Statistical Discrepancy

Often, students ask the question: Do all methods of Gross Domestic Product (GDP) calculation provide the same value? The answer to the question is: Theoretically, Yes and actually, No. The reason for the difference between the values of different methods of GDP is the statistical discrepancy. Statistical Discrepancy is the difference in national income accounting because the same economic activity is estimated using different data sources or methods. It reflects measurement errors, not real economic differences.

Why Does the Statistical Discrepancy Occur?

1. Valuation Difference among Approaches: The Production Approach uses value added reported by firms. The Expenditure Approach uses final spending, which can be overstated or understated if inventory changes or exports/imports are misreported. The Income Approach uses compensation, profits, taxes, which may not fully capture informal income or unreported profits. Thus, variation in valuation methods causes divergence.

2. Unrecorded or Misreported Inventory Changes: The expenditure method includes the change in inventories. But businesses often misreport inventories, because stock levels fluctuate daily and may not be measured precisely. If inventories are overstated, the expenditure-based GDP becomes artificially higher.

3. Incomplete Reporting in the Income Method: For example, small farmers and cooperative members may under-report income, especially mixed income, profit, or self-employment earnings. This can lead to income-based GDP being lower compared to actual activity.

4. Differences in Data Sources: Each approach relies on a different dataset. For example, Production data → agricultural boards, food processing firms. Income data → household and enterprise surveys, Expenditure data → government accounts, trade records, consumption surveys. Differences in coverage, timing, and reliability naturally lead to gaps.

5. Handling of Indirect Taxes and Subsidies: The Income Approach includes Net taxes = Indirect taxes – subsidies. If subsidies are under-reported or indirect taxes over-reported, this inflates or deflates income-based GDP.

6. Shadow (Informal) Economic Activity: Rural and agricultural economies often have informal hiring, unreported sales off-the-books transactions. The Production Approach might capture more activity (through value added) than the Income Approach (which relies on reported incomes), while the Expenditure Approach may capture household consumption even if production was not formally recorded.

In real national accounts, such discrepancies are common. Statistical agencies often add a line item called “Statistical Discrepancy” to reconcile the accounts and ensure that GDP appears consistent.

Case Study

Let us consider the following hypothetical case study (given in Figure 1).

Figure 1: Case Study on GDP calculation

Answers

(A)GDPₚ = 400 + 150 + 50 = ₹600 crore

(B)Net taxes = 40 – 10 = 30

GDPᵢ = 430 + 130 + 20 + 30 = ₹610 crore 

(C)GDPₑ = 300 + 250 + 80 + (90 – 40)

GDPₑ = 300 + 250 + 80 + 50 = ₹680 crore

(D)All three approaches measure the same economic activity from different angles: production creates income, and income enables expenditure. In real-world data collection, discrepancies arise due to measurement errors, informal sector activities, and reporting delays.

Interpretation

In the EdTech sector, companies often outsource services, rely on gig workers, and use cloud-based tools that are often not consistently recorded across datasets. This naturally creates output–income–expenditure mismatches.

Production-Based GDP is the Lowest  (₹600 crore)

The lowest value of Production-based GDP suggests that it may understate true economic activity due to the following reasons:

• Small digital content creators may under-report revenue.

• Freelancers and small vendors in the EdTech ecosystem may not be fully captured.

• Some production occurs informally (e.g., part-time creators, student developers).

Income Approach Slightly Higher (₹610 crore)

The Income Approach includes: Compensation (₹430 crore) + Profit (₹130 crore) + Depreciation & net indirect taxes (₹50 crore).  Wage and salary records are often more accurately reported because payroll systems are formalised. This explains why Income-based GDP is slightly higher than production-based GDP.

Expenditure Approach Significantly Higher (₹680 crore)

The Expenditure Approach may appear inflated due to:

•Strong household and government spending - Online course purchases and government EdTech initiatives are well-documented, often leading to higher expenditure totals.

•Possible overstatement of business training expenditures - Firms may classify broader HR training or IT expenses under “digital training,” raising expenditure-based GDP.

•Trade mismeasurement - Exports of software services (₹90 crore) and imports (₹40 crore) might not perfectly align with domestic production statistics.

This larger figure suggests that demand-side activity is being captured more comprehensively than production-side activity.