WHAT IS NOT COUNTED IN GDP

As GDP is the market value of goods and services produced in a country, some items are not included in GDP.

These items excluded from GDP can be grouped under three categories: Intermediate goods, nonproductive transactions, and non-market/illegal activities.

Let's take a closer look at each one of them.

Intermediate goods

Intermediate goods are goods that are not in their final stage of production. They are used in the production of final goods. Intermediate goods are excluded from GDP and therefore, do not affect GDP. 

To understand why we don't add intermediate goods to GDP, let's consider tire. 

If manufacturers make tires and automobile manufactures then use these tires to produce automobiles, Then, the tire is an intermediate good while the automobile is a final good.

If we decide to add tire to GDP and also add automobile to GDP, we will be double-counting tire because the value of the tire is already included in the value of the automobile.

To avoid this problem of double-counting, economist only counts final goods, they do not include intermediate goods.

Non-production transaction

As GDP is the market value of all goods and services produced in a country in a specific period, non-production transactions are not included in the GDP.

This means that all financial transactions in which nothing is produced are not entered in the GDP.

So, when you sell stocks, bonds, and other financial assets, they will not be included GDP

This is because the money just changes hands, no production actually happens. Hence, it is not included in GDP.

However, if you paid a fee to a broker for selling the stock to someone else, this fee is counted in GDP, because the broker is performing a service and this service is part of current production. 

Also, when you buy used cars, books, they are not included in the GDP of the current year.

This is because GDP is concerned with the current year. Old output is not counted in the GDP because it was already counted in the GDP of the year it was produced. 

Furthermore, transfer payment by the government is also not included in GDP. A transfer payment is a payment of money from the government to the individuals, for which there is no exchange of goods and services in return.

An example of government transfer payment is subsidies to businesses. When the government gives subsidies, the recipient (business) receives such subsidies without giving the goods and services in return.

Since transfer payment does not involve the production of goods and services, it does not affect government spending, and, therefore, is not included in GDP.

Lastly, interest payments made by the government and households counted are not counted in GDP. This is because such interest payments are not for loan purchasing equipment, and, therefore, are not connected to the production of goods and services.

Stated differently, interest payments by government and households are not connected to the production of goods and services and therefore are not included in GDP. 

Non-market transactions and illegal activities.

Another thing not included in GDP is non-market transactions.

The non-market transaction is a transaction covering goods and services in which the producer supplies these goods for free. 

In other words, a non-market transaction is a transaction in which cash does not change.

Two cases of non-market transactions can be identified. Home production and bartered transaction.

Home production is works done without pay. When you grow flowers in your garden for your consumption, you are not receiving pay for that, hence, this is not counted in GDP.

The direct implication of not Including home production is this: When you grow flowers for your consumption, the value of such services is not included in GDP.

However, if you render such services for other individuals and you get paid for it, then, it will be counted in GDP.

In the same token, if you send your child to daycare for a week, whatever fee you paid is part of GDP. However, If your mother-in-law watches the child instead (for free), it is not entered in GDP.

Barter transaction is an exchange of goods for goods and services for services without money used as a medium of exchange.

For example, if I give my neighbor a bag of rice, who reciprocates by giving me a bag of beans, this will not be included in GDP. This is because the transaction does not involve any exchange of cash.

The last thing not recorded in GDP is an illegal transaction. Some transactions are illegal they are simply done "under the table".

Underage gambling is illegal in most countries. They are not reported, and, therefore, not included in GDP.

Illegal buying and selling of stolen goods (collectively called the black market) are also not included in GDP.

In many countries, prostitution is illegal. Hence, they are also included in GDP even though they offer services( not legally recognized)

To summarize, here is a list of items not included in GDP.

What is not counted in GDP

Conclusion

We just look at items excluded from GDP. Did you know any other thing excluded from GDP? tell me in the comment box.


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