Question

Explain why intermediate goods and services usually are not included directly in GDP. Are there any circumstances under which they would be included directly?

Answer 1

Sol :

GDP means the sum total value of alll goods and services prodcued in the domestic country at a particular period of time.

Intermediate goods and service doen not include in the GDP because of the following reason :

• Intermediate goods are those goods which are used up in producing finished goods.
• As, value of finished goods included in the GDP and, if the value of intermediate goods included in the GDP , it will lead to problem of Double Counting of Goods.
  

Problem of double counting will arise as follows :

Items	Value Added ($)	Value of goods
1. R produces grains in the economy of $500	500	500
2. B buys From R grains and convert it into Flour of worth $1000	500	1000
3. M buys wheat from B and convert it into bisucits of worth $ 1500	500	1500
4. H , retailer purches from M and sells it at $2000	500	2000
Total	2000	5000

If we include the value of final goods , the GDP will be $5000 whereas , if we include only value added , then GDp will be $2000.

Included of final value will be double counting of goods because goods produces by R is included in GDP when he produces it but when B buys it again in the value of final goods , the value of grains is included . So at 2 stage , GDp is overvalued by $500.

Due to this , valure of only value added is included in the GDP not the intermediate goods.