All you wanted to know about: Calculating GDP
Suddenly the Indian economy is looking much better than it did two weeks ago, thanks to a little sleight of hand. The Government’s statistics wing made two changes to the GDP calculation last week which have had the happy effect of lifting growth to 6.9 per cent for 2013-14 instead of 4.7 per cent as estimated earlier.
What is it?
There have been two changes to the GDP calculations. One was a change in the base year for the calculation which is done routinely every five years or so. The other was to adopt a new method to measure output. But why make any changes?
Starting now, Indian GDP will be measured by using gross value added (GVA) at market price, rather than factor cost. If you are not an economist, the previous sentence may have sounded like it’s in Swahili. Simply put, GDP is the total value of goods and services produced within the country during a year. You take all final finished goods and services produced domestically in volume terms and multiply this by their market prices to arrive at the value of output. Intermediate goods need to be excluded to avoid double-counting.
In India GDP did not include what that the Government received . Now, what the it earns by way of indirect taxes such as sales tax and excise duty after deducting subsidy is also added into the GDP.
Why is it important?
You can question the timing, but the change in method of calculation has brought Indian GDP calculations more in line with global practise. For example, IMF’s world economic outlook projections, which all of us used even recently to make India-China comparisons, are not based on factor costs. This used to create confusion in the past, with IMF’s projections turning out to be very different from the Government’s.
As for the base year change, it is the only way to ensure that the products and services included in the GDP calculation do remain contemporary and reflect the present state of the economy.
For instance, the latest change in base year from 2004-05 to 2011-12 has included the recycling industry which didn’t figure in the earlier GDP computations.
Similarly trading activities by manufacturing firms are now included in that sector’s share. This change along with better data compilation (online data filed with the Ministry of Corporate Affairs) has led to manufacturing increasing its share in GDP.
Why should I care?
Global investors use growth prospect numbers to allocate their investment allocations between countries - GDP is a key metric here. So news that India’s GDP growth has averaged 6 per cent for the last three years and not 4.6 per cent as thought earlier, may help investors view India in a more favourable light.
Let’s not forget that important indicators such as the fiscal deficit are measured as a ratio of GDP too. Economists say that the latest revisions will help the Government meet this year’s fiscal deficit target. A more comfortable deficit number could help the Government stop tightening its belt and consider budget sops.
With indirect taxes added and subsidies deducted under the new GDP calculations, there is more incentive for the Government to raise indirect taxes and reduce subsidies. This may have an impact on sectors such as agriculture which receive a lot of subsidy.
The bottom line
It’s not always the economy, stupid. It’s sometimes the calculation.
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(This article was published on February 2, 2015)
All you wanted to know about: Calculating GDP | Business Line
After India, China announces new way of calculating GDP
September 9, 2015, 6:04 am
China today accounts for 10 per cent of world imports, 11.5 per cent of global GDP and 38 per cent of Asia Pacific GDP [Xinhua]
China on Wednesday announced its quarterly gross domestic product will be calculated using a new methodology, in line with that of major developed countries. Earlier this year, neighbouring India also revised the method for calculating GDP that has confused economists.
China will announce third-quarter GDP data, due out on October 19, based on the new methodology.
The move should give investors and policy makers a more accurate picture of the economy as Beijing tries to pivot from investment-led growth in industry and infrastructure toward services and consumption.
China’ National Bureau of Statistics on Wednesday said China is calculating GDP based on economic activity of each quarter to make the data “more accurate in measuring the seasonal economic activity and more sensitive in capturing information on short-term fluctuations”.
Previously, China’s quarterly GDP data, in terms of value and growth rates, was derived from cumulated figures rather than economic activity of that particular quarter, the NBS said.
China and India are not the only countries trying to get a boost out of revamping the methodology. Nigeria last year was declared the biggest African economy after it bumped up its 2013 GDP estimate by a whopping 89 per cent
China’s GDP expanded 7 per cent in April-June from a year earlier.
Questions were also raised this year about India’s new method of calculating GDP. India’s revisions this year made it the world’s fastest growing major economy as China slows.
China today accounts for 10 per cent of world imports, 11.5 per cent of global GDP and 38 per cent of Asia Pacific GDP.
After India, China announces new way of calculating GDP | The BRICS Post
