GDP, National Income and Inflation

In our conversations we often use terms like GDP growth and inflation without knowing the exact definition of these terms. In this article, we try to provide a clearer picture of National Income and Inflation for our readers. Content has been kept simple and complex details have been neglected for the same reason.

 

Gross Domestic Product: GDP is the value of all final goods and services produced within boundary of a nation during one year (For India it is from 1st April to 31st March)

  • Gross means same thing in economics as total means to mathematics.
  • Domestic means all the economic activities inside the boundaries of the country
  • Product is word for goods and services
  • Final means the stage of product after which there is no known chance of value addition in it. Thus, Iron mined for production of steel will not be included separately.
  • Net Domestic Product is GDP calculated after adjusting the weight of the value of depreciation. Every asset goes for depreciation in the process of their uses. 

Gross National Product: GDP + income from abroad.

  • Income from abroad includes trade balance (exports – imports), private remittance (inflow from Indians living abroad – outflow by foreigners living in India), Interest Payments (Inflow from interests on Indian loans to foreign countries or organizations – Outflow from interests on Foreign loans to Indian government or institutions).
  • This is used as National Income by IMF to rank the countries. However, Net National Product (after discounting for depreciation) is used as National Income for an economy. Per capita Income is NNP/ Population.

Other considerations in their calculations:

  • Factor Cost: It is the input cost for the producer to produce something (like capital cost, raw materials, labor, rent, power etc). In India, National Income is calculated at this cost due to lack of uniformity in taxes.
  • Market Cost: It is derived after adding the indirect taxes (taxes which are levied on producers but are collected from consumers) and subtracting subsidies.
  • Price: In India, Income is calculated at constant prices to remove the impact of inflation. Thus if inflation is 10% in India and National Income may increase by the same amount without increasing the production which is not the correct picture of growth. Hence, all growth estimates in general and GDP growth in particular are calculated at constant prices (of some base year)

Inflation: It is an increase in general level of prices in an economy that is sustained over time.

  • In India, it is calculated from the base year and is point to point (like 1 jan in base year to 1 jan in current year. Base year is not last year in Indian case (2004-05 from September 2011)
  • Inflation is measured on two indices; Wholesale Price Index (based on prices in wholesale market) and Consumer Price Index (based on prices in retail market). It is the later which impacts our savings.

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