How is GDP calculated?

• Gross Domestic Product (GDP) is the market value of the final goods and services produced during a year within the domestic territory of a country.

• Here only final goods and services are counted to avoid the problem of double counting.
  • For e.g. a farmer sold wheat to flour mill for Rs. 10 per kg. The mill grinds the wheat and sold the flour to a biscuit company for Rs. 12 per kg. The biscuit company uses the flour, sugar and butter to make 5 biscuit packets. He sold the biscuit to the consumer at Rs. 15 per biscuit packet.
  • Here biscuits are the final goods that are purchased by the consumer. Wheat and wheat flour are the intermediate goods used in the production of final good.
  • The value of Rs. 75 already includes the value of flour Rs. 12. 
  • Hence only the value of final goods and services. 

Therefore, GDP  = Value of output − Intermediate Consumption