- Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period.
- GDP includes all private and public consumption, government outlays, investments, private inventories, paid-in construction costs and the foreign balance of trade (exports are added, imports are subtracted)
- Thus the components of GDP are (C) plus Investment (I) plus Government Spending (G) plus BOP i.e. Exports minus Imports (X-M)
- GDP is calculated using this standard formula: C + I + G + (X-M).
- GDP is commonly used as an indicator of the economic health of a country, as well as to determine a country’s standard of living
- Since the mode of measuring GDP is uniform from country to country, GDP can be used to compare the productivity of various countries
- Gross national product is the value of all goods and services made by a country’s residents and businesses, regardless of production location.
- In other words, it counts the value of all products manufactured by domestic businesses, regardless of where they are made.
- GNP is the total value of all final goods and services produced within a nation in a particular year, plus income earned by its citizens (including income of those located abroad), minus income of non-residents located in that country.
- The formula to calculate the components of GNP C + I + G + (X-M) + Z
- GNP = Personal Consumption Expenditures (C) + Investment (I) + Government Spending (G) + BOP or imports minus exports (X-M) + Net income earned by domestic residents from overseas investments – Net income earned by foreign residents from domestic investments (Z)
- Thus, GNP = GDP + Net factor income from abroad (NFIA)
GDP vs. GNP
- The Indian GNP measures the production levels of any Indian or Indian-owned entity, regardless of where in the world the actual production process is taking place, and defines the economy in terms of the citizens.
- Say, L&T has got construction contracts in Qatar. The profit earned by L&T on this would be a part of India’s GDP but the payment it makes to the citizens of Qatar as wage/salary will be a part of Qatar’s GDP as well GNP.
- Now, a UK citizen working in L&T in India, his salary will be a part of India’s GDP but not GNP. At the same time, an Indian national working in US for an US firm, his income will be recorded as US’s GDP and India’s GNP.
- The term that is used to denote the net contribution made by a firm is called its value added
- The raw materials that a firm buys from another firm which are completely used up in the process of production are called ‘intermediate goods’.
- Therefore the value added of a firm is, value of production of the firm – value of intermediate goods used by the firm.
- Gross value added (GVA) is defined as the value of output less the value of intermediate consumption.
- Value added represents the contribution of labor and capital to the production process.
- When the value of taxes on products (less subsidies on products) is added, the sum of value added for all resident units gives the value of gross domestic product (GDP).
- Thus, Gross value added (GVA) = GDP + subsidies on products – taxes on products
GDP vs. GVA
- Gross value added (GVA) is the value addition done to a product resulting in the production of final product whereas Gross Domestic Product (GDP) is the total value of products produced in the country.
- While GDP gives a picture of whole economy, GVA gives pictures at enterprises, government and households levels. In other words, GDP is GVA of all enterprises, government and households
GDP at factor cost = Gross value added (GVA) at factor cost
GDP at market price = GDP at factor cost + net indirect taxes (indirect taxes- subsidies)
GVA at factor cost = value of output (quantity * price) – value of intermediary consumption.