Understanding Business: What's Not Included in the GDP

While there are many important factors for business, understanding the overall level of the economy is virtually priceless knowledge. In turn, one of the most important factors to a nations economy, and thus, all business and career related functions found within, is the Gross Domestic Product (GDP). The GDP is, essentially, a way to measure the market value of the goods and serviced produced by a nation during the current fiscal year. However, while the GDP is very important, too few understand precisely how its works, and one the most misunderstood factors is what actually contributes to the GDP and what does not.

Understanding the items which are excluded from the GDP is crucial for understanding the overall value of the economy, as only certain goods and services actually apply.

The first, and generally largest category of excluded goods are what are known as "intermediate goods". In short, intermediate goods are those goods which are purchased solely for their use in producing another product. For example, let us say that a coal mining company produces fifty dollars worth of metal ore. This fifty dollars produced by the company is added to the countries GDP. Now, that fifty dollars worth of ore is sold to a steel company, which uses the ore to produce two hundred dollars worth of steel. Because fifty dollars of the two hundred was already counted, the amount added to the GDP by the steel company is only one hundred and fifty dollars. Now, let us take this one step further and assume that the two hundreds dollars worth of steel is sold to a car company, which produces and sells a car for one thousand dollars. Because two hundred dollars of steel was already produced and accounted for, the value added to the GDP by the sale of that vehicle will only be eight hundred dollars. Thus, if we add up the three numbers together, we find that 1150 dollars were produced total for the three companies, but that only 1000 dollars is actually added to the value of the GDP. If we were to add intermediate goods to the GPA, we would be double and triple counting a lot of values, so this system helps to make sure that the GDP remains accurate.