Tag: Double counting

Supports: Macroeconomics, Chapter 8, Economics, Chapter 18, and Essentials of Economics, Chapter 12.

In a report, a consulting firm claimed that wealth is a better measure of the financial health of an economy than is GDP. They made the following argument:

“GDP counts items multiple times. For instance, if someone is paid USD 100 for a product/service and they then pay someone else that same USD 100 for another product/service, that adds USD 200 to a country’s GDP, despite the fact that only USD 100 was produced at the start.”

Briefly explain whether you agree with the consulting firm’s argument.

Solving the Problem

Step 1:  Review the chapter material. This problem is about how GDP is calculated, so you may want to review Macroeconomics, Chapter 8, Section 8.1, “Gross Domestic Product Measures Total Production” (Economics, Chapter 18, Section 8.1 and Essentials of Economics, Chapter 12, Section 12.1)

Step 2: Answer the question by explaining whether the consulting firm has correctly explained how the Bureau of Economic Analysis calculates GDP. The consulting firm has given an incorrect explanation of how GDP is calculated, so you should disagree with the firm’s argument. The definition of GDP in the chapter is: “The market value of all final goods and services produced in a country during a period of time.” The quoted excerpt is incorrect in claiming that GDP counts items multiple times. In terms of the example, if you pay $100 for a (very nice!) haircut at a hair salon and the owner of the hair salon uses that $100 to buy groceries, both transactions should be included in GDP because they represent $200 worth of production—a $100 haircut and $100 worth of groceries. Only buying and selling of used goods or of intermediate goods is excluded from GDP. In other words, contrary to the firm’s claim, when the Bureau of Economic Analysis calculates GDP, it doesn’t “count items multiple times.”

H/T Wojtek Kopczuk on X.