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We have already heard the term GDP a hundred times in the newspaper and TV media. We might have heard the GDP growth rate has been dropped drastically in FY2021 first quarter. Or we might have heard about the measures taken by the finance ministry in order to increase the GDP growth rate of the country amidst the lock down. Anyways we have definitely heard about the term GDP many times. GDP is often considered as the developmental index of a country before another nation. When we look into the better comparison between the GDP PPP V GDP Nominal, we may encounter some serious economic questions. It’s not so easy to seek the answer to the question which is better in GDP PPP V GDP Nominal even though the question seems to be simple and objective. Through this blog let us look into the concept of what is GDP and the main difference and comparison between GDP PPP V GDP Nominal.
Concept of GDP
The concept of GDP involves national income accounting. It is one of the measures adopted by the central statistical office (CSO) when calculating the national income of India. GDP is the abbreviated form of the Gross Domestic Product in India. GDP can be simply said as the total value of the final goods and services produced inside a country. Here inside a country means the inside the territory of a country. In the case of India GDP is the value of final goods and services produced inside the territory of India. So, the GDP calculation in India will include 150 nautical miles from the sea shore of India comprising the special economic zones (SEZ) inside it since it is also considered as the Indian territory. The goods and services that are created abroad by Indian diaspora will not be taken for the GDP calculation. If it is also taken, the measure of GDP will change to GNP (Gross National Product) which can be later explained through another blog.
Even though it simply says that GDP is the product of the final goods and services produced inside a country it is not as easy as it seems. The monetary value of the goods is taken. All the goods and services are converted into its monetary value for calculating the GDP. Understanding this concept will lay down the basics of GDP PPP V GDP Nominal. There are mainly adopted three methods of calculating the monetary value of all the goods and services produced inside the country and they are:
- By Product or Value-added method
- By Income Method
- By Expenditure method
How these methods are used and calculations are made may involve some complex economic transactions and identities. Let us keep it aside for a while. So, in short, we can understand the GDP will be obtained as the total monetary value of all the goods and services produced inside the country.
GDP PPP V GDP Nominal – Understanding GDP Nominal
When we go to understand the GDP nominal for considering the GDP PPP V GDP Nominal, we need to understand what is the mode of price used for calculating the monetary value of the final goods and services. The prices can be said as three categories. The Factory price, the Base price and the Market Price. The factory price involves the cost of the production. Factory prices + tax for production indicate the base price. The base price + tax for products includes Market price (the things have got a slight interpretation change due to the recent GST regime). Anyways the market price is the price of the goods and services in the market. GDP is mainly calculated in market prices.
The question here is the market price is fluctuating across the time (inflation and deflation). The market price of the bread was 50 rupees last year and the bread for this year is 70 rupees. 100 breads have been made last year and 95 breads have been made this year. When we calculate the monetary value of all the products the value will be big but production has not increased up to the last year. The GDP calculated in terms of the current market prices is called Nominal GDP. The nominal GDP will make us understand the monetary value but we cannot actually interpret the production increase. So, for understanding the GDP figures in terms of production we set a constant price and calculate GDP that is Real GDP. The ratio of the Nominal GDP to the real GDP will tell us how far the price of the products has been changed.
GDP PPP V GDP Nominal – Understanding GDP PPP
So, we can get the GDP as GDP Nominal (current market prices) or Real GDP (Constant prices). These figures will help you to understand the GDP and its implication inside our country at a different point of time for analysing how the production is changing, how the prices are changing etc. But will that all be enough to compare the GDP of two different countries? When we take the matter of India v America the price of bread in India may be 50 rupees whereas the price of bread in America may be 8 dollars. So, to understand and compare the GDP of different countries we need a common platform.
- By Market exchange rate method
- By Purchasing Power Parity
Exchange Rate Method
The GDP of every country is taken in dollars. So that they can be compared easily. If India’s GDP is 145 million rupees it will be converted into dollars as per the current market exchange rate of India. For example if 1$= 75 rupees the total GDP of India will be converted into dollars as per the exchange rate for the time being. This is GDP by exchange rate.
By Purchasing Power Parity
Is GDP by exchange rate a very good method for analysis? Absolutely no in some situations. For example, when we convert the GDP of India into higher figures of rupees say 100 million rupees into dollars it might be reduced to some dollars for example 45 million dollars. At the same time America’s GDP will show 165 million dollars since no conversion is needed there. Does it mean India stands very far behind America? No! because we can live luxuriously in a day using 10-20 dollars but in America it is for hard living only. We will get a standard meal using 1 dollar in India whereas we won’t get anything using 1 dollars in America. Here comes the idea of Purchasing power parity. So, the purchasing power in India is very high and the cost of living is low. So, the PPP exchange rate for equalising the purchasing power of different countries is considered for calculating the GDP PPP method.
I’m heading to the conclusion without saying the verdict of who is better between GDP PPP V GDP Nominal. After reading you may feel free to decide for yourself. Well, I could say it is not so easy to say an objective answer for GDP PPP V GDP Nominal. Both of them have applicability in different situations and calculations. Otherwise one of the calculations might have disappeared from our discussion. You can frame your answer subjectively and descriptively. Understand the above discussed concepts of GDP for any competitive examination. Enroll Entri for more updates. Keep Studying, Keep Winning!