Exclusions in GDP Calculation

by Tasos Vossos; Updated September 26, 2017
The extent of economic transactions and labor activity exceeds nominal GDP figures.

GDP, or gross domestic product, is a measure of a country's economic performance. You can calculate the GDP in three ways: summing up consumption, private investments, government purchases and net exports; summing up the income of all producers of the country; or calculating the value of all goods and services produced. All three approaches give the same result, disregarding, however, a number of significant sectors in the economy.

Voluntary Labor and Housework

Voluntary labor, such as fixing a friend's bike or helping your neighbor with the lawnmower, constitutes unpaid service provision and as such, it is not result in a worker earning a wage or a consumer buying a service -- it remains out of the GDP's scope. In a similar fashion, housework performed by members of the household is not included in the GDP, even though the same work, when performed by paid house cleaners, is.

Underground Economy

The underground economy is the sector that includes profitable illegal activities, such as human trafficking, illegal immigration, gambling, extortion and drug trade. Since offenders don't declare profits from such activities, they are excluded from the GDP calculation. Unreported earnings for the purpose of tax evasion are also included in this category. For example, a dentist who charges $400 for teeth whitening might agree on a lower cash payment with the client to avoid issuing a receipt and reporting the money as income.

Stocks and Bonds

The expenditure approach to calculating the gross domestic product includes purchasing products or services, as well as public and private investments: industrial purchases in new productive facilities and tools such as factories and trucks. Stocks and bonds, however, don't qualify as either consumer or capital goods, as they are purely financial transactions. Buying stocks is purchasing partial or full ownership of a company, but none of its products or services, while bonds are actually loans repayable at a later date.

Public and Private Transfer Payments

Transfer payments are transactions made not for the purpose of buying a product or service or making an investment, but to remain loyal to a formal or moral obligation. Hence, they are not included in the GDP. For example, the state does not grant benefits to the unemployed, low-income families and people with disabilities for the sake of production, but because of regulations regarding citizens' welfare. In addition, parents give children a sum of money because they achieved high grades as a token of appreciation and not because they received any services.

About the Author

Tasos Vossos has been a professional journalist since 2008. He has previously worked as a staff writer for "Eleftheros Tipos," a leading newspaper of Greece, and is currently a London-based sports reporter for Perform Sports Media in the United Kingdom. He holds a Bachelor of Arts in communication and media from the University of Athens.

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