2.8: Exclusions in GDP Calculation II

GDP helps track the value of goods and services sold in the market, but it leaves out many daily things. Some activities, even though useful or meaningful, are not counted because they don’t involve money or are not part of current production.

Imagine someone buys wood, nails, and paint to build chairs they plan to sell. These supplies are seen as part of making the final product. Only the money earned from selling the finished chairs is counted in GDP. The materials are not added separately since that would mean counting the same value twice.

If someone decides to sell a used camera online, that sale doesn’t increase GDP. The camera was already included when it was first sold as new. However, if the person uses a delivery service to ship the camera and pays a fee, that delivery charge is counted because it is a service provided now.

Some people receive money from the government, like a student grant or retirement support. These payments help people live and spend, but since they are not connected to current work or production, they are not included in GDP.

Some parts of life affect people but don’t show up in market activity. If road repairs nearby cause traffic and delays, the time lost isn’t subtracted from GDP. If someone grows flowers in their garden, the beauty and joy they bring are also not added.

These examples show that GDP focuses on market-based activity, but many real parts of life happen outside that system and are not captured in its numbers.

Let's look at another day in Sarah's life and see even more things that are not included in GDP.

Sarah buys flour, sugar, eggs, and butter. If she uses these to bake cakes for sale, they are considered intermediate goods. In GDP, only the final selling price of the cakes is counted, assuming Sarah formally reports the revenue from the sale as income. The cost of the ingredients is not included.

In the evening, Sarah sells some shares of stock. This isn't counted in GDP because it just represents a transfer of ownership of existing assets rather than production of new goods/services.

Sarah receives a monthly Social Security check. Since it's a transfer payment not tied to current production, it is excluded from GDP.

Nearby, a factory releases pollution that affects Sarah's health. These environmental costs aren't subtracted from GDP. Similarly, if she plants trees in her yard, their environmental benefits aren't added since there's no market transaction.

Sarah's story highlights that while GDP tracks market activity, it leaves out many meaningful contributions to economic well-being.