Question

If a consumer buys flour because he loves baking, the flour is counted as part of GDP. If a bakery buys flour as an input to bake things in order to sell, the flour is not counted as part of GDP. Briefly explain why we treat these purchases differently.

Answer 1

Explanation:

Remember, the GDP (Gross Domestic Product) is an economic term that refers to the total value of goods and services produced in an economy in a particular period, usually in a period of one year.

Note, the standard way of counting GDP tries to avoid double counting by noting only the final value of goods or services.

Hence, the flour bought by the consumer (the final user) is measured by the producer as output or goods produced, whereas If a bakery buys flour as an input to bake things in order to sell, the flour is not counted as part of GDP because it is not the final value of the goods as value is still going to be transferred to whatever output from the bakery (eg bread, cakes).