How do we calculate the GDP?
- Economists suggest that the values of goods and services should be used rather than adding up the actual numbers. The value of goods and seivices in the three sectors are calculated and thep added up.
- Not every good (or service), that is produced and sold, needs to be counted. It makes sense only to include final goods and services.
For example: A farmer sells wheat to a flour mill for ? 8 per kg. The mill grinds the wheat and sells the flour to a biscuit company for ? 10 per kg. The biscuit company uses flour, sugar and oil to make the packets of biscuits. It sells biscuits in the market to the consumer for ? 15 per packet. Now, biscuits are the final goods, i.e., goods that reach the consumer.
- Intermediate goods are used up in producing final goods and services. The value of final goods already includes the value of all the intermediate goods that are used in making the final goods.
So, the value of final goods and services produced in each sector during a particular year, provides the total production of the sector for that year. And the sum of production in three sectors gives us the ‘Gross.Domestic Product or GDP’.