Sunday, June 10, 2007

GDP Calculation Confusion

Now that we know how to calculate GDP there are some aspects which can be a little confusing. Let's examine them.

We calculate GDP using Consumption by households and Investments by businesses. Also, included in the Investment is the consumer purchases of household. However, when a household sets aside a part of its salary in savings account or in stocks it is not counted in the GDP measure.

Money used to acquire goods or services is counted in GDP. Transfer payments is not included in GDP calculation. This explains why social security and unemployment benefits are not included in GDP calculation.

Similarly household transfer payments like savings account or buying stocks are distinguished from Investments and are called Savings. These actions are not calculated in the GDP because they do not represent production but financial transactions.

However, in this measure we do not use consumption by businesses. Business also consume goods e.g. they buy office supply, some of them even buy juices, fruits or even lunch, etc for their employees. Why is this consumption not included in the GDP measure? I have no idea. Let me know if you have some.

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