Economic Measurements
Economic Measurements
Economists and statisticians use different techniques to monitor expansion. The GDP and other methods are the most
widely used and widely reported.
What is National Income?
● National income denotes the aggregate value of goods and services produced within a country during a fiscal
year.
● It represents the total income generated by diverse economic activities within a nation in a single year.
● Components: Encompasses wages, interest, rent, and profits earned by factors of production such as labor,
capital, land, and entrepreneurship within the nation.
Measurement of National Income
The methods to measure national income are:
Income Method
● The income method calculates the national income by summing up the pre-tax income from people and
businesses in the economy during a year.
● This income includes wages, rent for buildings and land, interest on capital, and profits.
● It illustrates how the national income is divided among various earning groups within the economy.
Income Method = Summing Up All the Income From Individual or
Business
Production (Value-Added) Method
● The product method, also called the value-added method, tracks the added value at each production stage.
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● This method segments the economy into various sectors like fishing, agriculture, and transport.
● National income is determined by summing up total output of all companies.
● It highlights each sector's contribution to the national income, revealing their relative significance.
Value Added Method = Summing Up value addition at
h t
Expenditure Method
● The expenditure method calculates national income by summing up spending from people, businesses, and the
government.
● It considers consumer spending, company investments, net exports, and government expenditures to find
the national income.
Expenditure Method = Summing up expenditure by people, business and
Government
Brief Overview of GDP
● GDP measures only final goods and services, excluding intermediate consumption.
● It represents the aggregate domestic production.
● GDP is calculated at a stable base year price for accurate value.
● It provides an estimate of a nation’s economic size.
● Despite its significance, GDP does not fully capture social well-being.
● Typically, GDP of developing nations exceeds their GNP.
Importance of GDP
● GDP indicates a country’s economic health.
● It helps identify economic trends such as recession, depression, or boom.
● Policymakers use GDP to inform decisions on interest rates, trade policies, and taxes.
● Investors use GDP to guide their portfolio management.
About GDP Growth Rate
● GDP growth rate measures the economy’s growth by comparing GDP across quarters.
● It depends on personal consumption, private investment, government spending, and net trade.
● In India, GDP growth is largely driven by personal consumption, including retail sales.
Calculation of GDP
● The most efficient method of calculating GDP is the expenditure method.
● It is calculated by adding up all the expenses incurred in the country:
○ National private consumption (C),
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○ Gross investment (I),
○ Government spending (G),
○ Net exports, (exports - imports)
GDP = C+G+I+(X-M)
Where:
C = Consumption expenditure
G Government expenditure
I = Investment expenditure
(X — M) = Net exports
Types of GDP
Following are the types of GDP:
Nominal GDP
● Nominal GDP, also known as nominal gross domestic product is the value of all the final goods and services
at current market prices, or in other words, it is GDP calculated at the current market prices.
● Nominal GDP takes into account these factors such as inflation, price changes, changing interest rates and
money supply, at the time of determining GDP.
Nominal GDP : Value of all the final goods and services at current market prices
Real GDP
● Real GDP is said to be the value of all goods and services determined in an economy after taking into
account the rate of inflation.
● In other words, it is the inflation-adjusted value of goods and services produced in an economy in a year,
therefore it is also known as inflation adjusted gross domestic product.
● Real GDP in addition to inflation also takes into account the deflation.
Real GDP: Value of all goods and services determined in an economy after taking
into account the rate of inflation.
Real GDP is therefore a more accurate measure of the economy than the other measures, such as Nominal GDP (which
measures total output based on the prices)
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Definition and Scope GNP (Gross National Product)
● GNP represents the total value of goods and services produced by residents and businesses within and outside
a country.
● It includes investments made by residents, regardless of their location, and domestic industry output.
Calculation of Gross National Product:
The normal formula is:
GNP = GDP + Income from Abroad.
But, for India:
GNP = GDP - Income from Abroad.
As the 'Income from Abroad' part is negative in India's case.
Significance and Use:
● Economists use GNP to address economic issues such as poverty and inflation.
● Provides a more reliable per capita income calculation compared to GDP, aiding in international comparisons.
Limitations:
● Affected by fluctuations in the foreign exchange rate and doesn’t reflect actual economic growth
Net National Product (NNP)
The Net National Product (NNP) of an economy can be simply stated as GNP after subtracting the loss due to
depreciation'.
