Measures and Measurement

GNP
It is the sum of all final goods and services produced
during a specified time period, usually a year, with
each class of goods and services measured at this
market value, that is, at price usually paid.
Measures of National Income
Gross Domestic Product (GDP)
Gross National Product (GNP)
Net Domestic Product (NDP)
Net National Product (NNP)

They can be expressed:

 At market price
At factor cost
Measures of National Income ..
Important to remember:
Gross = Net + Depreciation
Market Price = Factor Cost + [Indirect Taxes –
Subsides]
National = Domestic + Net Factor Income from
abroad
Question
Which of the statutory body responsible for compiling
national income accounts in India?
a. Planning Commission
b. Finance Ministry
c. Reserve Bank of India
d. Central Statistical Organization
e. National Informatics Centre
Question
 In national income accounting, market prices equals
to
a. Factor cost – [ Indirect taxes – Subsidies]
b. Factor cost + [ Indirect taxes – Subsidies]
c. Factor cost – [ Indirect taxes + Subsidies]
d. Factor cost + [ Indirect taxes + Subsidies]
e. Factor cost – Net indirect taxes
Question
Which of the following variable follows flow approach
a. National income
b. Unemployment
c. Foreign Exchange Reserves
d. Wholesale Price Index
e. Money supply
Question
From the following information , calculate GNP at market
prices
NNP at market prices Rs 3467
Net factor income from abroad Rs 675
Exports Rs 1267
Depreciation Rs 378
2320
3764
3845
4356
4520
Question
The difference between the profit of an informal unit and
that of a registered company is that

a. The former is included in GDP while the latter is not

b. The former is not included in GDP while the latter is
c. The former is not included in GNP while the latter is
d. The former is included in personal income but that of
latter is not
e. There is no difference
Question
From the following information , calculate GDP at market
prices
NNP at market prices Rs 3467
Net factor income from abroad Rs 675
Exports Rs 1267
Depreciation Rs 378
a. 2320
b. 3170
c. 3845
d. 4356
e. 4520
Question
Which of the following is an example of stock variable?
a) Wages
b) Taxes
c) Exports
d) Inflation
e) Price index
Question
The figures given below pertain to the year 200X-0X. (All
figures in Rs. Cr)

GNP at Factor Cost = 395023

Indirect taxes = 58213
NDP at market prices = 400422
NNP at market prices = 400575
GNP at market prices = 407226

Compute the values of

Depreciation
Net Factor income from abroad
Subsidies
NDP at factor cost
Answers
Depreciation = GNP at Market Prices – NNP at market
prices
= Rs. 407226 – Rs. 400575
= Rs. 6651 Cr
Net Factor income from abroad = NNP at market prices
– NDP at market prices
= Rs. 400575 - Rs. 400422
= Rs. 153 Cr
Subsidies = GNP at factor cost + Indirect taxes – GNP at
market prices
= Rs. 395023 + Rs. 58213 – Rs. 407226
= Rs. 46010 Cr
NDP at factor cost = NDP at market prices – Indirect
taxes + subsidies
= Rs. 400422 - Rs. 58213 – Rs. 46010
= Rs. 388219 Cr
Measuring National income
Three methods-
Income method
Output (Value added method)
Expenditure method
Income method
It gives national income as aggregate of all incomes of
the nation
Income of only residents of the nation (individual &
corporate) who participate in current production
→Transfer payments are excluded
Stocks adjusted
Net factor income from abroad included
Output/ Value Added method
Valuing all final goods & services produced in an
economy
Normally value added at each stage of production is
calculated & added
The NFI is then added
Expenditure Method
Aggregates all money spent by private citizens, firms
& the government
Expenditures on all intermediate goods are excluded
Expenditures on indirect taxes excluded
Subsidies added
Exports and FI from abroad added
Imports and FI paid abroad is subtracted
A problem
An economy has a farm and a bakery. Households own all of
the labour services and all of the capital, which they rent
out to farm and bakery. Farm produces wheat using
labour services worth Rs. 100 and capital services worth
Rs. 200. It sells Rs. 50 worth of sugar to households and
Rs. 250 worth of sugar to bakery. Bakery produces bread
worth Rs. 800, which it sells directly to households.
Households earn Rs. 300 in wages from the farm and
bakery combined.
a) What is the value of GDP in this economy?
b) What is the value added by the farm?
c) What is the value added by the bakery?
d) How much do the households earn in profit from farm
and bakery combined?
e) What is the total value of intermediate goods produced
in this economy?
Answers
a. Rs. 850
b. Rs. 300
c. Rs. 550
d. Rs. 550
e. Rs. 250
Problems
GNP 4,800
Gross Investment 800
Net Investment 300
Consumption 3,000
Government purchases 960
Government budget surplus 30
What is
NNP, net exports, government tax?
Problem:
GNP at market price 4000
Corporate taxes 800
Personal income tax 600
Subsidies 350
Factor income received from abroad 1000
Factor income paid abroad 800
Undistributed profits 150
Indirect taxes 600
Depreciation 400
Calculate: Personal disposable income, GDP at FC
Solution
Personal disposable income
= Personal income
– Personal taxes
Personal income = National income
– Retained earnings
– Corporate tax
National income = NNP at factor cost
NNP at FC = GNP at FC - Depreciation
GNP at FC = GNP at MP
- Indirect Taxes + Subsidies
Role of Prices
Movements in prices have two aspects-

