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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.

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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

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  • $\begingroup$ 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? $\endgroup$ – Bravo Dec 1 '14 at 13:36
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    $\begingroup$ 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 $\endgroup$ – skv Dec 1 '14 at 13:37
  • $\begingroup$ 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? $\endgroup$ – Bravo Dec 1 '14 at 13:40
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    $\begingroup$ 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) $\endgroup$ – skv Dec 1 '14 at 13:43
  • $\begingroup$ @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. $\endgroup$ – Brythan Dec 1 '14 at 16:50

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