GDP Deflator & Recent Changes in GDP Calculation

 GDP Deflator

• In order to compare the GDP figures (and other macroeconomic variables) of different countries or to compare the GDP figures of the same country at different points of time, we cannot rely on GDPs evaluated at current market prices due to impact of inflation
• Hence for comparison we take the help of real GDP.
• Real GDP is calculated in a way such that the goods and services are evaluated at some constant set of prices (or base year prices).
• Since these prices remain fixed, if the Real GDP changes we can be sure that it is the volume of production which is undergoing changes.
• Nominal GDP, on the other hand, is simply the value of GDP at the current prevailing prices

For example, suppose a country only produces bread.

Year	Quantity   of Beard Produced	Cost per   Unit	Nominal   GDP	Real gdp	GDP   Deflator
2011	100	10	1000	1000	-
2015	100	15	1500	1000	1
2019	110	15	1650	1100	1.1

Here Nominal GDP for 2019 calculated at 2019 prices is 1100 but real GDP calculated at 2011 (Base year) price is 1000 hence GDP Deflator is, Ratio of Nominal GDP to Real gdp.

GDP deflator = GDP/gdp

• Notice that the ratio of nominal GDP to real GDP gives us an idea of how the prices have moved from the base year (the year whose prices are being used to calculate the real GDP) to the current year.
• In the calculation of real and nominal GDP of the current year, the volume of production is fixed.
• Therefore, if these measures differ it is only due to change in the price level between the base year and the current year.
• The ratio of nominal to real GDP is a well-known index of prices. This is called GDP Deflator.
• GDP Deflator is indicator of inflation in entire economy.

Recent Changes made in GDP calculations

1. Changing the base year:
• The CSO changed the base year from 2004-2005 to 2011-2012.
• done by recommendation of the National Statistical Commission, which had advised to revise the base year of all economic indices every five years.
2. Replacing factor costs with market prices:
• From now on, the Central Statistical Office will measure gross domestic product (GDP) by the gross value added (GVA) method – a way of calculating GDP at market prices(basic) instead of at factor cost.
• The industry-wise estimates will be presented as gross value added (GVA) at market prices while GDP at market prices will be referred to simply as GDP.
• The new method was recommended by the United Nations System of National Accounts in 2008 and will make India’s GDP growth numbers comparable with that of developed nations
• The concept of GVA is considered to be a better indicator to measure economic activities as it includes not only the cost of production but also product subsidies and taxes.
• The United Nations System of Accounts, 2008 (UNSNA, 2008) differentiates between product taxes and production taxes.
• It defines taxes on products as taxes on goods and services that become payable as a result of the production, sale, transfer, leasing or delivery of those goods or services, or as a result of their use for own consumption or own capital formation.
• Taxes on production consist mainly of taxes on the ownership or use of land, buildings or other assets used in production or on the labour employed, or compensation of employees paid.
3. Widening of the data pool:
• The new GDP incorporates more comprehensive data on corporate activity than the old one.
• Earlier, data from the Annual Survey of Industries (ASI), which comprises over two lakh factories, was used to gauge activity in the manufacturing sector.
• Now, annual accounts of companies filed with the Ministry of Corporate Affairs — MCA21 — has been used. This is said to include around five lakh companies, bringing in more companies from the unlisted and informal sectors

Also, the new 2011-12 series will incorporate results of the

• Recent national sample surveys such as enterprise survey (2010-11),
• Employment-unemployment survey (2011-12),
• All India debt and investment survey,
• Situation assessment survey of farmers and survey on land and livestock holdings (2013).
• Population census (2011),
• Agriculture census (2010-11) and livestock census (2012).

1) Changes in calculation of labour income:

• The old series, due to lack of annual surveys, output in the unorganized, or informal, manufacturing and services sectors is calculated using the Labour Input (LI) method, which uses a benchmark-indicator process and then calculates output as the estimated labour input times the value added per worker, making all kind of labour equal. In the new series, an Effective Labour Input (ELI) method is used. This method distinguishes workers on productivity by assigning weights to different categories of workers (such as owner, hired professional or a helper), changing overall output contributed by these sectors

2) Changes in calculation of agricultural income:

• Value addition in agriculture is now taken beyond farm produce. Livestock data is critical to new method. Value attached to by-products of meat including “heads and legs”, “fat” “skin”, “edible offal and glands” of cattle, buffalo, sheep, goat and pig.

Problems in NI Calculations

• Agriculture sector is subsistence
• Non-availability of data in household enterprises and unorganised sector
• Prevalence of parallel economy (Black economy)
• GDP is not distributed equally among sections of society and economy
• Negative externalities not accounted
• NSSO – Uses Sample survey which is not true reflection
• GSDP data of state is inadequate and inaccurate (poor accounting standards)