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What are the main components of the Gross domestic product (GDP) from the demand perspective?. In the context of weak private consumption, what could be done to boost the GDP growth?
Gross Domestic Product(GDP) is the sum total of value of goods and services created within the geographical boundary of a country in a specific time period (particular financial year). The term 'boundaries' includes political boundaries, embassies & consulates of India in other countries, military establishments of a county in a another country and Indian vessels/shipping/helicopter, aeroplanes. There are various ways of computing GDP - from demand side(expenditure method), from supply perspective(the production method) and the income method.
From the demand perspective - the expenditure method is used to compute the GDP(expenditure creates demand)
There can be four types of expenditure in an economy that creates demand:
However, in the recent times it is seen that Private consumption (C), Trade surplus(X-M) have been muted due to the pandemic. In this context, following steps are necessary to boost the economy:
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- Final consumption expenditure(Ci) on the goods and services produced by the firm. It is mostly the households that undertake consumption expenditure, but, there may be exceptions when firms buy consumables.
- Final investment expenditure(Ii) incurred by other firms on the capital goods produced by firm i. Final expenditure on investments is included in calculation of GDP(but not intermediate goods). These investment goods remain with the firm, whereas intermediate goods are consumed in the process of production.
- Final Expenditure incurred by govt.(Gi) on the final goods and services produced by firm i. It includes both the consumption and investment expenditure. Consumption can be expenditure to run the everyday expenses of the government such as on salaries etc. Whereas investment, inter alia, includes investment in physical and social infrastructure.
- The Net export revenues(Xi) that firm i earns by selling its goods and services abroad. To derive net exports, imports must be deducted.
However, in the recent times it is seen that Private consumption (C), Trade surplus(X-M) have been muted due to the pandemic. In this context, following steps are necessary to boost the economy:
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- Promoting Private investment(I):
- Allowing FDI in most of the sectors, subject to national security.
- Keeping inflation in check so that interest rates remain low.
- Promoting Private investment(I):
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- government expenditure(G):
- Massive infrastructure boost - both in the form of physical infrastructure and social infrastructure.
- Boosting incentives on production: such as through schemes like PLI and MSP.
- Private consumption(C):
- Lowering indirect taxes: Which would lower the prices of goods which should create demand.
- Direct benefit transfer: The cash in the hands of people through schemes like MGNREGA can boost demand too.
- Net Exports(X-M):
- Through export promotion schemes and
- Production linked incentives(PLI) in sectors like electronics to substitute imports.
- Substitution of oil imports - such as by shifting to alternative fuels like ethanol and electric vehicles.
- government expenditure(G):
POSTED ON 02-02-2022 BY ADMIN
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