Q1. Distinguish GDP at factor cost from GDP at market prices. Calculate the difference

between the two for India from 1980-81 to 2010-11 at current prices as well as constant

prices.

Gross Domestic Product (GDP) is the market value of all the final goods and services

produced within the domestic territory of a country. It is the sum total of the income earned

by all the people in the country including the income locally earned by the non-nationals.

GDP also equals total expenditure on the economy’s output of goods and services. Gross

Domestic Product is often considered the best measure of how well the economy is

performing.

It is measured by three methods:-

1. Income Method

According to income method, GDP is estimated by adding domestic incomes earned by all

the factors of production for their factor-services during a year.

2. Expenditure Method

According to income method, GDP is the sum total of all the final expenditures on various

goods and services, within the domestic territory of a country, during a year. In the estimation

of final expenditure, we include households’ expenditure, firms’ expenditure and

government’s expenditure. The main components of final expenditure are Private Final

Expenditure(C), Final Investment Expenditure (I), Government Expenditure on Final Goods

and Services (G) and Net Exports(X-M).

3. Value Added Method

This method measures the value of goods and services produced. This enables us to

understand the performance of an economy in terms of the targets set before.

Market Price is the price paid by the buyer of a commodity in the market. On the other hand,

Factor Cost is the cost paid by the producer to the factors of production for their contribution

in the production of the commodity. The difference between Market Price and Factor Cost

arises due to indirect taxes and subsidies. To find out Factor Cost, Indirect taxes are

subtracted from Market Price and Subsidies are added.

Thus, Factor Cost = Market Prices – Indirect Taxes + Subsidies

GDP at Market Prices (GDPMP) measures the value of goods and services at their market

prices. In order to calculate the market value of a commodity the quantity of a commodity is

multiplied by its price. Market Value = Quantity * Price

Thus, the sum total of value of various goods and services is GDPMP.

GDP at Factor Cost (GDPFC) is the sum total of gross earnings of the people within the

domestic territory of a country during a year. In India GDP is measured at Factor Cost not at

Market Price.

Nominal GDP (Current Prices)

Year GDP at Factor

cost

GDP at Market

Price

NIT

1980-81 132520 145370 12850

1981-82 155158 170805 15647

1982-83 173337 191059 17722

1983-84 202750 222485 19735

1984-85 227694 249268 21574

1985-86 254427 281330 26903

1986-87 283681 314816 31135

1987-88 321589 357861 36272

1988-89 383790 424531 40741

1989-90 442134 487684 45550

1990-91 515023 569624 54601

1991-92 594168 654729 60561

1992-93 681517 752591 71074

1993-94 792150 865805 73655

1994-95 925239 1015764 90525

1995-96 1083289 1191813 108524

1996-97 1260710 1378617 117907

1997-98 1401934 1527158 125224

1998-99 1616082 1751199 135117

1999-2000 1786526 1952036 165510

2000-01 1925017 2102314 177297

2001-02 2097726 2278952 181226

2002-03 2261415 2454561 193146

2003-04 2538170 2754620 216450

2004-05 2971464 3242209 270745

2005-06 3389621 3692485 302864

2006-07 3952241 4293672 341431

2007-08 4581422 4986426 405004

2008-09 5282086 5582623 300537

2009-10 6133230 6550271 417041

2010-11 7306990 7875627 568637

Nominal GDP (Current Prices)

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

9000000

GDP FC

GDP MP

NIT

Real GDP (Constant Prices)

Year GDP at Factor

Cost

GDP at market

Price

NIT

1980-81 641921 695361 53440

1981-82 678033 737078 59045

1982-83 697861 762622 64761

1983-84 752669 818288 65619

1984-85 782484 849573 67089

1985-86 815049 894041 78992

1986-87 850217 936671 86454

1987-88 880267 973739 93472

1988-89 969702 1067582 97880

1989-90 1029178 1131111 101933

1990-91 1083572 1193650 110078

1991-92 1099072 1206346 107274

1992-93 1158025 1272457 114432

1993-94 1223816 1333123 109307

1994-95 1302076 1421821 119745

1995-96 1396974 1529453 132479

1996-97 1508378 1645037 136659

1997-98 1573263 1711735 138472

1998-99 1678410 1817752 139342

1999-2000 1786525 1952035 165510

2000-01 1864301 2030711 166410

2001-02 1972606 2136651 164045

2002-03 2048286 2217133 168847

2003-04 2222758 2402727 179969

2004-05 2971464 3242209 270745

2005-06 3254216 3544348 290132

2006-07 3566011 3872974 306963

2007-08 3898958 4253184 354226

2008-09 4162509 4462967 300458

2009-10 4493743 4869317 375574

2010-11 4877842 5298129 420287

Real GDP (Constant Prices)

0

1000000

2000000

3000000

4000000

5000000

6000000

GDP FC

GDP MP

NIT

Q2. What is the difference between gross domestic product (GDP) and gross national

product (GNP)? Which is higher for India and why? Calculate the difference from 1980-81 to

2010-11. Do it for both current and constant prices.

Gross Domestic Product (GDP), we include only the goods and services produced within the

domestic territory of a country. It includes the incomes locally earned by the non-nationals

and excludes the incomes received by the resident nationals from abroad.

Gross National Product (GNP) is the value of goods and services produced by all the normal

residents of a country during a year.

GNP is Gross Domestic Product plus net factor income from abroad.

OR

GNP is the money value of all final goods and services produced in the domestic territory of

a country during a year plus net factor income from abroad (NFIA).

