CHAPTER 8 GROSS DOMESTC PRODUCT(GDP)-AN OVERVIEW 8.1 Domestic product is an indicator of overall generated through the production activity is production activity. GDP is a measure of distributed between the two factors of production. The level of production is production, namely, labour and capital, important because it largely determines how which receive respectively the salaries and much a country can afford to consume and it the operating surplus/mixed income of self also affects the level of employment. The employed. Thus the income approach GDP consumption of goods and services, both is the sum of compensation of employees, individually and collectively, is one of the gross operating surplus and gross mixed most important factors influencing the income plus taxes net of subsidies on welfare of a community. The concept of production. In the National Accounts GDP in the 1993 SNA framework has been Statistics of India, the production approach briefly discussed in the following paragraphs. GDP is considered firmer estimate; and the NAS presents the discrepancy with the expenditure approach GDP explicitly. 8.2 It should be noted, however, that GDP is not intended to measure the production taking Production approach GDP place within the geographical boundary of 8.3 GDP is a concept of value added. It is the the economic territory. Some of the sum of gross value added of all resident production of a resident producer may take producer units (institutional sectors, or place abroad, while some of the production industries) plus that part (possibly the total) taking place within the geographical of taxes, less subsidies, on products which is boundary of the economy may be carried out not included in the valuation of output. by non-resident producer units. For Gross value added is the difference between example, a resident producer may have output and intermediate consumption. teams of employees working abroad temporarily on the installation, repair or 8.4 The underlying rationale behind the concept servicing of equipment. This output is an of GDP for the economy as a whole is that it export of a resident producer and the should measure the total gross values added productive activity does not contribute to the produced by all institutional units resident in GDP of the country in which it takes the economy. However, while the concept of places. Thus, the distinction between GDP is based on this principle, GDP as resident and non-resident institutional units defined in the System may include not only is crucial to the definition and coverage of the sum of the gross values added of all GDP. In practice, of course, most of the resident producers but also various taxes on productive activity of resident producers products, depending upon the precise ways takes place within the country in which they in which outputs, inputs and imports are are resident. However, producers in service valued. industries which typically have to deliver their outputs directly to their clients 8.5 Output: Output is a concept that applies to a wherever they are located are increasingly producer unit- an establishment or tending to engage in production in more enterprise–rather than a process of than one country, a practice which is production. Output has to be defined in the encouraged by rapid transportation and context of a production account (refer to instantaneous communication facilities. Table 1, Appendix 5.1), and production There are three equivalent approaches to accounts are compiled for establishments or measure the GDP, namely the production, enterprises, and not for processes of income, and expenditure. The production production. Output therefore consists only of approach GDP measures the sum of value those goods and services; that are produced added of all economic activities within the within an establishment that becomes country’s territory (sum of output minus available for use outside that establishment. intermediate consumption) plus indirect When an enterprise contains more than one taxes minus subsidies on products. The establishment, the output of the enterprise expenditure approach GDP depicts the final is the sum of the outputs of its component use (demand) of the output and comprises establishments. (i) Government Final Consumption Expenditure (GFCE) (ii) Private Final 8.6 The output of most goods or services in Consumption Expenditure (PFCE) (iii) Gross majority of the cases is recorded when their Fixed Capital Formation (GFCF), (iv) Change production is completed. However, when it in Stocks (CIS), and (v) Net Export of Goods takes a long time to produce a unit of & Services. The income (value added) output, it becomes necessary to recognize National Accounts Statistics-Sources & Methods, 2007 Î 83 CHAPTER 8 that output is being produced continuously amounts the producers are willing to supply and to record it as "work-in-progress". For and on the amounts purchasers wish to example, the production of certain buy. Apart from certain service industries agricultural goods or large durable goods for which special conventions are adopted, such as ships or buildings may take months the value of the market output of a producer or years to complete. In such cases, it is given by the sum of the values of the would distort economic reality to treat the following items for the period in question: output as if it were all produced at the (a) The total value of goods and services moment of time when the process of sold (at economically significant prices); production happens to terminate. In any (b) The total value of goods or services case, whenever a process of production, bartered; however long or short, extends over two or (c) The total value of goods or services used more accounting periods, it is necessary to for payments in kind, including calculate the work-in-progress completed compensation in kind; within each of the periods in order to be able (d) The total value of goods or services to measure how much output is produced in supplied by one establishment to each period. another belonging to the same market enterprise to be used as intermediate 8.7 Goods or services produced as outputs may inputs; be used in several different ways. Apart from (e) The total value of changes in inventories certain service producers, such as financial of finished goods and work-in-progress intermediaries and wholesale and retail intended for one or other of the above traders whose outputs have special uses. characteristics, goods or services produced as outputs must be disposed of by their 8.10 Output produced for own final use (P.12): owners in one or more of the following ways Such output consists of goods or services during the period in which they are that are retained for their own final use by produced. Output may: the owners of the enterprises in which they • be sold: only goods or services sold at are produced. As corporations have no final economically significant prices are included consumption, output for own final here; consumption is produced only by • be bartered in exchange for other goods, unincorporated enterprises: for example, services or assets, provided to their agricultural goods produced and consumed employees as compensation in kind, or by members of the same household. The used for other payments in kind; output of domestic and personal services • enter the producer's inventories prior to produced for own consumption within their eventual sale, barter or other use: households is not included, although housing incomplete outputs enter the producer's services produced for own consumption by inventories in the form of additions to owner-occupiers and services produced on work-in-progress; own account by employing paid domestic • be supplied to another establishment staff are included under this heading. belonging to the same enterprise for use, as intermediate inputs into the later's 8.11 Goods or services used for own gross fixed production; capital formation can be produced by any • be retained by their owners for own final kind of enterprise, whether corporate or consumption or own gross fixed capital unincorporated. They include, for example, formation; the special machine tools produced for their • be supplied free, or sold at prices that are own use by engineering enterprises, or not economically significant, to other dwellings, or extensions to dwellings, institutional units, either individually or produced by households. A wide range of collectively. construction activities may be undertaken for the purpose of own gross fixed capital 8.8 A fundamental distinction is drawn between formation in rural areas, including communal market output, output produced for own construction activities undertaken by groups final use and other non-market output. of households. 8.9 Market output (P.11): Market output is 8.12 The value of output produced for own final output that is sold at prices that are use is given by the sum of the values of the economically significant or otherwise following items for the period in question: disposed of on the market, or intended for sale or disposal on the market. Prices are (a) The total value of goods and services said to be economically significant when produced by household enterprises and they have a significant influence on the consumed by the same households; National Accounts Statistics-Sources & Methods, 2007 Î 84 CHAPTER 8 (b) The total value of the fixed assets free, but they are not intended to eliminate produced by an establishment that are such excess demand. Once a decision has retained within the same enterprise for been taken on administrative, social or use in future production (own-account political grounds about the total amount of a gross fixed capital formation); particular non-market good or service to be (c) The total value of changes in inventories supplied, its price is deliberately fixed well of finished goods and work-in-progress below the equilibrium price that would clear intended for one or other of the above the market.