If your friend says that this is the most important topic of Economics then you can be assured that he is your good friend. Why are we saying this? GDP data is a favorite of Modiji (India is now the fastest growing economy in the world) and also favorite of RBI, IMF and WB. Without GDP these organizations are like Team India without MS Dhoni.
Where is the Confusion?
Our beginner friends will ask this innocent (massom sa) questions but veterans will counter that they have to revise this topic before every exam of RBI, NABARD, SEBI or UPSC. Now let’s find the confusion.
GDP has many Cousins
Let’s list them all
- NDP
- GNP
- NNP
- GVA
A Short Trick to Understand All
Let’s come on the Ramban (most important trick). The first confusion is where do these terms differ and how to differentiate one from the other. Examiner also understands this and he will trick you by giving the definition of GDP and then naming it GNP. Time pressure in exams will further create confusion.
So let’s see how to deal with it. Remember what each alphabet in these terms means.
- N (on first position) stands for Net
- N (on second position) stands for National
- P stand for product
- G stand for Gross
- D stands for Domestic
- V stands for value
- A stands for added
GDP – Amitabh Bachhan of Bollywood
GDP stands for Gross Domestic Product. It is the most talked about term. Here we will not give you a long definition which you will eventually forget. We will only tell you the information you must remember.
Domestic here means that all economic activities are conducted in the territory of a country.
When we form the word “territory” as a basis of our understanding. We then move forward to GNP.
Here domestic is replaced by National. It means the concept of boundary doesn’t arrive. Income which is not generated on a country’s territory may also be included here. So, we add three components here
- Private remittances – Your NRI Mausi has gifted you 1000 Rs. This will be included in GNP and let’s say Jacqueline Fernandez (ED’s favorite) is sending 1000 to Sri Lanka, then it will be excluded from GNP.
- Like you Zamindar Bapu, the Indian government also lends and borrows money from the international market. You may have heard Pakistan asking money from its best friend China. Net (inflows-outflows will be added).
- The third component is External grants. Veterans will remember that Modiji denied external grants from Gulf countries in wake of Kerala floods of 2018.
Now, Let’s Shift our Focus to NNP
It is simple. One can remember it by the fact that you have to subtract something from Gross to get Net. The subtraction here is depreciation.
Subtract depreciation from GNP to get NNP. Similarly, subtract depreciation from GDP to get NDP.
GVA – Estranged Brother of GDP
- GVA stands for gross value added. It measures value addition over any stage. Let’s take an example to understand this. Farmer grows a sugarcane crop and he sells it for 20 Rs/kg. Here value added is 20 Rs. This stage is called the primary stage. The mill then converts sugarcane into sugar and sells it at 80 Rs/kg. The value addition here is 60 Rs. This is the secondary stage.
- Similarly a company may buy sugar and package it using their branding. They may sell the packaged sugar at 100 Rs/kg. The value addition at tertiary stage is 20 Rs/kg.
Kitne aur bach gaye – 2 more to go
- Factor Cost = Rent + Wages + Interest + Profit
- Basic prices = Factor Cost + (Production Taxes – Production Subsidies)
- Market Price = Basic Prices + Indirect/Product Taxes – Product Subsidies
So that’s all from the GDP family. This blog is part of our CPSS campaign where we work on your basic concepts so that you become an officer at the earliest and send us treats. The Gurudakshina for this CPSS campaign is your goodwill. However, you may cut a big check after you receive your first hefty salary as an IAS or RBI officer.
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