GNP = GDP + NFIA

Net Factor Income from Abroad (NFIA) - It is the income earned from abroad for rendering

factor services by the normal residents of the country to the rest of the world and the income

paid for the factor services rendered by non – residents (foreign residents) in the domestic

territory of a country. NFIA has the following three components:

1. Net compensation of employees from abroad.

2. Net property and entrepreneurial income (rent, interest, profits and dividends) from

abroad.

3. Net retained earnings of resident companies working in foreign countries.

NFIA = Factor income earned by the domestic factors of production employed in the rest of

the world minus Factor income earned by the factors of production of the rest of the world

employed in the domestic economic.

It means, that wages earned by Indians (working as doctors, engineers, technicians, masons,

nurses etc.) in foreign countries is added to GDP of India whereas the wages paid to the

foreigners who are working in India will be subtracted. Similarly, if Indian individuals and

companies earn rent, interest and profits from their assets, investments and factories in

foreign countries, it is added to India’s GDP, whereas the rent, interest and profit earned by

foreign individuals and companies in India will be subtracted.

Consider an example:-

Suppose an Indian engineer is working in England and earning wages. It will form part of

England’s GDP because this income is generated in the domestic territory of England. But

the wages earned by Indian engineer in England will be added to India’s GDP in order to

estimate India’s GNP. Thus, the wages earned by Indian engineer in England will form part

of India’s GDP because it is income earned from abroad.

For India, GDP is higher than GNP. It is because the Net Factor Income Paid by our country

to rest of the world is more than the Net Factor Income received by us. So, our NFIA comes

out to be negative which is added to GDP to arrive at GNP.

In India the difference between GDP and GNP has increased considerably after 1991 as India

underwent economic reforms. Gates for Foreign Direct Investment were opened and lots of

foreign firms started investing in our country. Even today lots of MNCs do business in India.

The profits earned by them are added to our GDP but when it comes to calculating GNP,

these profits are deducted from GDP as Net Factor Income to Abroad. On the other hand,

Indian Nationals living Abroad do earn some income which is added to our GDP but this

income is not enough to offset the payments made to the rest of the world.

Hence, India’s GDP is higher than GNP.

At Current Prices:

Year GNP(Factor

Cost)

GDP(Factor

Cost)

NFIA

1980-81 132865 132520 345

1981-82 155198 155158 40

1982-83 172703 173337 -634

1983-84 201806 202750 -944

1984-85 226270 227694 -1424

1985-86 252998 254427 -1429

1986-87 281876 283681 -1805

1987-88 318970 321589 -2619

1988-89 379294 383790 -4496

1989-90 436403 442134 -5731

1990-91 507487 515023 -7536

1991-92 584091 594168 -10077

1992-93 669872 681517 -11645

1993-94 780070 792150 -12080

1994-95 912156 925239 -13083

1995-96 1069805 1083289 -13484

1996-97 1247628 1260710 -13082

1997-98 1388729 1401934 -13205

1998-99 1601114 1616082 -14968

1999-00 1771095 1786526 -15431

2000-01 1902284 1925017 -22733

2001-02 2077658 2097726 -20068

2003-04 2517462 2538170 -20708

2004-05 2949089 2971464 -22375

2005-06 3363505 3389621 -26116

2006-07 3919007 3952241 -33234

2007-08 4560910 4581422 -20512

2008-09 5249163 5282086 -32923

2009-10 6095230 6133230 -38000

2010-11 7241026 7306990 -65964

At Current Prices:

-1000000

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

GNP FC

GDP FC

NFIA

At Constant Prices

Year GNP(Factor

Cost)

GDP(Factor

Cost)

NFIA

1980-81 641919 641921 -2

1981-82 676994 678033 -1039

1982-83 694277 697861 -3584

1983-84 748695 752669 -3974

1984-85 776951 782484 -5533

1985-86 809521 815049 -5528

1986-87 844053 850217 -6164

1987-88 871991 880267 -8276

1988-89 957879 969702 -11823

1989-90 1016494 1029178 -12684

1990-91 1067694 1083572 -15878

1991-92 1082459 1099072 -16613

1992-93 1141240 1158025 -16785

1993-94 1208545 1223816 -15271

1994-95 1286594 1302076 -15482

1995-96 1380321 1396974 -16653

1996-97 1492406 1508378 -15972

1997-98 1560236 1573263 -13027

1998-99 1664570 1678410 -13840

1999-00 1771094 1786525 -15431

2000-01 1841873 1864301 -22428

2001-02 1952467 1972606 -20139

2003-04 2203258 2222758 -19500

2004-05 2949089 2971464 -22375

2005-06 3229296 3254216 -24920

2006-07 3536496 3566011 -29515

2007-08 3881779 3898958 -17179

2008-09 4137125 4162509 -25384

2009-10 4464854 4493743 -28889

2010-11 4834759 4877842 -43083

At Constant Prices

-1000000

0

1000000

2000000

3000000

4000000

5000000

6000000

19

80

-81

19

81

-82

19

82

-83

19

83

-84

19

84

-85

19

85

-86

19

86

-87

19

87

-88

19

88

-89

19

89

-90

19

90

-91

19

91

-92

19

92

-93

19

93

-94

19

94

-95

19

95

-96

19

96

-97

19

97

-98

19

98

-99

19

99

-00

20

00

-01

20

01

-02

20

03

-04

20

04

-05

20

05

-06

20

06

-07

20

07

-08

20

08

-09

20

09

-10

20

10

-11

GNP FC GDP FC NFIA