Unit  -  1

Unit - - - . . AM - - . . AM Gross Domestic Product and its Growth: an Introduction DEFINITION OF GDP The GDP is the market value of all the final goods and services produced in the country during a time period. GDP = C + I + G + (X − M ) C = Consumption, I = Investment G = Government Expenditure ( X − M) = X = Exports − M = Imports Every part of the definition is important. Goods and services: As you know by now, goods are tangible items but services are activities which are intangible . Market value: This is the price at which goods and services are sold in the market. Final goods and services: Economists Tyler Cowen and Alex Tabarrok say that “final goods and services” are the goods and services which will be used or consumed. The goods and services which will be used for producing other goods and services and will form a part of the goods and services produced are called “intermediate goods”. Only the final goods are included in the GDP. Intermediate goods are not counted in calculating the GDP, because their value is included in the final goods. However, if the intermediate goods are included in the GDP it will result in what is called “double counting”. For example, a cup of tea bought in a hotel is a final good because it is consumed and does not form a part of producing something else. So the market value of the cup of tea, being a final good, is included in the GDP. Sugar which is mixed in the tea is an intermediate good because it is used in making tea and forms a part of the tea served. Suppose the tea is priced ` a cup, of which the value of sugar used is ` . So the price of the cup of tea includes the ` , that is price of the spoon of sugar. If this value of sugar is included in the GDP , it will be counted twice: as a spoon of sugar and again as a part of the cup of tea. This is “double counting” and to avoid it the intermediate goods like sugar are excluded from GDP.