Question

Why are only final goods and services counted in Gross Domestic Product (GDP)? Explain.

Hint:

Take a simple chain such as wheat to flour to bread and add up all three prices. Compare that with the price of the bread alone, and the problem of double counting becomes clear.

Answer 1

Concept:

• A final good is one that reaches the ultimate consumer, while an intermediate good is one used up in producing something else.
• Gross Domestic Product is the value of all final goods and services produced within a country during a particular year.

Step 1: Understand the distinction.
A farmer who sells wheat to a flour mill is selling an intermediate good, and the mill selling flour to a biscuit company is doing the same. The packet of biscuits bought by a household is the final good.

Step 2: See that the value is already included.
The price of the packet of biscuits already covers the cost of the flour, and the price of the flour already covers the cost of the wheat. The value of every intermediate good is therefore carried forward into the value of the final good.

Step 3: See what happens if all goods are counted.
If the wheat, the flour and the biscuits were all added up, the same wheat would be counted three times. This mistake is called double counting, and it would make the total far larger than the actual production.

Step 4: State the rule that follows.
To avoid double counting, only the value of final goods and services is added up. This gives a true measure of how much was actually produced in the country during the year.

Final Answer: Only final goods and services are counted because the value of every intermediate good is already included in the price of the final good. Counting them separately would mean counting the same value more than once, and the resulting figure would overstate what the country actually produced.