RBI decides to switch to GDP from GVA to measure economic activity - Current Affairs 2018



[Applause] hello and welcome to study IQ in this lecture we will discuss about G VA and GDP that this gross domestic product and gross value added why this has become an important current affair is because recently the deputy governor of the RBA made an announcement that the central bank would be moving back to GDP for the calculation of national income so before making a comparison between the GDP and the GVA let us first see what are these two terms first let us discuss GDP gross domestic product we have already seen in a previous module of national income Berta's GDP and the definition of GDP but for your understanding and explain it again by definition GDP or the gross domestic product is the total monetary value of all the goods and services produced in an economy in a financial year here in this definition some terms are very important first one final goods and services it means that only the final goods and services are taken into consideration which means the intermediary goods are excluded so the first important term is final goods and services which means intermediate real goods are excluded second one produced in an economy this is very very important in gross domestic product GDP the word domestic is given the importance which means that those goods and services which are produced inside the economy or inside the domestic territory of an economy is given importance so this is the most important term here which means that when you calculate GDP only the goods and services which are produced inside the domestic territory of a countries included third one is financial air so the time period is one financial year in India a financial year begins on 1st of April and ends on 31st of March and financially is also an honest accounting here now let us see this terms in detail the first one final goods as you all know goods are of two types one is final and second one is intermediary goods final goods can be again subdivided into capital goods and consumer goods so what are final goods final goods are those goods which are ready for consumption or ready for use intermediate goods are those goods which will help in the production process or they cannot be directly consumed but they will help in the production of a other commodity examples raw material and we said final goods can be again divided into capital goods and consumer goods capital goods are those goods which will help in the production process example machinery which means that they will again produce those goods are capable of producing again and again or giving output and what about consumer goods consumer goods means those Goods which are consumed example bread now let us see some examples sometimes final Goods can be intermediate goods let us see how how final Goods become intermediate goods let us take the example of make if you purchase a packet of milk suppose a household or an individual purchases a packet of milk to make tea in his home it is a final good how because that family will make tea and they will consume it themselves so it becomes a final good for that household but but if the same packet of milk is purchased by a hotel it becomes intermediary good how this chavala will make tea out of that milk and they will sell that tea so it becomes intermediate good and what is their final good tea is the final good here milk is not the final good because they uses it as an intermediate rate to make tea so T is the final good and make here becomes intermediate good so for the household milk is the final product also in some cases consumer goods become capita let us see how example car if a family purchases a car and uses it within the family it is a consumer but because the car is used by the family for their personal use so this is a consumer good the family consumes or utilizes the car it becomes a capital good when a person purchases car and converts this car into a taxi so if the car is use this a taxi it becomes a capital good because this car will be used in the production process what is the production here it is a production of services so taxi is a service and this same car will be used as a taxi and services are provided so this becomes a capital good hope this is clear for you the next important thermos in an economy or the domestic territory what is a domestic territory mean the mystic territory is not only the political boundaries of a country so domestic territory means political boundaries plus something what is this something this will include embassies consulates and military establishments abroad ships aircrafts or shipping vessels which are owned by the residents of the country so domestic territories beyond political boundaries all these are included in domestic territory the next important term here is financial year we have already said that financial air is also known as accounting year and in India it begins on 1st of April and ends on 31st of March now let us see some important concepts the first one is gross versus net when you purchase a capital good for example machinery suppose you have purchased the machinery in the year 2015 and this is 2018 do you think the machinery will have the same value when you purchased it in 2015 know the value of the machinery would have come down why this is because of depreciation so what is depreciation depreciation is the wear and tear that happens to the capital goods over a period of time so depreciation and we have already seen what GDP GDP gross domestic product so it is a gross concept and if we deduct depreciation from GDP we will arrive at NDP which is