000

 Deflating with Price Index
  Nominal GNP Price Index Real GNP
Year (in Rs. Crores) (in Rs. Crores)

1980 - 81 122,226 100 122,226

1981 – 82 142,876 110 129,887

1982 – 83 158,851 119 133,830

1983 – 84 186,406 129 144,391

1984 – 85 206,732 139 148,955

1985 – 86 233,305 149 156,083

1986 – 87 260,680 159 164,441

1987 – 88 293,680 172 170,363

1988 – 89 341,472 186 183,587

1989 – 90 384,270 194 198,077

1990 – 91 424,729 200 212,365

 India’s GDP: An Illustration
(www.finmin.nic.in/stats_data/)

Period of latest GDP at WPI GDP at

data Current Prices (1999-2000 = 100) Constant Prices

01-04-2007 990,868 cr. 136.68 724,949 cr.

To
30-04-2007

01-04-2008 1,152,530 cr. 147.32 782,357 cr.

To
30-04-2008

% change 16.3 7.78 7.92

 Understanding Price Indices
An Illustration
 
Ref.: Economic Times dt. 5th January 2004
 
“ A rise in the price of diesel and petrol pushed up inflation to a 29
week high of 5.63% for the week ended December 20th.”
 
“ The WPI rose to 176.5 points (1993-94 = 100) during the latest
reported week as fuels group index rose substantially, giving a
positive linkage to the upward movement in the inflation rate, even
as the indices of primary products and manufactured products
fell.”
 
“The index was 167.1 points in the previous year period.”
 Other Related Indicators
 
NNP = GNP – Depreciation
 
NI = NNP – Indirect Business Taxes + Subsidies
 
PI = NI – Income earned but not received + income received
but not earned
DPI (Y) = C + S
PCI = GNP/ Population of the country
GDP is defined as
“the market value of final goods and services produced in’ a
country during a given period of time”

http://www.oecd.org/dataoecd/1/55/2726323.pdf
 Numerical Exercise No. 1:
Sl. Item Bn. $ Sl. Item Bn. $
No. No.

1 Aggregate personal consumption 245 11 Dividends 16

exp.
2 Transfer payments 12 12 Indirect Business taxes 18
3 Rents (actual) 10 13 Undistributed corporate profits 21

4 Rents (imputed) 4 14 Direct personal taxes 26

5 Capital consumption allowance 27 15 Corporate income tax 19

6 Employees contribution to PF, 20 16 Corporate profit 56

etc.
7 Interests 13 17 Govt.’s consumption expenditure 50
on goods and services

8 Proprietors’ income 31 18 Net investment by Govt. 22

9 Net Exports 3 19 Personal savings 16

10 Net Domestic Private Investment 33 20 Wages and salaries 221

From the above data, find out the GNP by using both expenditure and income approaches.
Also compute: NNP, NI, PI, DPI (Y) and C.
 Issue for discussion
Is GNP a useful Measure to Indicate Human Welfare?
• Excludes contribution by the unorganized sector
• Completely ignores quality aspects
• Not concerned about distribution
• Silent about the “productive” contribution of the household services
• Does not bother about the social costs involved in development
• Doesn’t convey anything about destruction
• Includes the value of resources wasted
• Includes the value of “economic bads”
• Includes the value of “regrettable necessities”
According to Sir. James Tobin & William
Nordhaus:

Net Economic Welfare =

 
GNP – economic bads – regrettable
necessities
+household services + un(der) reported legal
income + illegal income