While considering the four economic factors that comprise GDP, one may start to question whether things like transfer payments are included in GDP. In other words, what is not included in GDP? There are several economic events and factors that are not included in GDP such as sales of goods or services produced outside the country, illegal goods or services, transfer payments, and unpaid services.
GDP does not include transfer payments because they are not part of current production. They are instead considered to be a redistribution of income. Unpaid services, such as cooking dinner for your family, are also not included in GDP because they are not part of the market economy.
Why are intermediate goods not included in GDP?
Intermediate goods and used goods are also not included in GDP. An intermediate good is a product that is used in the production of another. A final good is a good that is not used in the production of another good. An example of this would be if you bought a toy dart gun, and the toy dart gun was made up of several different parts including the plastic shell, foam darts, and electronic circuits. The toy dart gun would be the final good, while the plastic shell, foam darts, and electronic circuits would be the intermediate goods.
In order to avoid double-counting of final goods, intermediate goods are not included in GDP. This is because they have already been counted as part of the GDP of the final good. For example, if the toy dart gun was counted as part of GDP, then counting the individual parts that make up the toy dart gun would be double-counting.
Used goods are not included in GDP because they have already been counted as part of GDP in the year that they were produced. For example, if you buy a used car, the GDP has already been counted when the car was originally produced. Only purchases of newly-made domestic products are counted.
While GDP does provide a broad overview of an economy, there are several things that it does not include. It is important to keep this in mind when considering GDP data.
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GDP is important for identifying trade surpluses or deficits. If a country has a trade surplus, it means that the country is exporting more than it is importing. When a country imports more than it exports, it is known as a trade deficit. Trade surpluses and deficits can have an effect on the exchange rate and the overall health of economies.
GDP is also important for decision-making among business or investment strategies. Businesses use GDP data to make decisions about where to invest their money. They also use GDP data to decide how much to produce and what prices to charge for their products. Investors also use GDP data to make decisions about where to invest their money. They look at GDP data to get an idea of how the economy is performing and to find out which countries are experiencing economic growth.
GDP is also a measure of long-term economic performance. Countries that have high GDP growth rates tend to be more prosperous than countries with low GDP growth rates. Countries with high GDP growth rates are also more likely to experience inflationary pressures.
Criticisms about what GDP does not measure
One of the main criticisms of GDP is that it does not include unpaid work, such as child care or housework. This can lead to an underestimation of economic activity since these unpaid activities contribute to the economy but are not captured by GDP.
Some also criticize GDP because it does not include activity between businesses (B2B). This can lead to an underestimation of economic activity since B2B transactions make up a significant portion of the economy.
Another criticism of GDP is that it is geographically limited. This means that it only captures economic activity within a country's borders and does not account for economic activity that occurs between countries (e.g., trade). This can lead to an underestimation of the true size of the economy.
Lastly, GDP is often criticized for its emphasis on material output instead of overall well-being. This means that GDP does not take into account factors such as environmental degradation or income inequality. This can lead to a false sense of economic progress since GDP growth does not necessarily mean that everyone is better off.
Despite its criticisms, GDP is still the most commonly used measure of economic activity. This is because it is the best available measure of economic activity. GDP is also a good predictor of other economic indicators, such as employment and inflation.
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Gross Domestic Product (GDP) is a measure of economic activity within a country over a period of time. It takes into account four core economic factors including government spending, consumption, net exports, and business investments. There are different types of GDP such as nominal, real, and per capita. There are also different methods of calculating GDP such as the expenditure, output, and income approaches. There are several things that GDP does not include such as activity between businesses, sales of goods or services produced outside the country, illegal goods or services, intermediate goods, transfer payments, and used goods. There are numerous examples of these uncounted activities. For example, if an American musical performer held a concert outside of the U.S. it would not be included in the GDP because the service was provided outside the United States. Another example would be in relation to used goods, only purchases of newly made products produced within domestic borders are counted in GDP. A final example would be intermediate goods. Intermediate goods are goods or services that are used in the production of other goods or services. Only final goods and services are included in GDP, not intermediate goods.
