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:

• The reason becomes obvious if the total is worked out both ways on a simple example and the two results are compared.
• The example also shows what part of the value each producer really adds.

Step 1: Set up a chain of production.
Suppose a farmer sells wheat to a mill for $\textrm{Rs.}\ 100$, the mill sells flour to a bakery for $\textrm{Rs.}\ 150$, and the bakery sells bread to households for $\textrm{Rs.}\ 200$.

Step 2: Add up everything that was sold.
$100 + 150 + 200 = \textrm{Rs.}\ 450$
This figure is clearly wrong, because no household actually received goods worth $\textrm{Rs.}\ 450$. The only thing that finally left the chain was bread worth $\textrm{Rs.}\ 200$.

Step 3: See where the extra amount came from.
The wheat was counted once on its own, again inside the price of the flour, and a third time inside the price of the bread. That repetition is double counting.

Step 4: Count only the final good.
Taking the bread alone gives $\textrm{Rs.}\ 200$, which matches what was actually produced for final use. The same answer comes from adding the value added at each stage, $100 + 50 + 50 = \textrm{Rs.}\ 200$.

Final Answer: Counting every sale would add the same wheat in three times over and inflate the total. Since the value of intermediate goods is already contained in the price of the final good, only final goods and services are counted in GDP.