What is included and excluded in the measure of national GDP?
Gross Domestic Product (GDP) can be defined as the market value of all final goods and services that are newly produced within a given country in a given year. What this means is that GDP includes things that are made within the country; goods and services that are final, rather than intermediate; goods that are newly made; and goods and services that have a market value in the formal economy. In order to understand what is and is not part of GDP, let us look at each of these in turn.
- Only goods made within a country count as part of its GDP. For example, then, the value of the cars made at a Toyota plant in Kentucky goes on America’s GDP even though Toyota is Japanese-owned. Similarly, the value of Nike shoes made in Vietnam does not count in US GDP.
- Only final goods and services count. When Toyota buys windshields from a supplier, they do not count. This is because their price will be factored into the price of the car. If we counted intermediate goods like the windshields, we would be overstating the value of goods we produce.
- Only new goods count. If you sell your used Toyota, it does not count on GDP because nothing new has been created.
- Only goods that have a market value in the formal economy count. Illegal goods and services such as drugs and prostitution do not count. In addition, unpaid work does not count. If you send your kids to daycare, the price you pay the providers is counted, but if you take care of them at home, your work is not part of GDP because it has no explicit monetary value.
These, then, are the basics of what does and does not count as part of GDP.