Gross Domestic Product (GDP) aims to measure the total value of final goods and services produced within a country’s borders during a specific period. Intermediate goods, on the other hand, are goods used in the production of other goods. For example, steel used in car manufacturing or flour used by a bakery are intermediate goods. If the value of these inputs were directly tallied in GDP alongside the final product, the result would be an inflated and inaccurate representation of economic output due to double-counting.
The exclusion of intermediate goods from GDP calculations is crucial for providing an accurate assessment of a nation’s economic health. The value of intermediate goods is already implicitly incorporated within the price of the final goods and services. The historical development of national accounting systems recognized this potential for overestimation and established protocols to avoid it, ensuring that GDP reflects only the value added at each stage of production culminating in the final product available to consumers.