net domestic product NDP is nothing but depreciation is deducted from GDP to arrive at NDP or net domestic product next concept is factor cost and market price what is factor cost factor cost is the cost incurred on factors of production so the cost incurred on factors of production is known as the factor cost what are the factors of production they are land labor capital and entrepreneur so these factors of production required some arimin aeration so whatever the remuneration land runs land rent must be given labor wages are provided interest is provided to the capital and profit is given to the entrepreneur so these four things together culminate the form cost on factors of production so this is known as cost on factors of production and this is known as the factor cost so cause John factors of production is called the factor cost and if you add net indirect taxes to the factor cost we will get market price so what is market price market prices factor is net indirect taxes so what is this net indirect taxes let us see net indirect taxes means indirect taxes – subsidies so indirect taxes – subsidies will give you net indirect taxes and if you add net indirect taxes to your factor cost we will derive it market price and GDP at factor cost and GDP at market price is very very important let us see that through an example let us take two years 2016 and 2017 year production factor cost tax market price GDP at factor cost GDP at market price both in the year 2016 the production was 100 units the factor cost was 10 tax first one so market price equal to factor cost plus net indirect taxes so ten plus one market prices 11 GDP at factor cost production in two factor cost thousand G repeat market price that is production in new market price that is hundred into 11 eleven hundred again coming to the year 2017 production 100 units itself factor cost also ten rupees tax increased to three rupees so market prices factors that is 13 GDP at factor cost one hundred production hundred into factor cost n that is thousand and GDP at market price 100 into 13 that is thirteen hundred so now let us consider this example you will notice that in the two years that is 2016 and 2017 the production is hundred unit that means the production in the economy has not increased over one year so production is hundred 100 in 2016 hundred in 2017 factor cost is also the same ten rupees factor cost is 10 what has changed the tax has increased in 2016 the tax rate was 1 rupees and in 2017 it has increased to 3 so because there was an increase in tax what happened with market price increased what is market price factor cost plus net indirect taxes so because the tax increase you will see that the market price was 11 rupees in 2016 it increased to 13 in the year 2017 why this is because of an increase in the tax rate okay coming to GDP GDP at factor cost is production in the factor cost it is thousand units it is thousand in the year 2016 and also in the year 2017 you will see that GDP at factor cost is thousand what has changed GDP GDP at market price so GDP at market price was thousand 100 in the year 2016 when the tax rate was one rupee and market price was eleven in the year 2017 GDP at market price increased two thousand three hundred why because market price increased 230 market price increased to 13 why because taxes increased to three so from this example what can be the conclusion we can conclude that if taxes in the economy increases this will result an increase in GDP at market price so GDP at market price can increase with an increase in the tax rate in the economy so can you say that there is growth in the economy if GDP at market price has increased no you cannot measure growth in the economy using GDP at market price because this can simply increase because there is an increase in tax rate in the economy so this does not mean there is growth in the economy so this is not an indication of growth in the economy this concept you should be very clear off because as we proceed with this module this understanding is very necessary that's why I have given you an example and explain this concept so this is a very very important concept you should have clear understanding now let us see the third concept that is current price and constant prices current prices means that goods and services are calculated all valued at the same ear prices same year prices are taken into consideration constant prices means that the value is based on a base year price so what is a base here base here is a normal year without much inflation in the economy so this is a normal year without much inflation in the economy I will explain to you the concepts of current prices and constant prices through an example let us take three years year production current here price base here price GDP at current prices GDP it constant prices okay let us consider three years 2014 15 15 16 16 17 so production for the year 2014 50 let us assume as hundred units current prices 10 base year price also 10 so GDP at current prices will be production into current price that is thousand GDP at constant prices will be production into base year price GDP at constant prices will be production hundred into base year price that is 10 that is thousand so coming to the next year 1516 2015-16 assume that production was 100 units itself but the current year prices increase to 15 earlier it was 10 now will this 15 base year prices constant so it is again 10 GDP at current prices will be production into current layer price that this thousand five hundred GDP at constant prices production into base year price that is 100 into 10 that this thousand again coming to the next