Licchavi Lyceum


Licchavi Lyceum

Important terms of economy

GDP: Total market value of goods and services produces within the geographical boundary of the country within a given time period.

The GDP of a country is derived from the different sectors of the economy, namely the agricultural sector, the industrial sector and the service sector. The contribution made by each of these sectors makes up the structural composition of the economy.

Nominal GDP: If GDP is calculated considering market price of the current year, This GDP is called nominal GDP.

Real GDP: If the GDP is calculated considering the market price of base year, This GDP is called real GDP.

Deflator: The deflator is used to calculate real GDP by Nominal GDP. It neutralizes the effect of inflation.

In order to compare the economic performance of current year the real GDP is used.

While calculating the GDP only the final goods and services are taken into account and intermediate goods and services are not counted. This is done to avoid the double counting.

What is market price?

The price of a good calculated after adding taxes and duties.

What is factor cost?

The term factor refers to all the factors of production i.e. Land, Labor and Capital. The actual cost incurred in the production of an item is called the factor cost.  For calculating the factor cost from market price we need to subtract taxes and add subsidies given by the government. (Cost of production till factory gate).

So, GDP at factor cost= GDP at market price – Taxes + Subsidies

What is the ‘Tax-To-GDP Ratio’?

The tax-to-GDP ratio is the ratio of tax collected compared to GDP. Some countries aim to increase the tax-to-GDP ratio by a certain percentage to address deficiencies in their budgets.

Transfer of Payment: The transfer of payment refers to the payments done by the government to the section of society for which no economic activity is produced in return. Examples are Scholarship, Pension.

Estimating GDP: There are three ways to calculate the GDP.

  1. Expenditure Method: This method adds the consumption, Government Expenditure, Investments and Net export from the country.
  2. Income approach: This method adds the income received by each factor of production like wages, rents etc. 
  3. Output Method: This method adds the total value of final goods and services produced in the country.

The calculated value of GDP should ideally be the same by all these methods. Practically they are different.

Note: If the depreciation of the capital goods is taken into account, then the value becomes net value.

Gross National Product GNP: The final value of goods and services produced by the nationals of a country. The production is counted irrespective of the geographical location.

GNP ≡ GDP + Net factor income from abroad

(Net factor income from abroad = Factor income earned by the domestic factors of production employed in the rest of the world – Factor income earned by the factors of production of the rest of the world employed in the domestic economy).

Net National Product (NNP): The value of GNP after subtracting the depreciation. (NNP=GNP- Depreciation). Net means after depreciation.

National Income (NI): National Income is the Net National Product at facto cost, (NNP – Taxes + Subsidy).

Per Capita Income: The GDP divided by population. The per capita in India was estimated by Dadabhai Naoroji. This helps to ascertain a country’s development status. It is one of the three measures for calculating the Human Development Index of a country. Income per capita counts each man, woman and child, even newborn babies, as a member of the population.

Note: In pre-independent India, Dadabhai Naoroji was the first to discuss the concept of a Poverty Line. He used the menu for a prisoner and used appropriate prevailing prices to arrive at what may be called ‘jail cost of living’.

What is ‘Gross Value Added – GVA’: Gross value added is a productivity metric that measures the contribution to an economy, producer, sector or region. Gross value added provides a dollar value for the amount of goods and services that have been produced, less the cost of all inputs and raw materials that are directly attributable to that production.

# Note: In an open economy the GDP and GNP are different whereas in closed economy the GDP and GNP are same.  In closed economy neither the export nor the import takes place.

Who calculates GDP?

The Central Statistical Office calculated GDP. CSO also calculates the GDP deflator.

Problems faced while calculation the National Income:

  1. Black Money is not taken into account
  2. The household services are not counted.
  3. The Charitable work is not counted
  4. The environmental costs are not accounted.

The GDP growth is measured in terms of gross value added. These measures by what percentage the GDP of current year is higher than the GDP of previous year.

The GDP of a country shows the level of development in the country. However this condition is not always fulfilled.

That part of our final output that comprises of capital goods constitutes gross investment of an economy.

Human Development Index by UNDP: The Human Development Index (HDI) is a composite statistic of life expectancy, education, and per capita income indicators, which are used to rank countries into four tiers of human development. A country scores higher HDI when the lifespan is higher, the education level is higher, and the GDP per capita is higher. The HDI was developed by Indian Economist Amartya Sen and Pakistani economist Mahbub ul Haq.

The index is used to measure the human development level in the country with the help of following three indicators.

  1. Life expectancy at birth
  2. Literacy Rate
  3. Purchasing Power parity

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