GDP
AND GVA - ECONOMY
News:
India’s GDP data for
2023-24’s Q3: Why have GDP and GVA growth rates diverged?
What's
in the news?
●
India’s Gross Domestic Product (GDP)
growth rate surpassed expectations to rise to a six-quarter high of 8.4% in the third quarter
(October-December) of 2023-24, data released by the National Statistical Office
(NSO).
Key
takeaways:
Gross
Domestic Product (GDP):
●
GDP measures the value of a country’s
final goods and services (those purchased by the final user) generated in a
specific time period (say, a quarter or a year).
●
It includes all of the output produced within a country’s borders.
GDP
Calculation:
GDP = Private consumption
+ gross investment + government investment + government spending + (exports –
imports)
●
Private
Consumption Expenditure refers to the value of all goods and
services purchased for consumption by households.
●
Government
Consumption Expenditure refers to the value of all goods and
services purchased for consumption by the government.
●
Gross
Investment refers to the total value of all capital investments
made in the economy.
GDP is made up of
commodities and services generated for market sale as well as certain non
market production, such as government-provided defence or education services.
Methods
of GDP Calculation:
1.
Production Method:
●
This approach estimates the value of
products and services produced in the country during a certain period, by
adding up the gross value of all final items and services produced in various
sectors of the economy.
●
Agriculture, manufacturing, mining,
construction, power, gas and water supply are examples of industries, as are
services such as trade, transportation, communication, finance, insurance and
real estate.
2.
Expenditure Method:
●
The expenditure method calculates GDP by
adding up all of the economy’s expenditures on goods and services, including
household consumption, government spending, investments and net exports
(exports minus imports).
3.
Income Method:
●
It measures GDP by adding up all of the
incomes earned by individuals and firms in the economy, such as wages and
salaries, profits, interest and rent.
Limitations
of GDP:
●
GDP does not encompass all productive
activities.
○
Unpaid
work
(such as that done at home or by volunteers) and black-market activities, for
example, are not included since they are difficult to assess and value
effectively.
Gross
Value Added (GVA):
●
The contribution of an industry, sector,
or region to a country’s overall GDP is represented by GVA. It is computed by deducting the entire value of output from
the value of intermediate inputs (such as raw materials and other goods and
services utilized in the manufacturing process).
●
The GVA of a sector is defined by the RBI
as the value of output minus the value of its intermediary inputs. This “value
added” is distributed among the primary production factors, labour and capital.
By examining GVA growth, one may determine which sectors of the economy are
doing well and which are struggling.
Calculation
of GVA:
To calculate GVA, the NSO
estimates the gross value of production for each sector, which is the total
value of goods and services generated by that sector. The value of intermediate
inputs is then subtracted from the gross value of output to arrive at the GVA,
which includes the cost of goods and services used in the manufacturing
process. The resulting GVA data quantifies each sector’s contribution to the
country’s overall GDP.
●
GVA is the sum of a country’s GDP and net
of subsidies and taxes in the economy at the macro level, according to national
accounting.
●
Gross
Value Added = GDP + product subsidies – product taxes
●
Previously, India measured GVA at ‘factor
cost’ until a new methodology was implemented, in which GVA at ‘basic prices’
became the primary measure of economic output.
●
GVA at basic prices will include
production taxes and exclude production subsidies.
●
GVA at factor cost included no taxes and
excluded no subsidies.
Importance
of GVA:
●
GVA is more accurate than GDP because,
unlike GDP, it excludes the value of intermediary goods and services utilized
in the production process, which might lead to double-counting. As a result,
GVA is a more precise measure of the value added by each sector of the economy.
●
Sectoral
Comparison: GVA allows for a comparison of the
contributions of various economic sectors to GDP. This can assist policymakers
in identifying segments of the economy that are expanding or contracting and
making informed judgments on policies to support or regulate various sectors.
●
GVA is a helpful measure of productivity because it captures the contribution of
each sector of the economy to the creation of economic value. GVA calculates
the value-added per worker or unit of input to help understand the productivity
of a specific sector, such as agriculture or manufacturing.
●
Policymakers, investors, and businesses
utilize GVA to analyze the potential of
a sector or industry, discover opportunities, and plan investment
decisions. Policymakers can discover which sectors are underperforming and may
require further investment or policy support by analyzing GVA.
●
International
Comparison: GVA provides a common metric for
comparing productivity and economic performance across countries. Policymakers
can find areas of strength and possibilities for improvement in different
economies by comparing GVA across countries.
Limitations
of GVA:
●
Sector
Definition: There is no global definition of sectors,
and they may be defined differently by different countries and organisations.
This can make comparing GVA between countries or areas challenging.
●
Output
Valuation: GVA calculations are based on the valuation of
output, which can be subjective. In some situations, determining the
appropriate valuation of commodities and services generated by a sector may be
difficult.
●
While GVA does not include intermediate
inputs, there may be some
double-counting in the GVA calculation. If two sectors, for example, use
the same input, such as electricity, the value of that input may be counted
twice.
●
Changes
in Input Prices: Changes in input prices, such as the
price of raw materials, can have an impact on GVA. This makes comparing GVA
over time challenging since changes in input prices might impact the value of
output.
●
GVA calculations rely on data from a
variety of sources, including surveys and administrative records. However, data
availability can be a challenge, especially in developing countries or in
sectors where data may not be collected or is unreliable.