Calculation of GDP: Output Method
GDP = Monetary (market) Value of all goods and services produced during an year
Nominal GDP (or GDP calculated ignoring effects of inflation) leads to incorrect measurement. Hence, an adjustment for inflation is required against the current market value, to arrive at the ‘real’ GDP
For eg:
- Year 1 : 10 units of ‘X’ produced of Rs.10 each, Total value = Rs.100
- Year 2 : 9 units of ‘X’ produced at Rs.12 each, Total value = Rs.108
o Increment in total value of output at market value = (108-100)/100, or 8%
o Increment in total value of output at constant price=((9 units x Rs.10 each)-100)/100, or 10%¯
o Prices rise (from Rs.10 to Rs.12) due to inflation makes it seem as if output has increased by 8%, whereas in reality it decreased by 10%
- Taxes destroy () the cost of production, hence they need to be subtracted from the cost
- Subsidies also distort (¯) the cost of production, hence they need to be added back to the cost
- Value of GDP measured at actual cost without taxes or subsidies is called GDP at factor cost.
- It is important to avoid ‘double counting’ – counting the value of the same good twice. For eg. If value of steel is counted as raw material cost, it should be deducted from value of cars that use steel as an input.
Final GDP = GDP constant prices – Taxes + Subsidies
GDP = Monetary (market) Value of all goods and services produced during an year
Nominal GDP (or GDP calculated ignoring effects of inflation) leads to incorrect measurement. Hence, an adjustment for inflation is required against the current market value, to arrive at the ‘real’ GDP
For eg:
- Year 1 : 10 units of ‘X’ produced of Rs.10 each, Total value = Rs.100
- Year 2 : 9 units of ‘X’ produced at Rs.12 each, Total value = Rs.108
o Increment in total value of output at market value = (108-100)/100, or 8%
o Increment in total value of output at constant price=((9 units x Rs.10 each)-100)/100, or 10%¯
o Prices rise (from Rs.10 to Rs.12) due to inflation makes it seem as if output has increased by 8%, whereas in reality it decreased by 10%
- Taxes destroy () the cost of production, hence they need to be subtracted from the cost
- Subsidies also distort (¯) the cost of production, hence they need to be added back to the cost
- Value of GDP measured at actual cost without taxes or subsidies is called GDP at factor cost.
- It is important to avoid ‘double counting’ – counting the value of the same good twice. For eg. If value of steel is counted as raw material cost, it should be deducted from value of cars that use steel as an input.
Final GDP = GDP constant prices – Taxes + Subsidies
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