year that is 2016-17 production increased to 150 let us assume that the production has increased from 100 to 150 units current here price is the same that is 15 rupees base your price again it is 10 because it is constant G debate current prices GDP current prices is production into current higher price that is 2250 GDP at constant prices production 150 into base year price that is thousand and five hundred now let us see in the year 2014-15 production was hundred units current price 10 base year price 10 so GDP at current prices is thousand and GDP at constant prices also thousand that means GDP current price and constant price is the same why because the current price and the base year price was the same coming to 2050 sixteen the production is 200 units itself there is no increase in production current prices 15 which means that the price or the current price has increased earlier it was ten now it is fifteen and base year price ten itself so GDP current price increased from thousand two thousand five hundred why this happened this happened because the current prices increased so what this current price the existing price in the market so in the market the prices has increased from 10 to 15 which increase the GDP at current prices and GDP a constant is the same because the base year price is not changed and production is also the same what can be the conclusion from this we can make a conclusion that GDP at current prices can increase because of increase in the current oil prices GDP at current price can increase because there is an increase in the prices of commodities in the market hole with an increase in the current price in the market why does the current price in the market increase current prices in the market increase due to a phenomena called inflation what is inflation inflation means a persistent rise in the prices of commodities in the market so due to inflation the current prices in the market can increase and due to that GDP at current prices also can increase and what is the understanding production will remain the same GDP at current prices has increased there is no increase in production but GDP increase due to inflation this is the conclusion now coming to the third year that is 2016 17 you will see that the production has increased the production has increased from 100 to 150 the current prices is same as in 2015-16 15 rupees in 1516 again 15 rupees in 1617 by a share price as we said it is the same so let us come to the GDP GDP current prices is production into current 115 to 15 that is 2250 GDP at constant prices production into Basya price thousand 500 see what you will notice here is that the GDP has increased comparing to 1516 in in the year 1617 the GDP at current prices as well as GDP at constant prices has increased so what does this mean it means that the production has increased therefore the GDP also has increased so we can arrive at another conclusion that is the GDP will increase because of increase in production so here two conclusions the GDP at current prices can increase due to two reasons oneness and increase in cost are ending or an increase in the prices that is inflation GDP can increase due to inflation and also due to an increase in production I hope now you also know why base year prices is taken into consideration while calculating the GDP because of the influence of inflation now I hope GDP and its associated concepts are clear for you now let us see what the CVA or gross value added GB 8gb refers to the total value of output in the economy – intermediate consumption o total output less intermediate consumption we have seen the GDP is the total monetary value of all the final goods and services produced in an economy during a financial air but when it comes to G VA it is the total output or the total output it is GDP so what is total output it is GDP so GDP – intermediate consumption will give you G VA or gross value added let us take an example suppose the value of a final output as rupees 25 this is the value of final output and suppose rupees 15 is the cost of intermediate consumption so 25-15 will give you 10 and this is value-added rupees 10 is the value added here and rupees 25 is the final output which is the GDP so GDP – intermediate consumption will give you value-added of a commodity or you can also say that value added plus intermediate consumption will give the GDP so what does you DP value added plus intermediate consumption so what is the significance of value added this represents the contribution of labour and capital in the production process so this is the contribution of labour and capital now let us see whether we can arrive at the connection between G via and GDP so what is a collection let us see suppose a bottle of appreduce the cost is rupees 30 30 rupees this means that rupees 30 is the total output all the monetary value of the total output so value of total output is 30 rupees and how did we get this total output then you produce this one bottle of apple juice there were many intermediate risk so when you produced this one bottle of apple juice there were value addition in many stages so value addition was there in many stages and if you kept together all these value additions that happened in different stages of production you will get GDP this means that you can arrive at GDP by adding value addition at different stages so this will be gross value added how there will be value additions at different stages of production and when you add all this value additions you will get GDP or the total output so GDP is a culmination of various value additions at different levels of production hope this idea is clear