Macroeconomics
Gross Domestic Product A Comprehensive Insight
Nowthatwe’vebuiltanunderstandingofhowgoodsandservicesmovearoundinaneconomy,itistime tocalculatethe grossdomesticproduct (referredtoas GDP hereon)whichrepresentsthe moneyvalue of all fnished goods and services produced within a country’s borders over a period of time .
However, in order to accurately measure GDP, we must note the following:
● Finished Goods and Services: To prevent double-counting, only fnished or completed goods and services are included in GDP calculations. This means that intermediate goods , which are goods usedtoproduceother products, are excluded from GDP . Thisisdue to the fact that the value of fnished goods already incorporates the value of the intermediate goods. Counting theintermediate goods would lead to double-counting and inflated values.
For example, cheese bought by a family for immediate consumption is a fnishedgood,while cheese acquired by a pizzeria for making pizzas qualifes as an intermediate good and is not factored into GDP. The value of the pizza itself already accounts for the cheese used in its production. ● Money Value: Calculating the volume or the quantity of goods and services is not a defnite reflection of economic performance. Instead, the monetary values of goodsandservicesare necessary to calculate aggregate output and compare it across years and/or economies. In addition, transactions that are not related to production are omitted from GDP . These include the following: ○ Financial Transactions: Transactions that do not produce output are not accounted for in GDP to prevent overstating the national output. These include public transfer payments (made by the government e.g., welfare payments) and private transfer payments (made by people e.g., cash gifts and pocket money). Stock market transactions , such as the purchase and sale of bonds and shares, arealsoexcluded from GDP because they are based on the transfer of ownership rather than on the production of fnished goods and services. ○ Second-HandTransactions: GDPmeasurementalso ignorestransactionsrelatedtothe saleofsecond-handproducts .Forexample,resellinganiPhone7thatwasreleasedin 2016 in 2017 is not counted in the 2017 GDP because it was already included as a fnished good in the 2016 GDP. This practice helps prevent double-counting .
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