GVA vs GDP

GVA vs GDP

Subject: Economy

Context: Report prepared by the Finance Ministry’s Economic Affairs Department has said that using GVA (Gross Value Added) rather than GDP (Gross Domestic Products) for tracking the economy in a better way.

Concept:

• India opted to make major changes to its compilation of national accounts and bring the whole process into conformity with the United Nations System of National Accounts (SNA) of 2008.
• As per the SNA, gross value added, is defined as the value of output minus the value of intermediate consumption and is a measure of the contribution to GDP made by an individual producer, industry or sector.
• It gives the rupee value of goods and services produced in the economy after deducting the cost of inputs and raw materials used.
• GVA can be described as the main entry on the income side of the nation’s accounting balance sheet, and from an economics perspective represents the supply side.
• It provides the rupee value for the number of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into the production of those goods and services.
• In the new series, in which the base year was shifted to 2011-12 from the earlier 2004-05, GVA at basic prices became the primary measure of output across the economy’s various sectors and when added to net taxes on products amounts to the GDP.
• Earlier, India had been measuring GVA at ‘factor cost’ till the new methodology was adopted in which GVA at ‘basic prices’ became the primary measure of economic output.
• GVA at basic prices will include production taxes and exclude production subsidies
• As part of the data on GVA, the NSO provides both quarterly and annual estimates of output — measured by the gross value added — by economic activity. The sectoral classification provides data on eight broad categories that span the gamut of goods produced and services provided in the economy. These are:

1. Agriculture, Forestry and Fishing
2. Mining and Quarrying
3. Manufacturing
4. Electricity, Gas, Water Supply and other Utility Services
5. Construction
6. Trade, Hotels, Transport, Communication and Services related to Broadcasting
7. Financial, Real Estate and Professional Services
8. Public Administration, Defence and other Services.

GDP

• It is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period.
• GDP includes all private and public consumption, government outlays, investments, additions to private inventories, paid-in construction costs, and the foreign balance of trade. (Exports are added to the value and imports are subtracted).
• Nominal GDP is evaluated at current market prices and real GDP is inflation-adjusted measure that reflects the quantity of goods and services produced by an economy in a given year, with prices held constant from year to year in order to separate out the impact of inflation or deflation from the trend in output over time.
• GDP can be calculated in three ways, using expenditures, production, or incomes.

GDP and GVA relationship

• Gross Value Added = GDP + subsidies on products – taxes on products
• GVA represents supply-side perspective of economy, unlike GDP which is a demand side approach. This makes GVA a good estimate for policymakers.
• GVA as a measure is important for attracting investment as any country which seeks to attract capital and investment from overseas does need to conform to the global best practices.
• GVA is considered better estimate for economy as sharp increase in the output (as measured in GDP) can be due to higher tax collections due to factors like better compliance and hardly reflection of production