National Income Accounting/GDP Calculation

GROSS DOMESTIC PRODUCT: The gross domestic product (GDP) is the aggregate monetary value of all goods and services produced in the country during a period of time. The word domestic here assumes special importance as it highlights the fact that only goods & services produced within the confines of the country would be taken into account while calculating the GDP.

CALCULATING GDP: There are 3 ways for calculating a countrys GDP:
1 SUPPLY/PRODUCTION SIDE: The whole economy is divided into distinct water-tight segments-Agri,industry & services. The total value of output of goods and services & the value of inputs of raw materials & services used for production is estimated for each of these. The value added for each sector is arrived at by deducting from the total value of output the value of inputs of raw materials and services is attained.
2 DEMAND/EXPENDITURE SIDE: The income generated at production stage is finally spent on purchase of goods & services or is invested. GDP can, therefore, be also estimated from the expenditure by different segments namely government,private sector and investments. Private final consumption expenditure would include all household expenditure on goods and services except on land and buildings. GFCE would include the amount the government pays to its employees. The remaining part of expenditure would be classified under gross fixed capital formation, which would include various kinds of investments.Adding all three of the expen-ditures would give us a third estimate of GDP.
3 INCOME SIDE: Income generated during the production of goods & services is distributed between two factor inputs,labour & capital. Income is distributed among people who own the capital & those put in their labour.Through this exercise we get a second estimate of GDP.

Difference in the three sets of numbers: The differences arise due to the following reasons. We have a number of taxes/subsidies on various products.This should explain the differnces between the supply and demand estimates of GDP. Various estimation methods are used under different approaches,which also caused discrepancy in data.

Supply side widely followed: The supply side estimation of GDP is taken to be more accurate. The baseline figure for GDP growth put out by the CSO is based on the one derived from the supply/production side. Any revision in the expenditure side of the equation is therefore does not affect the headline. GDP The two sets of numbers helps policymakers/analysts to understand the current position of the industries and the overall demand picture.


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