# Where do remittances come into play in the formula for GDP?

In the classic formula for GDP, i.e., GDP=C+I+G+X-M, where are remittances accounted for? With remittances as high as third of GDP for developing countries, I wonder how they are not explicit in this equation.

Gross domestic product (GDP) is the total value of output in an economy, this can be measured only by Output using this formula.

This method uses GDP = C + I + G + (X-M) where

C: Consumption (Household spending)
I: Investments
G: Government spending
X: Exports from an economy
M: Imports into an economy


The remittances that you mention about are not made against any services. While remittances can be a source of GDP growth by increasing household consumption, it does not directly add to GDP, it does affect GNP though.

For a clear comparison of these two terms GDP and GNP use this

Alternatively you can use incomes to calculate GDP, however note that even in that method you add only those incomes that are made from the production of goods and services are included and not transfers

• But this World bank link says remittances are as high as a third of GDP. Why say so, if remittances are not a part of GDP at all? Dec 1, 2014 at 13:36
• I could compare illegal income as a percentage of GDP as well, or black money as a percentage of GDP too :) but they are all not part of GDP, its just to show the numbers as significant
– skv
Dec 1, 2014 at 13:37
• I see your point. If the remittances are deposited in fixed account in a bank, then they do enter the GDP as part of 'Investment', right? Dec 1, 2014 at 13:40
• Yes, as soon as it reaches someone, they can either "spend" it or "invest" it and then it becomes part of GDP that way (as spending/investment)
– skv
Dec 1, 2014 at 13:43
• @Bravo But note that remittances are often going to be in the wrong currency. They would generally be spent on imports either directly or after being exchanged for the local currency. Imports are subtracted from GDP, so even if you can trace spending or investment back to a remittance, it won't necessarily count towards GDP. Dec 1, 2014 at 16:50

I disagree with the above answer.

In the classic formula for GDP, i.e., GDP=C+I+G+X-M,

Remittances get accounted by mostly from the C factor. Remittances are used by the families back home for additional expenditure - like mobiles, household appliances, eating out, vacation etc.

Even savings eventually are used to build a new house, or fund education or the marriage. SO remittances do get accounted for the in the actual GDP.

If one uses the money earned form abroad in setting up a new business back home, that would come under factor I = Investment.

YOU can ask go talk to an economist who can explain it better.

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– 1muflon1
Apr 11, 2021 at 11:24

Form the national accounts perspective (since we arise the GDP calculated by the expenditure approach), remittances are not counted in GDP, as @skv correctly affirms. Nevertheless, from the income perspective, remittances are included in the National Disposable Income. Basically its the GDP plus the current account from the balance of payments, where the remitance flows are recorded.

In a future timre, this cash flow will enter to the economy through the banking system and then will impulse consumption and investment.

Regards,

Sergio.

If remittance is included in GDP through private consumption C then trade balance (if positive) can be considered in GDP as this is used in C and I. It implies that there is no difference between GDP and GNP in this case. I believe that we should take sources of income into consideration when including in GDP calculation. If the income comes from abroad and later consumed and invested in the country, it should not be included in GDP. Otherwise, there raises a double counting problem in global economy. If I earn in Sweden 6000 USD (equivalent) and send 1000 USD to my relatives in Bangladesh, should my same 1000 USD be included in Swedish and Bangladeshi GDP? I guess, it should not be. Remittance is a popular part of GDP in many low-income countries for the government to show their success, which appears to be a fake claim. It comes from my understanding in theoretical economics and practical observations in economic and political discussion. Jahangir Khan