Why is it necessary to make the distinction of "final" goods in the definition of GDP?

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pohnpei397 eNotes educator| Certified Educator

It is necessary to make the distinction between “final” goods and other goods when talking about gross domestic product (GDP) because otherwise we will badly overestimate the value of what is produced in our country every year.

The point of GDP is to serve as a measure of how much has been produced in our country in a year.  We want to know the value of everything that is produced.  However, if we do not differentiate between final goods and intermediate goods, we will overstate this value.  For example, let us think of something as minor as a sandwich that you buy at a shop for, say, $5.  That is a final good.  Now let us think about all the intermediate goods that went into that sandwich.

Some company bought wheat to make into flour.  Another company bought the flour and made it into bread.  The sandwich shop then bought the bread.  Some company bought cucumbers to make into pickles.  The sandwich shop then bought the pickles.  Some company bought a turkey from a farmer to slaughter.  Another company bought the turkey, killed and dressed, from the slaughterhouse and cut the turkey breast into slices and sold them to the sandwich shop.

The price of the sandwich ($5) already includes the costs of all of those transactions.  If we counted those transactions, and then we counted the $5 also, it would make our economy look like it was producing much more than it actually was.  In order to avoid this “double counting” it is important to make the distinction between final goods and others.