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GDP Inclusions and Exclusions Explained

Gross Domestic Product (GDP) is defined as the total market value of final goods and services produced by all resident producing units of a country in a specified period of time. GDP excludes intermediate products, second-hand goods, past inventories, unpaid domestic services, non-market activities, financial assets, capital gains, and transfer payments to avoid double counting. GDP at factor cost equals GDP at market prices minus indirect taxes plus subsidies. GDP is used to assess economic performance, reflect economic welfare, facilitate international comparisons, and provide information for government policymaking and business planning, though it has limitations such as excluding unpaid services and underestimating economic welfare.

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413 views3 pages

GDP Inclusions and Exclusions Explained

Gross Domestic Product (GDP) is defined as the total market value of final goods and services produced by all resident producing units of a country in a specified period of time. GDP excludes intermediate products, second-hand goods, past inventories, unpaid domestic services, non-market activities, financial assets, capital gains, and transfer payments to avoid double counting. GDP at factor cost equals GDP at market prices minus indirect taxes plus subsidies. GDP is used to assess economic performance, reflect economic welfare, facilitate international comparisons, and provide information for government policymaking and business planning, though it has limitations such as excluding unpaid services and underestimating economic welfare.

Uploaded by

Ip Cheng Xin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Gross Domestic Product (GDP)

Definition: Total market value of final goods and services produced by all
resident producing units of a country or territory in a specified period of time.

Resident producing units: production unit that maintains a centre of economic


interest in a particular economy or territory

Items not included in GDP


1. Intermediate products
Used as factor inputs already
Double counting would occur
2. Second hand goods
Values had been counted already when sold for the first time
Double counting would occur
3. Past inventories
Not produced within the period
Double counting would occur
4. Unpaid domestic services by households for own consumption
Do not have market values
Exclude according to international GDP accounting standard
Rental value of owner-occupied housing services is estimated
5. Non-market activities/illegal transactions
Not marketable -> no market value
Data difficult to collect
Not collected unless reliable estimates can be obtained
6. Financial assets (bonds and shares)
Only represent a transfer of wealth/ownership
Not payments for current production
Commission, transaction levies, stamp duties are included
7. Capital gain
Only increase in market value of asset
No current production is involved
8. Transfer payments
Only represent a transfer of wealth
Recipients do not supply goods and services to the government

GDP at factor cost


= Sum of value-added of all resident producing units
= GDP at market prices Indirect taxes + subsidies
Uses of GDP
1. To assess the economic performance of an economy
Real GDP: aggregate output at constant market prices
Growth rate of real GDP: how fast an economy expands
Value-added of different sectors: contribution and performance of
different industries
2. To reflect the economic welfare of an economy
Per capita real GDP: aggregate output a person can enjoy on average
Expenditure components: how the aggregate output is used
3. To facilitate international comparison
Per capita real GDP: compare living standards
Growth rates of real GDP: compare economic growths
4. To provide information for the government in formulating economic policies
Growth rate of real GDP: policies to raise/decrease output and growth
rate
Value-added of different industries: determine industries that needed
support
5. To help firms make production and investment plans
Growth rates of value-added: determine which industries are worth
investing

Limitations of GDP
1. Values of unpaid services are excluded
No market value
These production activities improve our living standard
GDP underestimates our economic welfare
2. Estimates of illegal and underground economic activities may be inaccurate
Government lacked detailed information about these activities
May not fully reflect our economic welfare
3. Value of leisure is not counted
More leisure = higher standard of living yet not counted in GDP
Country with a larger GDP may not have a higher living standard than
country with a smaller GDP
4. Undesirable effects of production not considered
E.g. traffic jams, pollution cannot be reflected in GDP
GDP overestimates economic welfare
5. Changes in price level not considered
Rise in nominal GDP may not imply improvement in economic welfare
Use Real GDP
6. Population size not considered
Larger GDP doesnt imply higher living standard -> shared by more people
Use Per capita real GDP
7. Composition of output not considered
Consumption goods directly related to living standard
If proportion of consumer goods is small, does not imply higher living
standard with higher GDP
Use per capita real consumption expenditure
8. Distribution of income not considered
Larger per capita real consumption expenditure does not imply better
economic welfare for the majority if income distribution is highly uneven
9. Problems of exchange rates
If value of a currency is undervalued/overvalued, the value of its GDP will
be undervalued/overvalued as well.
Use purchasing power parity exchange rates (PPP)

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