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As far as I understand, when we calculate GDP we want to estimate wealth produced during given year in given country. But it seems like it will be problematic when using the income approach (the expenditures approach doesn't suffer from this problem. After all, in the vast majority of cases people pay full price for services and goods at one sitting. When they have problem with paying full price they take a loan and then pay full price with money that they got from a creditor).

1.We include income from receiving interest because giving loans is a service. But if lending money is a service, then it can viewed as kind of service what you can spend literally years to pay for. There will be incomes from some loans that were given in previous years, yet they they will by included in GDP of this year.

2.We include deprecation. It seems to make sense at first. After all, if an asset was produced this year and was completely worn out the same year, then it's still production. By including deprecation we avoid situation when worn out asset is treated like it has never been produced in the first place. BUT, assets that were created in previous year are also included in this calculation. Why would we include cost of deprecation of something that was NOT produced this year?

Or maybe I don't understand something and there are good reasons to make exceptions for interest and deprecation?

P.S. Okay, so we add deprecation in order to ignore it altogether, thus we don't really count deprecation of old assets. But how about income from loans given years ago?

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  • $\begingroup$ GDP is a measurement of flows (production/income/expenditure) not of wealth. It does not include interest (in effect transfers between individuals) or take account of depreciation (which is why it is gross) $\endgroup$ – Henry Dec 23 '19 at 0:04
  • $\begingroup$ @Henry it includes net interest. See for example here: amosweb.com/cgi-bin/… . Or I should better say in some of the formulations of income approach it includes interest as it can be definitely calculated in a way that circumvent this. But in any formulation it is includes at least implicitly as some households derive income from it. $\endgroup$ – 1muflon1 Dec 23 '19 at 1:10
  • $\begingroup$ @1muflon1 What can you comment about interest? Why do we include interest from a loan made years ago in GDP of given year? $\endgroup$ – user161005 Dec 23 '19 at 3:11
  • $\begingroup$ @1muflon1 - As you say, "in some of the formulations of income approach". That version has company profits lower because they pay interest and others' incomes higher because they receive the same interest; it also has company profits lower because of depreciation and has to add it back in later. The version I am familiar with is where company profits (or surpluses) are measured rather higher, mainly reflecting their sales (and stockbuilding) less what they pay suppliers and workers, and so no need to account for interest or depreciation $\endgroup$ – Henry Dec 23 '19 at 6:16
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    $\begingroup$ @1muflon1 - "Correct" may be a relative concept here: interest payments which add to some components' income are subtracted from other components' income so in a sense net out and overall do not add to GDP (with the caveat that those parts of banks' interest margins which are used to provide services instead of explicit fees or charges do count towards GDP) $\endgroup$ – Henry Dec 23 '19 at 11:05
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So, if I correctly understand what I learned in comments, this question is resolved by two things:

1.We add deprecation in order to ignore it, rather than take it into account. It makes sense because incomes are already decreased by amount of deprecation, so in order to "unaccount" deprecation we must add deprecation. And due to us ignoring deprecation it doesn't make any sense to make distinction "deprecation of new assets VS deprecation of old assets", we ignore both of them.

2.Like renting, money lending is an ongoing service. You can keep extra money for some time, but with each year/month the amount of extra money that you're allowed to keep will become less and less.

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