for you one thing that you should notice in GV is that depreciation is not considered so depreciation is not calc or depreciation is not adjusted in the calculation of GVA we have already seen what this depreciation so you must understand that both GDP and GBA are tools to measure economic growth in a country so GDP and GBA both are tools to measure the economic growth in a country but GDP is the monetary value of all the final goods and services produced in an economy while Givi is merely the value-added that means intermediate consumption is reduced so this is the total output now let us see what are the differences between GBA and GDP one major difference between GDP and GV is that GDP measures the economic growth from the consumers angle or from the consumers side whereas GBA or gross value added measures the economic growth from the producers angle so this is one major difference so GDP comes from the consumers angle why because it is the monetary value of total final goods and services or the total output whereas GV is value-added so it is calculated from the producers angry another important difference is that GDP gives an overall figure of economic growth whereas GV gives a sector-specific view whereas evo gives a sector specific picture so coming to GDP GDP shows an overall growth picture of the economy it does not show sector specific but coming to jva this can bring a sector specific picture which means that GVA can bring for example GVA can bring our data relating to the growth of different sectors which sectors have shown improvement or which sectors have come down what is the growth in agricultural sector or what is the growth in industrial sector or different categories so this will bring sector specific pictures and this sector specific picture is very necessary for making policies by the government why because the vehicle sections need to be given more attention so the policy makers can decide which sectors need simulus or incentives in such a way GBA is very important but when it comes to GDP what is more important here GDP is a key measure in comparing the performance of an economy with other economies that means cross-country analysis so GDP helps in cross-country analysis if you want to compare the indian economy or growth in indian economy with that of other economies this is important JD Pisa key measure for that in the beginning of the discussion we have already said that this is an important current affair because the RBI deputy governor veeral Acharya has recently made an announcement that the Indian economy would be moving back to the GDP calculation so we need to understand why we are going back to GDP so for that we must understand what are the reasons for that and the Pitti governor himself has given certain reasons let us see one by one the first reason he had given was that in order to conform with international practices this means that globally many economies have adopted the GDP model of calculation of income and growth so this is an international practice and we need to comply with it all conform with it that's why we are moving back to the GDP or gross domestic product the second reason he gave us due to the ease of comparison here comparison means comparing our economy with other economies so comparing economies globally global comparison comparing Indian economy with that of other developing countries economies or developed countries economies etc another reason he gave was that global performance of economies our goals in terms of GDP so global performance can be measured another reason he pointed out another reason he pointed out was that multinational multinational institutions international analysts and stills used GDP for their calculations so multinational institutions like the World Bank IMF Exeter so multinational institutions international analysts investors etc use GDP so this is an internationally accepted norm GDP again another reason he pointed out was that CSR all Central Statistical Office also uses GDP to measure economic growth CSO uses GDP to measure economic activity or growth so these were the reasons pointed out by the the beauty governor to shift back to GDP this is an important current affair please have a clear understanding of this topic [Applause]

Author Since: Mar 11, 2019

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  2. Mam I mostly like your sweet and impressive voice and Your way of talking and your knowledgeable vedio also

  3. Dimag ka dahi bna di apne GDP and gva me, GDP me v apne intermediate goods ko hatane ko khi thi… Aur gva me intermediate consumption … Plz explain it in lucid Mannar…

  4. Kindly cover other important current affairs for upsc from economic point of view . you are absolutely perfect teacher

  5. Mam, in india which method of GDP USE BEFORE 2014. And which method after 2014..?? Plese help….?????

  6. Really good…
    When i watch video u r 1st time it was terrible for me, because u speek like bullet Train. but now its easy to learn because of I watched u r other videos..
    Keep it up…

  7. instead of using a lot of words you have used easy examples to explain complicated terms,thank you for that

  8. Nyc explaination mam. I m from hindi medium bt never found this much helping video in hindi language so I watched this video nd now this topic is crystal clear for me. Thnks alot

  9. Awesome lecture. Just a query if someome can resolve- Are taxes like VAT and GST included in GDP?

  10. Nominal GDP Vs GDP per capital k bare me video banaye. Why So Much Difference? Ex: INDIA Nominal GDP USD 1983 ; GDP per capital (PPP) 7174

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