Gross Domestic Product: Items Excluded from National Production

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  • 0:05 Gross Domestic Product (GDP)
  • 1:04 What's Not Included in the GDP
  • 3:44 Final and Intermediate Goods
  • 5:38 Lesson Summary
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Lesson Transcript
Instructor: Jon Nash

Jon has taught Economics and Finance and has an MBA in Finance

In this lesson, you'll gain a better understanding of what the gross domestic product is by exploring things that are excluded from it. Why do we count some items in the GDP but not others?

Gross Domestic Product (GDP)

We're talking about a nation's GDP, and it's important to understand not only what's included in the GDP, but also what's not included in the GDP. GDP stands for gross domestic product and represents the total production of a nation within its domestic borders.

We know from the formula of GDP that gross domestic product = consumption + investment + government purchases + (exports - imports). However, there are some transactions that take place every day that don't get counted in the GDP. Let's talk about what's not included in the GDP and then look at some examples.

Basically, in order for something to be included in our GDP, it has to be something that is actually produced. It has to be something that isn't used to produce something else. It has to be produced here and not somewhere else, and it also has to be legal.

What's Not Included in the GDP

So here is a list of things that are not included:

  • Sales of goods that were produced outside our domestic borders
  • Sales of used goods
  • Illegal sales of goods and services (which we call the black market)
  • Transfer payments made by the government
  • Intermediate goods that are used to produce other final goods

Let's say that Kelly, an economist-turned-opera singer, has been invited to sing in the United Kingdom. At the same time, an American computer company produces and sells all their computers in Germany, while a German company produces and sells all its cars here inside the borders of America. Economists need to know what gets counted and what doesn't.

Only goods and services produced domestically are included within the GDP. That means that goods produced by Americans outside the U.S. will not be counted as part of the GDP. When a singer from the United States holds a concert abroad, this isn't counted. On the other hand, goods and services produced and sold by foreigners within our domestic borders are counted in the GDP. When a famous British singer tours throughout the United States or a foreign car company produces and sells cars here in the U.S., this production does get counted.

If a foreign company produces and sells goods or services in the U.S., it is counted in the GDP
Foreign Goods Sold Here Count

No used goods are included. When Jennifer purchases a lawnmower from her father, or Megan resells a book she received from her father, these transactions are not counted in the GDP. Only newly produced goods - including those that increase inventories - are counted in GDP. Sales of used goods and sales from inventories of goods that were produced in previous years are excluded.

Only goods that are produced and sold legally, in addition, are included within our GDP. That means that goods produced illegally are not counted. If there's a transaction that you see taking place in a parking lot with two cars and somebody's selling stereos, that's not going to be counted in the GDP.

Governments spend money in the economy, but they also send transfer payments to individuals. Transfer payments are not counted. An everyday example of a transfer payment would be a welfare check received by a household. When calculating GDP, transfer payments are excluded because nothing gets produced. Money is simply transferred from one group to another.

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