Chapter 11: Problem 3

Why are only final goods and services computed in GDP?

Short Answer

Expert verified

Only final goods and services are computed in GDP to avoid double-counting, which would occur if intermediate goods were also included. This way, GDP accurately reflects the total production value within the economy during a specific period, without any inflation of data due to repetitive counting of the same goods.

Step by step solution

Understand the Concept of GDP

Gross Domestic Product (GDP) is the broadest quantitative measure of a nation's total economic activity. More specifically, GDP represents the monetary value of all goods and services produced within a nation's geographic borders over a specified period of time.

Define Final Goods and Services

Final goods and services refer to those which are consumed or used as is, without any further transformation or use in other production processes. These goods are also known as consumer goods and producer goods, respectively. Consumer goods are those that will not be used in any other production while producer goods are those that will be used in other stages of production.

Explain the Inclusion of Only Final Goods and Services in GDP

In GDP computation, only final goods and services are included because they represent completed production. If GDP was to include intermediate goods (goods used to produce other goods), it would create a problem of double-counting. Double-counting occurs when the same goods are counted more than once. For example, if you consider a car manufacturer, counting the value of the steel when it is sold to the car manufacturer as an intermediate product, and then again when the car is sold as a final product, would result in the value of the steel being counted twice. This would inflate the GDP figure and not give an accurate representation of the economy's total production.

Provide an Example to Further Illustrate The Point

Consider the process of making a wooden table. The value of wood, when it is still just lumber, is an intermediate cost. If we were to count the value of the lumber as well as the value of the finished table in the GDP, we would end up double counting. Instead, we only consider the value of the final product – the wooden table – in the GDP. This includes the value of all components (including the wood), labor, profit margins, taxes, etc., giving us a more accurate representation of the total production in the economy.

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