GROSS DOMESTIC PRODUCT

• GROSS(G)-TOTAL
• DOMESTIC(D)- HOME COUNTRY
• PRODUCT(P)- TOTAL OUTPUT PRODUCED IN A
COUNTRY
3 METHODS OF MEASURING GDP:
 OUTPUT
 INCOME
 EXPENDITURE
 Output-income-expenditure
• ALL THE 3 METHODS SHOULD GIVE THE SAME
FIGURES.
• This is because an output of $20 bn will give
rise to an income of $20bn which in turn will
be spent on output.
• This relationship is referred to as the circular
flow of income(the movement of exp,income
and output round the economy)
 The methods of calculating GDP
• Output method- measures GDP by adding up
the output produced by all the industries in
the country.
• Precaution- ensure that o/p is not calculated
more than once
• Ex:
Assume that there are only 4 production firms
engaged in production of garments
Firm A PRODUCES RAW SELLS IT FOR RS1000 FIRM B
COTTON
Firm B CONVERTS IT INTO SELLS IT FOR RS 1500 FIRM C
COTTON YARN
Firm C MANUFACTURES SELLS IT FOR RS 2200 FIRM D
COTTON CLOTH
Firm D PRODUCES GARMENTS SELL THEM FOR RS FINAL CONSUMERS
3500
TOTAL VALUE OF RS RAW COTTON HAS ON THE CONTRARY ,
ALL THE 8200=(1000+1500+2200 BEEN COUNTED 4 VALUE OF FINAL
TRANSACTIONS/GR +3500) TIMES GOOD= RS 3500.
OSS OUTPUT COTTON YARN FOR
3TIMES,COTTON
CLOTH FOR 2 TIMES.
CERTAIN ITEMS COUNTED MORE THAN RESULTING IN OVER- PROBLEM OF DOUBLE
ONCE ESTIMATION OF COUNTING(COUNTING
NATIONAL PRODUCT THE VALUE OF THE
SAME COMMODITY
MORE THAN ONCE)
To avoid this economists include the
problem “value added” by each
firm at each stage of
production
• Income method: includes all the incomes
which have been earned in producing the
country’s output.
• Transfer payments, such as pensions and
unemployment benefits are not included.
This is because there is no corresponding
output of goods and services.
• Expenditure method:
• C+G+I+(X-M)
2 types of GDP-Nominal GDP and REAL
GDP
Nominal GDP REAL GDP
• It is not adjusted for • It is adjusted for
inflation inflation
• GDP at current • GDP at constant
prices prices
• It provides • It provides accurate
misleading info info about the
about the output output over a period
• AKA money GDP of time.
• In 2007,the nominal GDP of a country=$800bn
and its price index may be 100(base year)
• In 2008, nominal GDP may increase to $900bn
and price index rises to 110.
• Real GDP= NGDP/CY/BY
= NGDP *BY/CY
=$900*100/110 =818.18BN
• RISE IN REAL GDP= Real GDP- Old RGDP *100
Old RGDP
= 818.18-800 *100
800
=2.27%
• RISE IN NOMINAL GDP=
New NGDP-Old NGDP *100
Old NGDP
= 900-800 *100
800
= 100 *100 =12.5%
800
• NOMINAL GDP overestimate the increase in
output than REAL GDP
• Increase in output (NGDP)=12.5%
• INCREASE IN OUTPUT (RGDP)=2.27%
• O/P IS LOW- EG IS ALSO LOW
 REAL GDP PER HEAD/capita
• RISE in real GDP – more G&S have been
produced (depends on the state population)
• If real GDP INCREASES by 5% but population
increases by 8%- few G&S per head of
population and people’s LS may fall.
• If real GDP is $80bn and the population is 20m
• Real GDP PER HEAD=real GDP/population
• =$80bn/20m=$4000
 The difficulty of measuring real GDP
• GDP figures tend to understate the true level
of output
• Reasons: informal economy – covers
unrecorded economic activity and non-
marketed goods and services.
• Economic activity which is not declared is
referred to as HIDDEN, SHADOW OR GREY
ECONOMY.
 2 REASONS for concealing the
economic activity
• Illegal activity- drug dealing, work undertaken
by the immigrants, who have not been given
permission to work in the country.
• Legal activity- person does not want a pay a
tax on it(tax avoidance)
• In the UK, some workers in building , electrical
installation, plumbing and car repairs do not
declare all their earnings to the tax
authorities.
• Non-marketed G&S-are products which are
not bought and sold
• Family members who help during harvest
time, people who clean their own houses and
repair their own cars, are all providing
products but these are not counted in GDP.
• The size of the informal economy is influenced by a number of
factors.
• Illegal activity
• Tax avoidance
• No.of tasks people perform for themselves and
• The size of subsistence agriculture.(o/p of agr. Goods for
farmers personal use)
• Causes of Economic Growth:
• In the short term, an increase in aggregate demand may
stimulate a rise in output if the economy has unused
resources. For instance, a rise in consumption resulting
from increased consumer confidence or a cut in income tax
may encourage firms to increase their output.
• In long term, an economy can continue to experience
economic growth only if the quantity or quality of
resources increases. The quantity of resources may rise as a
result of, for instance, an increase in net investment or the
size of the labour force. The quality of resources may
increase due to an improvement in education and training
and advances in technology.
Consequences of economic growth
 Voting power at the International Monetary Fund (IMF – is an international org which
promotes international cooperation and helps countries with BOP), for instance, is
influenced by the size of an economy’s GDP.

IMF – act as an intermediate and

collects data on economic
problem faced by developing and
less developed countries

Provide
Developed infrastructure
Developing
countries (USA) countries
High GDP- Service (India)
Sector Problems- High
Unemployment

If more MNC’s set up the

Output produced in organization in India – creates
the economy will be employment opportunity-workers
given to USA get income
 Sustainable Economic Growth- EG that does not
endanger the country’s ability to grow in the
future.
• Due to these risks, economists are increasingly emphasizing the need for sustainable
economic growth.
• Economic growth may also lead to greater stress on workers.
• Increase of output may require some people to work for longer hours, some to learn new
skills and some to change their job.
• The net impact of economic growth is influenced by its rate, means adopted to achieve it
and distribution of its benefits.
• A very high rate of economic growth may not be sustainable. It may involve non-
renewable resources being used up too quickly, before the development of alternate
resources.
• If productive capacity can be increased in line with increases in aggregate demand, more
goods and services can be enjoyed without an increase in prices. Stable economic growth is
better than a high economic growth rate, which fluctuates.
• This is because, it makes it easier for firms and households to plan for the future and hence
encourages investment.
• Economic growth has the potential to raise living standards, but the extent to which it does
so is influenced by the type of products produced and the equality of distribution of extra
income.