Question

We know that GDP is the value of final goods and services produced in the economy in a given year. Briefly explain how the following are treated in the measurement of GDP: a) The value of intermediate goods; b) The value of financial transactions (like depositing money in the bank); c) The value of self-produced goods, like home child care; and d) the value of leisure activities.

Answer 1

Given by definition that GDP is the final value of all the goods and services produced in an economy in the given period,

(a) The value of intermediate goods is not included in the calculation of GDP. This is because they may have been already included by the previous supplier as a final good and hence we should avoid the problem of double counting.

(b) Financial transactions such as the deposit of money into bank accounts is not included in the calculation of GDP since they do not involve production.

(c) Self-produced goods like childcare which is not paid for but done by ourselves for our own child is not included as GDP due to lack of payment for these services.

(d) Since leisure does not come with a fixed price tag, hence it is not included in the calculation of GDP.