The formula to derive NNP is:
NNP = GNP - Depreciation
Or
NNP = GDP + Income from Abroad — Depreciation.
Some of the uses of NNP include the following:
1. This is simply the 'National Income' (NI) of an economy.
2. This can be termed the purest form of income of a nation.
3. When NNP is divided by the total population of a nation we get the 'per capita income' (PCI).
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PCI = NNP / Population
SOME OTHER CONCEPTS ABOUT NATIONAL INCOME
Gross Value Added (GVA)
● GVA is an estimate of the difference in value between the final good and the cost of ingredients used in its
production, it is a sum of the total cost of all factors used to produce a good or service, net of taxes and subsidies.
The formula to calculate GVA is:
GVA = GDP + Subsidies on products - Taxes on products
● Gross Domestic Product (GDP) includes all taxes received and subsidies provided by the government. GDP
equals Gross Value Added (GVA) plus net taxes (taxes minus subsidies).
● While GDP is useful for comparing diverse economies, Gross Value Added (GVA) is more effective for
comparing various sectors within an economy.
Per Capita Income (PCI)
● Definition: Per capita income (PCI) measures the average income earned per individual in a specified area
within a particular time frame (e.g., city, region, country) typically over a year.
● Calculation: Obtained by dividing the total income within the specified area by its total population.
PCI = Total Income / Population
Significance of PCI
● PCI is used to evaluate the standard of living and quality of life of the population.
● A higher per capita income represents higher purchasing power.
● PCI is a measurement of prosperity for a region.
Nominal PCI & Real PCI
Nominal PCI:
● Nominal per capita income represents the income per person at current year prices without adjusting for
inflation.
● It is calculated by dividing nominal income or nominal GDP by the population of a countr
Nominal PCI = Nominal GDP / Population
Real PCI:
● Real per capita income is determined by adjusting nominal income for inflation.
● It is computed by dividing real income or real GDP by the country's population.
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Real PCI = Real GDP / Population
GDP Per Capita
● It quantifies a nation's economic output relative to its population size by dividing the gross domestic product
(GDP) by the total population.
● This method is considered the most accurate gauge of a country's standard of living.
GDP Per Capita = GDP / Total Population
Human Development Index (HDI)
● HDI Components: Measures quality of life by combining indicators: life expectancy, education/access to
knowledge, and income/standard of living.
● Originators: Introduced by economists Mahbub ul Haq (Pakistan) and Amartya Sen (India).
● Higher HDI Score: Indicates higher life expectancy, education levels, and Gross National Income (PPP) per
capita; inversely reflects lower values for these indicators.
● India's HDI score is increasing by 1.42 percent over the last three decades, according to HDI data.
Dimensions of Human Development Index
Importance of the Human Development Index
Comprehensive Measurement:
● HDI considers life expectancy, education, and per capita income for a holistic view of development.
Human-Centric Approach:
● Emphasises people's well-being by focusing on life expectancy, education, and income, highlighting their
capabilities.
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Global Comparisons:
● Facilitates easy country-to-country comparisons, aiding policymakers in assessing a nation's human
development status relative to others.
Policy Guidance:
● Helps direct policies by revealing gaps in education, healthcare, and income, guiding improvement decisions.
Accountability:
● Holds governments responsible for their citizens' welfare, fostering accountability in promoting human
development.
Central Statistics Office (India)
● The Central Statistics Office (CSO) is an agency in India under the Ministry of Statistics and Programme
Implementation.
● It is responsible for coordinating statistical activities in India and maintaining statistical standards.
● The CSO's activities include:
○ National Income Accounting, conducting surveys such as the Annual Survey of Industries and Economic
Censuses, compiling indices like the Index of Industrial Production and Consumer Price Indices, and
providing training in Official Statistics.
● The CSO publishes two publications:
○ The Statistical Abstract of India (annual)
○ The Monthly Abstract of Statistics.
● The Director-General heads the CSO and has a team of additional Director-Generals, Deputy Director-Generals,
Joint Directors, special task officers, and other supporting staff.
● In 2019, the CSO was merged with the National Sample Survey Office (NSSO) to form the National Statistical
Office (NSO) under the Department of Statistics in the Ministry of Statistics and Programme Implementation.
