Question

Why is the value of intermediate goods not included to calculate the Gross Domestic Product?

Answer 1

The value of intermediate goods is not included in the calculation of Gross Domestic Product (GDP) because the value of final goods already includes the value of intermediate goods. Intermediate goods are used up in the production of other goods and are either used as raw materials or for resale within the same year. Including their value separately along with final goods would lead to double counting, thereby overstating GDP.

To illustrate, when a sugar mill buys sugarcane to produce sugar, sugarcane is an intermediate good; the sugar produced is a final good. The value of the sugar includes the value of the sugarcane. Similarly, if a wholesaler buys sugar from the mill for resale, that sugar at the wholesaler's level is again considered an intermediate good. Only the final goods sold to ultimate consumers are counted in GDP.

Thus, GDP is calculated as the sum of production of final goods and services, excluding intermediate goods, to avoid overstating the economic output because the value of intermediate goods is already embedded in the value of final goods.