The GDP and the New GDP
You must have read or heard about the ‘new’ GDP – it’s the new economic-term-virus making its way these days.
So why is the ‘new GDP’ making news? Why is there a ‘new’ GDP? What happened to the ‘old’ GDP? And what is a GDP? Some questions and their answers we look to address in today’s article.
Starting with -
1. What is GDP?
GDP stands for Gross Domestic Product. We can understand the concept by focusing our attention on the three words – Gross, Domestic and Product.
Gross means the sum total – gross total – without any deductions – just the bare and basic TOTAL.
Domestic means domestic! Whatever’s found in our home – but in this case the picture is a larger one and home is the country – India – or in other words India’s economy. Our very own Indian economy.
Product means whatever is ‘produced’ – and it will include both goods and services.
So, GDP is the gross total of the value of goods and services produced in an economy (Indian in our case) in a financial year.
Or, in a nutshell –
GDP = Private spendings + Business spendings + Government Spendings + Net Exports and Imports
2. Why is GDP calculated?
GDP is considered to be an adequate (if not absolute perfect) measure to estimate and assess how well (or not) an economy performing.
So GDP concept is important as, on year to year basis it is calculated to show how much in comparison to the previous year the country’s economy has fared.
All the national income, GDP calculations are down done by the Central Statistics Office – popularly known as the CSO
3. How is GDP calculated?
Two approaches –
(i) Income approach: where the income earned by every sector is added up.
(ii) Expenditure approach: the expenditure incurred by every sector is added up.
Whichever method is used for calculation of GDP - the figures under both the approaches should be same.
4. Base year concept – and real and nominal GDPs.
Base year is any year in the past – which based on certain parameters (the braniacs and economists do this job) is taken as a benchmark/ base for price estimates.
Say we take the year 2004-05 as the base year – then prices of all the items prevailing in that year is taken and applied on the productions of the year 2014-15 – to get GDP.
So prices of the base year and productions of this year (or any year in consideration) is how GDP is measured.
Which year to take a the ‘base year’ depends on many factors, which is best left to the economists – but base year changes from time to time to give a more accurate picture of an economy’s performance in the present time.
For example – prices of year 1956-57 can’t be base for measuring performance of 2014-15! It’ll give a complete unrealistic picture – the inflation levels, the economy’s size, the size of various industries, the spending habits of the people, the population size, economic policies etc. are very much different now from then and hence – base years are periodically revised.
If GDP is measured on the basis of prices of base year – it is called Real GDP.
And if GDP is measured on the basis of current year’s prices – it is called Nominal GDP.
Real GDP is considered a better measure than Nominal GDP – just because in Real GDP a base/ standard prices are used so it’s a more meaningful comparison.
As you know – to compare any two things – there has to be one thing in common, only then you can ‘compare’!
5. In Real GDP –
the prices of two years (the base year and the year under consideration) is common – and hence comparison shows how much the economy has grown or not in terms of production – and that is exactly what we want to know – how much has the economy grown in comparison to the previous years.
So now you know what is GDP; why it is important and how it is measured and what is the importance of base year.
Now, like I said – what’s the entire hullabaloo about a new GDP?
6. The New GDP and how it has the amused the world.
Recently India changed its base year 2004-05 from to 2011-12 – so that is new!
Plus it’s now measured using CPI (Consumer Price Index) – that is market prices; previously WPI (Wholesale Price Index, or factor costs) used to be used. Using market prices as price measure is to bring India at par with international practices.
Thus new base year and new price indicator – 2011-12 and CPI!
Which means now GDP is being recalculated according to the new base year and market prices – and this new GDP figure(s) is showing some tremendously unbelievable results – which has got economists all over the world and our own Raghuram Rajan baffled and amused!
Here are some highlights worth remembering:
- GDP growth according to the new base year shows, growth in the last quarter of 2014 at 7.5%.
- India GDP growth rate was higher than – get this – China (!) in Q4 of 2014; China’s was 7.3%
- International Monetary Fund (IMF) has predicted India to surpass China in growth in 2016-17. (Here’s hoping!)
- Overall for the whole year of 2013-14 the growth rate was recalculated to be 6.9% as per the new price measures, as against 4.7% as per the old price measures.
- Now with the revised figures showing a favourable picture of the Indian economy in 2013-14 – the political angle is – the UPA govt. which was at the helm at the time – are rubbing their hands in vindication as during their time the Indian economy had begun is recovery and started to improve and rise from the damning effects of inflation and global economic meltdown.
- The growth can be attributed to many factors, most important ones being bringing into the calculation bracket many untapped small industries which though were contributing to the economy were left unaccounted for and offcourse – India’s increase in capacity and output from the manufacturing sector which was seen to be contributing to GDP at 17.3% in 2013-14 as against 12.9%
- But with the new datas and figures throwing up such amazingly unbelievable results – there’s worry in the think-tanks coupled with some witty and sarcastic tweets and opinions.
- Our RBI Governor has said that more time needs to be taken to closely study the numbers to actually figure how such results came up – but he also added saying it is hard to imagine 2013-14 to have been a good year.
- I don’t think anyone would disagree – even to a layman who understands nothing of statistics and GDPs – he definitely would know how bad the year was with rising prices – inflation, job cuts and general gloominess in the economy!
- Others joked saying that if Raghuram Rajan can’t figure it out – then how can the world make sense of the new GDP data! (On a personal level – true that!)
And all these skepticism is not unwarranted; and hence opinions are being reserved for the time being as to how accurate these figures in portraying India’s growth of the past year.
So, the new GDP figures have made fun of and ridiculed and stared at with utter disbelief; but we eagerly await more news, hopefully positive.
And while we wait on the verdict of the think-tanks – it is important to appreciate that statistics is a number game – it’s all based on assumptions and figures and calculations – which is further based on assumptions and opinions of economists sitting at the highest level.
Thus, no matter how positive the growth rate is shown based on the new price measures and base year – we the people who bore the brunt of rising prices know how it was at the micro level.
But on a positive note – here’s to hoping that the new stats are a trailer to how the coming years will be for India in terms of growth … and everything else!
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