The changes in relative prices which affect

microeconomic resource allocation

The changes in the overall price level which affect the

purchasing power of money over goods & services in
general
Types of Price Indices
Three main indices
Consumers Price Index (CPI)
Wholesale Price Index (WPI)
GDP deflator

(Other indices like index number of industrial

production, index of agricultural production are
also possible )
Consumers Price Index (CPI)
It compares over time the money outlays required to
purchase a given basket of consumption goods & services.

The basket represents the actual consumption pattern of a

typical family from a specific group for which the CPI is
being constructed

Tastes vary across families & relative prices can also vary
geographically, so a separate CPI is constructed for each of
a few well-defined population groups.

Example – ‘Urban Industrial workers’; ‘Agricultural laborers

Measurement of CPI
CPIs normally employ Laspeyer’s Index

Suppose in the year ‘0’ (the base year) a typical family

purchased quantities q10, q20, q30…………………qn0 of ‘n’ goods
at prices p10, p20, p30…………………pn0 .

In year ‘t’ (the current year) the prices of the same goods are
p1t, p2t, p3t…………………pnt .

Then the Laspeyer’s index is given by

It = [(Σ pit q0i)/(Σ pi0 qi0)]*100

Measurement of CPI contd…..
It = Cost of purchasing the base year basket in current year *100
Cost of purchasing the base year basket in base
year
= [w1 (pit/pi0) + w2 (p2t/p20) +……….]*100

Where, wk = (pk0 qk0)/ (Σpi0qi0) → share of kth good in total consumption

expenditure in base year

Wk → weight attached to the kth good

pkt/pk0 → the price relative for good ‘k’

Thus, Laspeyre CPI = It = Σ wi (pit/pi0 )

Requirements to construct the CPI
Consumption basket in the base year
Prices of the items in the basket in the base year
Price relatives for each item in the given year
Wholesale Price Index (WPI)
This index can be interpreted as an index of prices
paid by the producers for their inputs
Method of constructing is quite analogous to those
behind CPI with differences like items included are
different, prices are not retail but wholesale etc
The GDP deflator
It is defined as the ratio of current price GDP to constant
price GDP
It is a price index which covers all final goods & services
Unlike CPI, it covers investment goods
Unlike WPI, it does not cover industrial raw materials &
intermediates
The goods basket entering the calculation is the basket
produced in the current year
It is the ratio of value of this year’s final outputs in this year’s
prices to the value of the same outputs in the base year’s prices
Real Vs Nominal GDP
Real refers to the fact that the data have been
adjusted for changes in the level of prices
Real GDP is the GDP at current prices deflated fro
changes in the prices of the items included in GDP
Thus, two ways of expressing GDP
GDP at current prices (nominal value)
GDP at constant prices (“real” value)
Real Vs Nominal GDP
GDP deflator
It is a measure of the current price level compared to
the price level during the base year

Real GDP (2003-04)

= Nominal GDP (2003-04) * [GDP
deflator (1993-94) / GDP deflator (2003-
04)]
Problem
From the table given below calculate
(a) the nominal GDP for the year 2001 and 2005
(b) the real GDP for the year 2005
(c) the GDP deflator for the year 2005.
2001 2005
Units Price/unit Units Price/unit
A 50 Rs.1.50 60 Rs.1.60
B 100 Rs.7.50 120 Rs.8.00
C 80 Rs.6.00 100 Rs.7.00
D 60 Rs.5.00 70 Rs.5.50
E 120 Rs.2.00 140 Rs.2.50
Answer2001 2005 Real 2005
A 75 96 90
B 750 960 900
C 480 700 600
D 300 385 350
E 240 350 280
GDP 1845 2491 2220

The GDP deflator for the year 2005 is 112.2, found

by dividing 2005 nominal GDP by 2005 real GDP
and multiplying by 100.
That is, 112.2 = 2491/2220*100
Difficulties
Non-market production
Imputed values
Underground economy
‘Side effects’ & economic ‘bads’
Leisure & Human Costs
Double counting
Usefulness of national income
To assess effectiveness of policies
To assess the standard of living
To indicate economic growth
To make cross country comparison