Answer to Question #256871 in Macroeconomics for Veenika

Question

In reference to the different methods of estimating national income, which method is suitable for Indian Economy and why?

Answer 1

India's GDP is calculated with two different methods, one based on economic activity (at factor cost), and the second on expenditure (at market prices).

The factor cost figure is calculated by collecting data for the net change in value for each sector during a particular time period. The following eight industry sectors are considered in this cost:

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 broadcasting
7. Financial, real estate and professional services
8. Public administration, defense and other services

The expenditure (at market prices) method involves summing the domestic expenditure on final goods and services across various streams during a particular time period. It includes consideration of expenses towards household consumption, net investments (i.e., capital formation), government costs, and net trade (exports minus imports).

Using these numbers, it is easy to see the current state of the economy and its different subsectors. Investors can make informed business and investment decisions and the government can implement policies accordingly.