Process to calculate gross domestic product, Macroeconomics

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process to calculate gross domestic product

We just include finished goods and services - which is, anything that is sold directly to consumer. Electric power sold to a steel mill isn't included while all the electric power sold directly to consumers is included. Reason is simply that we want to avoid "double counting". Consider for illustration the production of cars. Car producers have parts produced by other firms which in turn have parts delivered by other firms and so on. If we were to count value of everything produced by a firm, then most parts of a car will be counted several times. This is why only the value of finished car is used in calculation of GDP. Note, though, that if a firm buys a robot which it uses in production of cars, then this robot is counted (if it's produced in the same country). Car producer is then "final consumer" of the robot - no value is added to it and it is not resold to another firm.

 


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