0
$\begingroup$

The calculation of GDP(using expenditures) is: $C+I+G+Xn$,

where we calculate the spending on final goods and services within a country. However, how exactly are final and intermediate goods differentiated when calculating spending?

For instance, if one firm sells a product to another firm that adds to that same product and sells it again, how exactly do governments account for this when calculating GDP?

$\endgroup$
1
$\begingroup$

While @M3RS is correct that value added is another approach to computing GDP that handles the final vs. intermediate goods problem more aptly, within the context of the expenditure approach, you would effectively be measuring spending by who's buying it, and this measure is fundamentally imperfect. For example, flour sold by a cooking supply company to a bakery is likely to be counted as an intermediate good. Flour sold at a retail store is likely to be counted as a final good. But, it could be that a relatively small scale bakery buys flour at Costco (I used to work at a wholesale club, and we supplied a lot of small businesses). In that case, despite efforts by the government not to double count, it's really unavoidable. This is why value added is generally better for avoiding double counting.

$\endgroup$
  • $\begingroup$ Thanks so much for your answer. I completely agree that value added is a much better approach to take. This is why I always wonder why they only teach the expenditures approach in economics classes $\endgroup$ – Samvit Agarwal Dec 12 '18 at 22:15
0
$\begingroup$

I can give you a rough idea. You have to look at value add.

Take company A, which sold goods for \$100. Government statisticians will not just say, OK, add $100 to GDP. Instead, they will also look at the cost of goods sold, which is what the company paid to suppliers before it could produce the \$100 worth of goods. Let's say it paid \$80. The value add for company A is then \$20.

Let's imagine Company B is the only supplier to Company A and it doesn't have any suppliers anymore as it creates everything in-house. The value add at Company B will be \$80.

The get GDP, you'll add value add at company A (\$20) and value add at company B (\$80), which is \$100.

Statisticians gather the necessary info from companies to be able to determine these values.

There is article along these lines on Investopedia.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.