Macroeconomics
Session 4
Dr. Jithin P
IIM Raipur
Is GDP a perfect measure of
standard of living?
GDP is the best single measure of the economic well-being of a
society.
◦ GDP per person tells us the mean income and expenditure of
the people in the economy.
◦ Higher GDP per person indicates a higher standard of living.
GDP is not a perfect measure of the happiness or quality of life,
however.
• However, alternative measure such as Human Development Index
(HDI) has been suggested as a measure of standard of living.
• According to this measure, the standard of living depends on
whether people have resources (or capabilities) to participate in
society and fulfil their potential.
Human Development Index
• The HDI focuses on three capacities such as education,
health, and income.
• A sub index between 0 and 1 (1 being the highest score
possible) is recorded for each of these three components,
and then an average score is taken as the HDI for that
country.
• The aim of the HDI is to provide a broader view of
welfare than just income.
• In accordance with the Human Development Report
2021-22, the rank of India is 132nd, among 191 countries.
Human
Development
Index (HDI)
In addition to GDP, other measures of
output include:
Gross National Product/Income
Other
Net Domestic Product/Income
Measures
of Income Gross Value Added at Basic Prices
Net national product (NNP)
Gross national product (GNP)
• Gross national product (GNP) is the total income earned by a nation’s
permanent residents (called nationals).
• Profits earned by Indian firms overseas that they remit (example: send back to
India) all the wages and salaries earned by Indians overseas that are remitted
any other overseas investment income earned by Indian firms/households that
are also remitted are included to GDP.
• Profits made in India by non Indian firms that are repatriated; the wages and
salaries earned by non Indians based in India that they remit; any investment
income earned by foreign investors in India that are remitted abroad are to be
excluded from the GDP.
• Hence, GNP = GDP + Net factor income from abroad.
Net domestic product
• It is the market value of all final goods and services keeping stock of capital intact.
• Two factors cause the capital stock to change over time. The first is that firms invest in
new machinery and structures, so that the capital stock is increasing. But another factor,
“depreciation,” reduces the capital stock. Whenever they are used, machines are subject
to wear and tear and breakdown.
• GDP includes the gross investment, i.e., is the amount of new capital being added to an
economy.
• Net Domestic Product (NDP) equals GDP less depreciation.
• NDP=GDP-Depreciation
Gross Value Added at Basic Price
• What is the Gross Value Added at Basic Price?
• Gross Value Added at Basic Price is another important measure of income It can be
derived from the GDP at MP
• Market price= factor cost+ indirect taxes-subsidy
• Gross Domestic Product at MP- Product taxes+ Product Subsidies (ie less net taxes on
products)= Gross Value Added(GVA) at Basic price
• (Product taxes include indirect taxes such as Goods and Services Tax(GST), import duties
etc. Product subsidies are subsidies on food, petroleum, fertilizer, etc ).
• NNP(Net national Product)@ Market Prices = GNP – Depreciation
Some Important Identities
Some Important Identities
Saving, Investment, Government Budget and
Trade
Saving, Investment, Government Budget and
Trade
• Understanding the uses of private saving is useful for understanding some
macroeconomic issues.
• Any sector that spends more than it receives in income has to borrow to pay for the
excess spending.
• It states that an economy’s private saving is used in three ways:
• (i) Investment (i.e., firms borrow from private savers to finance the construction and
purchase of new capital),
• (ii) Finance govt deficit (i.e., when the government runs a deficit, it must borrow from
the private savers to cover its deficit).
• (iii) Finance trade deficit (i.e., when foreigners receipts are not sufficient to cover the
payments, they must borrow from us to finance their trade balance)
Saving, Investment,
Government Budget
and Trade
• It shows that an increase in govt deficit
leads to
• either (i) an increase in private saving,
• or (ii) a fall in investment,
• or (iii) a fall in net exports (i.e., increase
in trade deficit).
