GDP and GVA

Gross Domestic Produce (GDP)

GDP measures the value of a country’s final goods and services (those purchased by the final user) generated in a specific time period (say, a quarter or a year). It includes all of the output produced within a country’s borders.

GDP = Private consumption + gross investment + government investment + government spending + (exports – imports)

• Private Consumption Expenditure refers to the value of all goods and services purchased for consumption by households.
• Government Consumption Expenditure refers to the value of all goods and services purchased for consumption by the government.
• Gross Investment refers to the total value of all capital investments made in the economy.

GDP is made up of commodities and services generated for market sale as well as certain nonmarket production, such as government-provided defence or education services. A different concept, gross national product, or GNP, accounts for all of a country’s output. So, if an India-owned company has a factory in the United States, the output of that factory is included in both US GDP and India’s GNP.

• Gross National Product (GNP): GNP is a measure of the total economic output produced by a country’s inhabitants and enterprises in a certain time period, often a year.
• GDP at factor cost: It is calculated by subtracting indirect taxes, such as sales taxes and value-added taxes, and adding subsidies from GDP at market prices. GDP at factor cost = GDP at market price – Indirect taxes + Subsidies
• GDP at market price: It includes the value of all final goods and services produced within a country during a given period, regardless of whether they are produced by domestic or foreign entities. GDP at market price = Private Consumption Expenditure + Government Consumption Expenditure + Gross Investment + (Exports – Imports)
• GNP at factor cost: GNP at factor cost is calculated by subtracting the cost of intermediate inputs used in production from the total value of output produced by a country’s residents. The term “factor cost” refers to the cost of the factors of production used to produce goods and services, such as labour, capital, and land
• GNP at market price: It is calculated by adding up the value of all goods and services produced by a country’s residents, including income earned from domestic production activities as well as income earned from foreign production activities such as dividends, interest, and profits from foreign investments. This is done at the market prices prevailing during the period being measured. The term “market price” refers to the price at which goods and services are sold in the market.
• NDP at Factor Cost is calculated by subtracting the depreciation of fixed capital from Gross Domestic Product (GDP) at factor cost.
• NDP at market price: It is calculated by subtracting the value of depreciation from the Gross Domestic Product (GDP) at market prices.

Calculation of GDP

• Production method: This approach estimates the value of products and services produced in the country during a certain period, by adding up the gross value of all final items and services produced in various sectors of the economy. Agriculture, manufacturing, mining, construction, power, gas, and water supply are examples of industries, as are services such as trade, transportation, communication, finance, insurance, and real estate.
• Expenditure method: The expenditure method calculates GDP by adding up all of the economy’s expenditures on goods and services, including household consumption, government spending, investments, and net exports (exports minus imports).
• Income method: It measures GDP by adding up all of the incomes earned by individuals and firms in the economy, such as wages and salaries, profits, interest, and rent.

Importance of GDP

• GDP is significant because it provides information on the size and performance of an economy. The rate of increase in real GDP is frequently used to indicate the overall health of the economy.
• An increase in real GDP is viewed broadly as indicating that the economy is performing well. When real GDP grows rapidly, employment is likely to rise as businesses hire more workers for their factories and people have more money in their pockets.
• When GDP falls, as it happened in many nations during the recent global economic crisis, employment
  typically falls. In certain cases, GDP may be increasing, but not quickly enough to produce a sufficient number of employment for individuals who are looking for them. However, real GDP growth occurs in cycles over time.
• GDP per capita is frequently used to assess a country’s standard of life. Higher GDP per capita generally implies that a country’s people have greater access to goods and services, which can improve their quality of life.
• GDP data is also used by governments to guide policy decisions. For example, if GDP growth slows, a government may pursue stimulus policies such as tax cuts or increased government expenditure to revive the economy.
• GDP is a widely used indicator for comparing different countries’ economic performance. This can assist governments and investors in determining where to invest and how to distribute resources.

Limitations of GDP

• GDP does not encompass all productive activities. Unpaid work (such as that done at home or by volunteers) and black-market activities, for example, are not included since they are difficult to assess and value effectively. That is, a baker who makes a loaf of bread for a customer contributes to GDP, but he does not contribute to GDP if he bakes the same loaf for his family (though the ingredients he purchases are counted).
• The “gross” domestic product does not account for “wear and tear” on the machinery, buildings, and other assets needed to produce the production (the so-called capital stock). When we subtract the depreciation of the capital good from GDP, we get the net domestic product (NDP).

Gross Value Added (GVA)

The contribution of an industry, sector, or region to a country’s overall GDP is represented by GVA. It is computed by deducting the entire value of output from the value of intermediate inputs (such as raw materials and other goods and services utilized in the manufacturing process).
The GVA of a sector is defined by the RBI as the value of output minus the value of its intermediary inputs. This “value added” is distributed among the primary production factors, labour and capital. By examining GVA growth, one may determine which sectors of the economy are doing well and which are struggling.

Calculation of GVA

To calculate GVA, the NSO estimates the gross value of production for each sector, which is the total value of goods and services generated by that sector. The value of intermediate inputs is then subtracted from the gross value of output to arrive at the GVA, which includes the cost of goods and services used in the manufacturing process. The resulting GVA data quantifies each sector’s contribution to the country’s overall GDP.

• GVA is the sum of a country’s GDP and net of subsidies and taxes in the economy at the macro level, according to national accounting.
• Gross Value Added = GDP + product subsidies – product taxes
• Previously, India measured GVA at ‘factor cost’ until a new methodology was implemented, in which GVA at ‘basic prices’ became the primary measure of economic output.
• GVA at basic prices will include production taxes and exclude production subsidies.
•  GVA at factor cost included no taxes and excluded no subsidies

Importance of GVA

• GVA is more accurate than GDP because, unlike GDP, it excludes the value of intermediary goods and services utilized in the production process, which might lead to double-counting. As a result, GVA is a more precise measure of the value added by each sector of the economy.
• Sectoral Comparison: GVA allows for a comparison of the contributions of various economic sectors to GDP. This can assist policymakers in identifying segments of the economy that are expanding or contracting and making informed judgments on policies to support or regulate various sectors.
• GVA is a helpful measure of productivity because it captures the contribution of each sector of the economy to the creation of economic value. GVA calculates the value-added per worker or unit of input to help understand the productivity of a specific sector, such as agriculture or manufacturing.
• Policymakers, investors, and businesses utilize GVA to analyze the potential of a sector or industry, discover opportunities, and plan investment decisions. Policymakers can discover which sectors are underperforming and may require further investment or policy support by analyzing GVA.
• International Comparison: GVA provides a common metric for comparing productivity and economic performance across countries. Policymakers can find areas of strength and possibilities for improvement in different economies by comparing GVA across countries.

Limitations of  GVA

• Sector Definition: There is no global definition of sectors, and they may be defined differently by different countries and organisations. This can make comparing GVA between countries or areas challenging.
• Output Valuation: GVA calculations are based on the valuation of output, which can be subjective. In some situations, determining the appropriate valuation of commodities and services generated by a sector may be difficult.
• While GVA does not include intermediate inputs, there may be some double-counting in the GVA calculation. If two sectors, for example, use the same input, such as electricity, the value of that input may be counted twice.
• Changes in Input Prices: Changes in input prices, such as the price of raw materials, can have an impact on GVA. This makes comparing GVA over time challenging since changes in input prices might impact the value of output.
• GVA calculations rely on data from a variety of sources, including surveys and administrative records. However, data availability can be a challenge, especially in developing countries or in sectors where data may not be collected or is unreliable.