Checking a District GDP Draft
A district statistical officer is preparing the gross domestic product estimate for a newly formed industrial district for one year. She lists these transactions: a farmer sells wheat worth ₹200 crore to a flour mill; the mill sells flour worth ₹350 crore to a bakery; the bakery sells bread worth ₹600 crore to households and ₹100 crore to government schools for midday meals. Households also buy imported butter worth ₹50 crore. The government pays old-age pensions of ₹80 crore. A family sells a house built in 2010 for ₹300 crore, paying a broker ₹6 crore. A foreign-owned factory located in the district adds value worth ₹400 crore; its profits repatriated abroad are ₹30 crore. Residents receive remittances of ₹120 crore from relatives abroad. Depreciation of fixed capital is ₹40 crore. The officer's draft sums every transaction to ₹2,246 crore and calls it GDP. She asks you to check the estimate and explain which items belong in GDP, GNP and NNP.
1. Using the value-added method, compute GDP at market prices. Show clearly how you avoid double counting, and state the treatment of the imported butter.
Read the worked answer
Value added = sales − intermediate purchases. Avoid counting the same grain and flour twice.
| Stage | Sales | Intermediate input | Value added |
|---|---|---|---|
| Farmer | 200 | 0 | 200 |
| Flour mill | 350 | 200 | 150 |
| Bakery | 600 + 100 = 700 | 350 | 350 |
| Foreign-owned factory | 400 | 0 | 400 |
| Broker | 6 | 0 | 6 |
| GDP at market prices | 1,106 |
The imported butter is a final consumption item but not domestic production. In the expenditure approach, it enters household consumption and is then subtracted as an import; it does not add to GDP. The foreign factory's value added is included because it is produced within the district's territory, regardless of ownership. The draft's ₹2,246 crore cannot be GDP because it adds intermediate sales, transfers and a second-hand sale.
2. Explain whether the pension, the second-hand house sale, the broker's fee and the remittances should enter GDP, GNP or neither. Justify each.
Read the worked answer
Pension ₹80 crore: a transfer payment; no current production; exclude from GDP and GNP. Second-hand house ₹300 crore: production occurred in 2010, not this year; exclude. Broker's fee ₹6 crore: current service produced this year; include in GDP. Remittances ₹120 crore: current private transfers from abroad, not payment for factor services; exclude from GDP and from GNP. GNP includes net factor income from abroad, not transfers. Repatriated profits ₹30 crore are factor income earned by foreign owners; they are part of the foreign factory's value added in GDP but must be subtracted in moving to GNP. Depreciation is not a transaction in the list but is deducted to get NNP. Thus the officer must distinguish production, transfers, second-hand assets and factor income.
3. Given repatriated profits of ₹30 crore and depreciation of ₹40 crore, compute GNP at market prices and NNP at market prices. Why is the officer's ₹2,246 crore draft wrong?
Read the worked answer
GNP at market prices = GDP + net factor income from abroad. The repatriated profit of ₹30 crore is income accruing to a foreign owner, so NFIA = −₹30 crore. GNP = ₹1,106 − ₹30 = ₹1,076 crore. NNP = GNP − depreciation = ₹1,076 − ₹40 = ₹1,036 crore. The draft's ₹2,246 crore is wrong because it sums every transaction: it counts the farmer's wheat, the mill's flour and the bakery's bread as separate final outputs, double-counting intermediate goods; it includes the pension transfer, the second-hand house sale and remittances; and it ignores the import offset. A correct estimate uses value added or final expenditure, not gross transaction values.