Monday, 25 April 2011

  Who is the regulator of capital market in India?
Q. : Who is the regulator of capital market in india?
  1. RBI (it issues Govt-securities)
  2. SEBI (it securities exchange market)
  3. MoF (it decides how much G-sec to be issued)  or
  4. all three of them
  5. Ans:
  • Capital market = Primary market + Secondary market
  • SEBI controls both primary and secondary market. Means SEBI controls the entire capital market.
  • RBI is 'controller' only for Banking and not for securities.
  • MoF (Ministry of Finance) decides how much Government security is to be issued, but it for filling the Government's money requirement. It doesn't regulate the capital market, it merely participates in it to get money.

Contradiction in GDP (Expenditure) formula?
in the start of definition of gdp.....u r nt counting income of
anil kapoor or garry kirsten.....but in the topic....expenditure
method of calculating gdp....u have used this
nt contradictory.....kindly plz....xplain?

Anil kapoor-Garry Kirsten example was for GNP. [GNP= domestic product+income from abroad]

For GDP (expenditure), we've to calculate
consumption (C), Government's expenditure (G), investment(I) and eXport (X).
But what if government imports 5000 special mobile devices to print biometric UID smartcards? That is also counted in Government's expenditure accounts (G).
So, we've to deduct all the iMports (M) to prevent them from being counted into nation's GDP.
That's why

GDP (Expenditure)= C+I+G+(X-M)
Now, GNP (national product)= Domestic product + Income from abroad.
But since foreigners will be sending remittances to their families back home. So if every nation adds(+) foreigner's income (who is residing in their country) into their GNP, then it'll lead to double counting. So we've to deduct(-) the remittances. 
GNP= GDP + Income from abroad - income earned by foreigners.

Saturday, 23 April 2011

[Economy] 3 Methods of calculating GDP
Got this question from mail,
what are these income,production and expenditure methods in calulating GDP?how do terms like NNP, NDP, GNP,GDP,NNPFC,NNPMP DIFFER FROM EACH OTHER. what is difference between gdp at constant prices and current prices. its very confusing

I'll deal with each question in one post.
Earlier I had wrote an article on GDP, GNP,NNP, 
anyways lets refresh the concepts again.

GDP (Gross Domestic Product) means,

Money value of everything you produce within your country.
(Domestic=within country).
Everything means products and services.

GNP (Gross National Product) means,

The Money value of everything you produce within your country PLUS your income from abroad. Anil Kapoor goes to America, get 5 million dollar$ to play baddie in Mission Impossible 4, but sends that money to India = counted in India's GNP.
But with same logic, Cricket Coach Gary Kirsten gets 50 lakh rupees from BCCI, and sends it to his family in S.Africa, you've to deduct it from India's GNP. (South Africans will count it in their GNP)
Similarly, Americans will subtract the dollar value of Anil Kapoor's remittance to India while counting their GNP.
So, what'll be the (stupid) formula?
Gross National production=Money value of everything produced within India+Incoming money from outside-Outgoing money to abroad.
Or you can simply say
GNP = GDP + incoming money from abroad - Outgoing money to abroad.

How GDP calculated and what is are these income, production and expenditure methods.

GDP is calculated by three methods.

Theoretically all three of them should give same final number, but in reality there will be slight difference between each of them.


Here you count the money spent by everyone.

So How to make a 'technical' formula? Ask yourself, where is the money changing hands? There are five components of that.
Image Hosted by


like you and me buying (overpriced) daal, vegetables and milk (courtesy: Sharad Pawar).
I buy your second-hand bike for 15,000 Rupees, should we including it in the consumer Expenditure (C) ? Nope. Because the bike Is not 'produced again.
Second hand products are not counted

When you had bought that bike for Rs.30000, 10 years ago, we had counted that money in that year's GDP. So second hand-product sale money cannot be counted in this year's GDP.
Now, I buy your second-hand bike from an auto dealer, (who gets Rs.1000 Commission) should we include it in the (C)? Hell Yes, because he sold his 'service' to me uniquely. Every time he sells a second hand product, although no new 'product' is created but new service is delivered by him.
Each service or product has separate value even if same currency note is used to purchase it

I gave a note of Rs.1000 to that dealer as part of his brokerage (dalaali) and he gives the same Rs.1000 note to the electricity company for his monthly bill.
Same Rs.1000 note is changing hands so is our GDP =Rs.1000? Nope. GDP is the money value of everything produced within India. So brokerage service is Rs.1000 separately and the electricity produced is also worth Rs.1000 separately. Therefore, Even as same 1000 rupee note is given to both parties.
Total GDP=1000 brokeage+1000 electricity bill=Rs.2000
If gives that 1000 rupee note to its peon as salary, then again it has to be counted. Because peon sold his unique service separately to the company. So in that case
Total GDP =Brokerge+Electric bill+peon^' salary=Rs.3000

#2: Investment [I]

People investing in sharemarket, putting money in banks etc.

