GDP -II

It is the money value of final goods and services produced in the domestic territory ( indian embassies in foreign land is also a domestic ter. for india ) of a country in an accounting year.

• End - use classification of Goods and Services

i > Consumer goods (CG) - Durable goods like cars, tv , ac . Similar goods purchased by the govt. for military purposes are a part of final consumption of the govt. Non-durable goods and services like paper, pen, pencils, soaps, oil, etc.

ii > INTERMEDIATE GOODS (IG) - Durable goods mentioned above and other durable goods like trucks , buildings, airfields, aircraft, etc. meant primarily for military purposes by the govt. are intermediate goods. Non - durable goods mentioned above used by the three producing sectors of the economy for producing goods and services are intermediate goods.

iii > Capital goods (KG) - All durable goods like trucks, cars, machines etc used to produce goods and services for sale in the market are a part of capital goods. Stocks of raw materials, semi finished goods lying with the producers at the end of an accounting yr. are also a part of capital goods. Capital goods are defined as all goods produced for use in future productive processes.

These examples will help a lot .....

a> a car purchased by a consumer for house use is a CG ; a car purchased by govt for military pupose is a IG and a car purchased by a taxi driver is a KG.

b> pencil purchased by anarchy to write XAT is a CG and the same used by XLRI to set the paper is an IG.

Note :- Intermediate cons. of the govt. is part of its final cons. Therefore , all the IG are also final consumer goods as far as the govt is concerned.

Now we come back to the three methods.

• VALUE ADDED METHOD

Each producing enterprise sells goods and services in the market and the value of its output is equal to the sum of sales and change in stocks. As far as this enterprise is concerned, sales are treated as final sales or sale of final goods and services.

For example -(the main idea which confused evryone) say a farmer produces two tons of wheat and sells it in the market to a flour mill. As far as the farmer is concerned, the sale of wheat is a final sale, and he gets Rs. 500 (say). Let us suppose that he has not used any fertilizer or hired any labourer. In that case , Rs. 500 is entirely the value of his contribution. But the purchase of wheat by the flour mill is for internediate consumption (it is an IG ) . It converts wheat into flour and sells it at Rs. 700 to a baker. The flour mill treats the flour as final product, but the baker uses it at the intermediate input and manufactures bread. The baker sells the bread to shopkeeper at Rs. 900. For the baker, the bread is a final good, but it is an inter. input for the shop keeper. Now suppose the shop keeper sells it for Rs. 1000 (the bread).

Thus the value of production as far as the farmer, miller, baker and shopkeeper is 500 + 700 + 900 + 1000 = 3100. Every producer treats the commodity he sells as final. He is not wrong in thinking so, as he is not concerned to which use the comm. is going to be put. BUT we know that the value of flour contains the value of hweat, value of bread contains the value of wheat and the value of services by miller. Finally, the value of bread sold by the shop keeper contains the value of wheat , the value of services of the miller and baker. Now the value of wheat is counted 4 times, miller 3 times and baker 2 times. This leads to double counting. And thus leads to the over estimation of the value of goods and services.

To avoid this problem we have to take the value of final goods and services ( recall the definition of GDP !!) And as i have already mentioned that there are three classification of goods, CG, IG, KG. Hence there are three uses for any commodity, final consumption, intermediate consumption and capital formation. From this it is clear that there are only two final uses; final consumption and capital formation Thus we need to calculate the value of goods and services going into these two. The best way to do so is to find the Value Added ( VA ) at each stage of production and then add it.

Thus in our example .....

Farmers VA = 500 ( as assumed that no inter. consumption)

Miller's VA = 700 - 500 = 200

Baker's VA = 900 - 700 = 200

Shop keeper's VA = 1000 - 900 = 100

Hence the total VA = 500 + 200 + 200 + 100 = 1000 --- > which is equal to ??? hmmm the price of the bread !!! ( coincidence ??.... nahi boss ).

Thus we subtract depreciation from the (gross) VA of all the producing enterprises in a sector ( thus making it net VA) and we get the GDP of the economy.

Hence GDP in VA method = Gross VA - depreciation = Net VA

Note :- the funda of gross VA and net VA ..... just remember that while going from anything gross to anything net ... we subtract consumption of fixed capital (i.e depreciation) from gross to get net.