There are several criticisms of GDP. The main criticisms are that it does not include unpaid work, it does not include activity between businesses, it is geographically limited, and it emphasizes material output over well-being. Despite its criticisms, GDP is still the most commonly used measure of economic activity. It is often used by businesses and investors to make decisions about where to allocate resources. GDP is also a good predictor of other economic indicators, such as employment and inflation.
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Video Transcript
Gross Domestic Product (GDP)
We're talking about a nation's GDP, and it's important to understand not only what's included in the GDP, but also what's not included in the GDP. GDP stands for gross domestic product and represents the total production of a nation within its domestic borders.
We know from the formula of GDP that gross domestic product = consumption + investment + government purchases + (exports - imports). However, there are some transactions that take place every day that don't get counted in the GDP. Let's talk about what's not included in the GDP and then look at some examples.
Basically, in order for something to be included in our GDP, it has to be something that is actually produced. It has to be something that isn't used to produce something else. It has to be produced here and not somewhere else, and it also has to be legal.
What's Not Included in the GDP
So here is a list of things that are not included:
- Sales of goods that were produced outside our domestic borders
- Sales of used goods
- Illegal sales of goods and services
- Transfer payments made by the government
- Intermediate goods that are used to produce other final goods
Let's say that Kelly, an economist-turned-opera singer, has been invited to sing in the United Kingdom. At the same time, an American computer company produces and sells all their computers in Germany, while a German company produces and sells all its cars here inside the borders of America. Economists need to know what gets counted and what doesn't.
Only goods and services produced domestically are included within the GDP. That means that goods produced by Americans outside the U.S. will not be counted as part of the GDP. When a singer from the United States holds a concert abroad, this isn't counted. On the other hand, goods and services produced and sold by foreigners within our domestic borders are counted in the GDP. When a famous British singer tours throughout the United States or a foreign car company produces and sells cars here in the U.S., this production does get counted.
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No used goods are included. When Jennifer purchases a lawnmower from her father, or Megan resells a book she received from her father, these transactions are not counted in the GDP. Only newly produced goods - including those that increase inventories - are counted in GDP. Sales of used goods and sales from inventories of goods that were produced in previous years are excluded.
Only goods that are produced and sold legally, in addition, are included within our GDP. That means that goods produced illegally are not counted. If there's a transaction that you see taking place in a parking lot with two cars and somebody's selling stereos, that's not going to be counted in the GDP.
Governments spend money in the economy, but they also send transfer payments to individuals. Transfer payments are not counted. An everyday example of a transfer payment would be a welfare check received by a household. When calculating GDP, transfer payments are excluded because nothing gets produced. Money is simply transferred from one group to another.
Let's talk about final and intermediate goods. Gross domestic product measures the total market value of all final goods and services produced within the domestic borders of a nation. The key word here is 'final.' Final goods include anything that is purchased directly by consumers in the marketplace. For example, a computer sold at a retail store is a final good. A new car that a consumer purchases is considered a final good.
If a good is used as an input, however, to produce another good, it's considered an intermediate good. For example, the plastic used to produce some laptop computers is an intermediate good. The steel that is used to produce cars which are sold at the dealership is also an intermediate good. Because they are not final goods, they're not counted in the GDP of a nation.
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Let's say that you're a retailer that sells women's clothing. As you walk through your clothing store, you notice that most of the clothing is made from cotton that is turned into fabric. The clothing you sell would be included in GDP, but the raw materials that went into the product (in this case, cotton) would not. If the cost of the fabric was included in the GDP, the real market value of the good would be exaggerated because the cost of this material is already included in the price of the final product.
Another example of a final good is a newly constructed home. Homes are made up of many different kinds of intermediate goods. The wood that is used to produce the frame, the brick that's sometimes on the outside of the home, as well as the tile or carpeting that's probably installed inside the home - these are all examples of intermediate goods. The prices of these inputs are reflected in the price of the new home, which is the final good.
Lesson Summary
So let's review. Here is a list of items that are not included in the GDP:
- Sales of goods that were produced outside our domestic borders
- Sales of used goods
- Illegal sales of goods and services
- Transfer payments made by the government
- Intermediate goods that are used to produce other final goods
Lesson Objectives
By the end of this lesson, you'll have a better understanding of what GDP is by knowing which items are excluded from it.
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