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The question really confuses me. On one hand, we can consider the wages as purchasing services from employees. On the other hand, the salary is also part of the cost of the products, thus it isn't "final services".

Consider the following scenarios:

  1. Firefighters' salary

Yes, it contributes to GDP under the expenditure approach

  1. Salary for the employees in a private firm

No, it doesn't

  1. A tycoon pays the salary for a personal guard directly.

Yes

Am I correct to say so? Can anyone explain this to me? Any help is appreciated. Thanks.

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2 Answers 2

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No, in an under expenditure approach, neither salary or wages are directly factored into the GDP. An expenditure approach to GDP calculates GDP as follows:

$$GDP=C+I+G+NX$$

Where $C$ is consumer spending on final goods and services at market prices, $I$ is the investment spending, $G$ is government spending and $NX$ are net exports.

All wages and salaries are of course indirectly included in as prices of final goods and services indirectly may include them but under spending approach they are not counted directly. Even if you would hire lets say language tutor from some company where company pays almost everything directly to that tutor it would be the cost of service that would appear on national accounts not the wage of the tutor under spending approach.

If you would want to count wages & salary directly you could use income approach to GDP where the GDP would be calculated by summing all returns to labor (wages & salary), profits, rental income and interest.

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  • $\begingroup$ Ty. But what if I pay the salary for a personal language tutor directly? Does it contribute to the GDP? $\endgroup$
    – Www
    Sep 29, 2020 at 0:32
  • $\begingroup$ @Www not directly because even if you do it directly (the tutor is sole trader and gives you receipt/bill for their service) it will be the bill which is the cost of service that gets counted and not their income (which in this case actually is profit). If you would hire the tutor as a worker for your company then their wage would not count directly towards GDP. $\endgroup$
    – 1muflon1
    Sep 29, 2020 at 0:44
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Wages for government employees are directly counted in the expenditure approach.

https://www.bea.gov/sites/default/files/2022-08/GDPKeySource_2q22_2nd.xlsx

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