#3: Government spending [G]

Like buying (overpriced) sports equipment from Kalmaadi's associates during Common wealth games. Government  paying salary to staff, buying new tanks and missiles..everything.

#4, 5 :Export & Import [X & M]

Money we get from export is added.
You remember that GDP means Money value of everything we produce within India. So if we import something, it has to be subtracted, because it is not produced within India.
So formula (for ease In remembering)
GDP = Consumer+Investor+Governer + (eXporter - iMporter)
Technically correct formula:

#B: Income Method of counting gdp

Here you count everyone's income. But some people may be running business in credit (udhaari), sometimes payments are delayed. So may not give the 'full picture' for the given year.

#C: Production method of counting gdp

Total money value of everything produced (value added at each stage)
  1.     Farmer produced Wheat and sold 100 kg of it @ 2000 Rs. (Original value)
  2.     Flour mill, purchased it, grinded it and sold the flour to baker @ 2500 Rs. (+500 value added to previous purchase)
  3.     Baker made breads, cookies and biscuits and sold the total production @3500 Rs to its final customers. (+1000 value added to previous purchase)

what is total 'GDP' here?
2000+2500+3500=8000 Rs? Hell no! You've to see the value added.
So, total money value of this line is: 2000+500+1000=3500.
Not all of the wheat goes into Baker's oven. Some of it will go in making beer, some in a normal household for making roti and so on. You've to track the value added in each different line.

To be continued... GDP at nominal price, Market price, Factor Cost, etc.etc.etc.

[Economy Q] GDP at Factor cost and Market price (GDPFC & GDPMP), NNPFC,NNPMP
Posted: 21 Apr 2011 02:57 AM PDT
Continuing the previous post,
GDP at Factor cost means, money value of everything produced in India, without counting Government's role in it. i.e. indirect tax and subsidies.

Example#1: Subsidy

1 kg. Urea fertilizer's original-price is 500 Rs.
When it reaches the local supplier, Government is giving 10% subsidy. So farmer purchases it @ (500-50)=Rs. 450
  1. GDP @ Factor cost= 500 [i.e. without Government's involvement]
  2. GDP @ Market price= 450 [with Government's involvement]

Example#2: Tax

Box of 10 Blank DVDs =Rs.100 +10% VAT so final M.R.P.=Rs.110
  1. GDP @ Factor cost=Rs.100 (Real value of those dvds)
  2. GDP@ Market price=Rs.110

How will you calculate GDPMP if GDPFC is given, & vice versa?

GDP@Market price=GDP@ Factor price+Government involvement
Now, Government involvement=+Indirect taxes-subsidies
So finally,
GDP@Market price=GDP@Factor cost+Indirect tax-subsidies
Or doing the reverse,  
GDP@Factor cost=GDP@market price-Indirect tax+subsidies
Still doubt (like I always had about everything in college)? Following table should clarify it.
GDP @ Factor Cost and Market Price for same Urea and Blank DVDs

As you can see, Factor cost= Original or real value of something.
So at marketprice, even when Government is giving subsidy, the manufacturer still receives the original price. E.g. although farmer pays Rs.450, still manufacturer gets Rs.500 so we 'add' subsidy when converting MP to FC.
Similarly, even when customer pays MRP of DVD is 110, the DVD-manufacturer is still getting 100 Rs. So we 'deduct' the indirect tax(VAT) while converting MP to FC.



GNP = everything produced inside India + Anil Kapoor's income from Hollywood - Gary Kirsten's remittance to S.Africa 
So, what is Net National product @ Factor cost, and @Market price.
Net = Gross minus depreciation. (doubt? Click me
So NNP=GNP minus depreciation.
And factor cost, market price, just as explained above..with and without Government intervention.

