Question

how is gdp calculated? explain what is excluded from the gdp equation and why?

Answer 1

Solution:

GDP is the market value of final goods and services produced within the domestic territory of a country during a year. Components of GDP are Consumption expenditure, investment spending, government expenditure and net exports.

a) Private Final Consumption Expenditure: It refers to expenditure on final goods and services by the individuals, households, and non-profit private institutions serving society. It includes: consumer services, consumer non-durable goods and consumer durable goods.

b) Government final consumption expenditure (G): It refers to expenditure on final goods and services by the Government like expenditure on purchase of goods for consumption by the defense personnel.

c) Investment expenditure (I): It refers to expenditure on final goods and services by the producers. Example: expenditure by the farmers on the purchase of tractors or thrashers. It includes fixed investment and inventory investment.

d) Net exports refers to the difference between exports and imports during an accounting year.

Here is a list of things that are not included:

1. Sales of goods that were produced outside our domestic borders
2. Sales of used goods
3. Illegal sales of goods and services (which we call the black market)
4. Transfer payments made by the government
5. Intermediate goods that are used to produce other final goods
6. Intermediate goods - These are goods or services used in the production of a final good or service.
7. Government transfer - Most countries have some form of transfer payment that government makes to its citizens.
8. Goods produced in a previous period
9. Financial exchanges like share or bond transactions are not counted. They involve transfer of ownership and not purchase of final goods or services.