To be continued.. GDP @ Current Price and Constant Price, GDP deflator

 GDP mean money value of everything* produced inside India.
(*Everything means goods and services.)
100 kg. of onion produced in 2009, market price = 20 Rs/kg.
100 kg of onion produced in 2010, market price =70 Rs/kg (courtesy: Sharad Pawar)
So, India's GDP has increased at the rate of 250% in a year! But the World bank and leading economists say we can hardly reach 9% GDP increase rate per year. So what is this 250%??
It's nothing but inflation. Just because onion prices rose thanks to Government's faulty food policy or black marketers, doesn't mean that real-GDP has increased and that our contry has prospered.
So how do we find real GDP for 2010, when prices of everything have increased due to inflation?
We need to compare 2010's production to some base year.
Let's pick 2003-04 as base year. So whatever price Onion had in that year, will be our base price.
IN 2003-04, average price of 1 kg onion was 30 Rs. A kilo.
2010's GDP= 1 kg onion price of base year (2003-04) *multiply* total onions produced in 2010
=30 x 100
=Rs. 3,000 is our real-GDP for 2010.

So Formula: Real GDP= Price of xyz item in base year x Quantity produced in current year.

GDP Deflator

Image: Formula

In our onion case
Nominal GDP in 2010= 70 Rs/kg x 100 kg=Rs. 7000
Real GDP as we calculated=3000.
So, GDP deflator= [7000/3000]x100= 233

What does it mean?
Here, GDP deflator is >greater than 100. That means there is inflation. (very very heavy inflation)
IF it was near to 100, that'd mean, there is no difference in real and nominal GDP hence there is no inflation in India.
We've WPI and CPI to measure inflation, but they don't include each and every product and service available in India, while with GDP deflator, we can get an inflation-picture of them too.


Newspaper: "Montek Singh said we've got 8% GDP in 2010"
That doesn't mean India's GDP is 8%. It only means whatever was our GDP in 2009, we've increased it by 8%.
IF India produced goods and services worth 100 billion $ in 2009, then in 2010 we've produced goods n services worth 108 billion $. That's why GDP rose by 8%.
Now back in our onion example,
2009's real GDP=3000
2010's real GDP=3000
So real-GDP has rose by 0% in two years.

Monday, 18 April 2011

[Economy Q] Minimum Alternative Tax (MAT) its provisions in DTC
Question from via email
Explain Minimum Alternate Tax (MAT) and its provisions under the new Direct tax code (DTC)
First we need to understand why Government takes MAT?

Zero Tax companies

Example, A company's book-profit is 10 lakh Rupees.
Then they use some creative accounting methods like depreciation, donations etc. to claim deductions and finally their 'taxable' income is reduced to almost zero.

e.g. in 2009 during the recession time, Government of India launched a scheme to give 50% depreciation to commercial vehicles. (with assumption that it'll boost the vehicle demand and help the automobile industry to come out of the recession.)

So the company buys a truck, for 20 lakh rupees on loan.
Their deduction on first year= 50% of 20 lakh rupees= 10 lakh rupees.
Their taxable income = book profit minus deductions =10 minus 10=0.
So they don't have to pay any tax on their profit at all!

Other tricks involve donating 5,000 rupees to some religious institution run by con-man and getting donation-receipt of 5 lakh rupees. And claiming deduction! and so on..

These companies, making profit but having zero taxable income, are known as 'Zero tax companies'

Minimum Alternative Tax (MAT)

Around 1997, Indian Government realized above large-scale problem of creative accounting and tax-deduction. So it came up with MAT (Minimum alternative tax).
So if company's taxable income is less than 30% of its book profit, then it'll have to pay MAT, which is around 15% of the book profit.
Therefore, now even if above zero-tax company escapes the regular taxes, it still has to pay 1.5 lakh rupees in MAT.

[Q] ENGLISH a big necessity in clearing IAS and State PSC exam

Got question via email
I wanted to ask that is ENGLISH a big necessity in clearing IAS exam and other STATE PSC'S..

As per new pattern in IAS exam (known as CSAT), there will be compulsory English grammar/ comprehension questions in the prelim paper-II. [its marks will be counted in the prelim-selection list]

In the mains exam of IAS, there is a compulsory english language paper, but its marks are not counted in the final merit list. However, in some State PSCs such as Gujarat, the marks of compulsory English language paper (mains) are counted in the final merit list.

So yes English has became a big necessity for clearing competitive exams be it IAS and State PSC or Bank.