In national income accounting, what would happen to the measured value of gross domestic product (GDP) if intermediate goods and services were mistakenly included along with final goods and services?

Introduction / Context:
Gross domestic product is a key macroeconomic indicator that measures the market value of all final goods and services produced within a country in a given period. To avoid double counting, national income accountants carefully exclude intermediate goods and services that are used as inputs to produce final goods. If intermediate goods were included, the same value would be counted more than once along the production chain. This question examines whether you understand why GDP is defined in terms of final goods and what would happen to the measured GDP if intermediate goods were erroneously included in the calculation.

Given Data / Assumptions:

• Final goods are those purchased by end users for consumption, investment, or government use.
• Intermediate goods are goods and services used as inputs in the production of final goods.
• GDP aims to measure the value of final output without double counting intermediate stages.
• We assume a standard national income accounting framework.

Concept / Approach:
The concept of double counting is central here. When a producer buys intermediate goods, their value is incorporated into the price of the final good. If we were to add the intermediate goods and the final goods separately in GDP, the value of the intermediate goods would be counted twice. For example, the value of steel used to make cars is already reflected in the market price of the car. To avoid overstating economic output, GDP includes only the final value of the car and excludes the steel as a separate item. Therefore, if intermediate goods are mistakenly included, GDP will be overstated, not understated.

Step-by-Step Solution:
Step 1: Recall that GDP is defined as the market value of all final goods and services produced within a country in a given period. Step 2: Understand that intermediate goods are used in producing these final goods. Step 3: Recognise that the value of intermediate goods is already embedded in the price of the final goods. Step 4: If intermediate goods were added to the GDP calculation along with final goods, the same value would be counted twice. Step 5: This double counting would lead to an artificially high measure of GDP. Step 6: Conclude that including intermediate goods would cause GDP to be overstated.

Verification / Alternative check:
Consider a simple numerical example. Suppose a steel producer sells steel to a car manufacturer for 10 units of value, and the car manufacturer sells the finished car to a consumer for 20 units. The value added by the car producer is 10 units, representing processing and assembly. If we include only the final output, GDP is 20 units. If we mistakenly add both the steel and the car, GDP would be recorded as 10 plus 20, equal to 30 units. This clearly exceeds the true final value produced. The extra 10 units represent double counting of the intermediate steel. This example shows that including intermediate goods would overstate GDP.

Why Other Options Are Wrong:
The option suggesting that only the general price level might change but GDP stays accurate misunderstands that including intermediate goods directly affects the measured value of GDP, not just price indices. The option that claims the price level would rise faster than nominal GDP is unrelated to the specific issue of double counting in GDP measurement. The option stating that all of the above occur is incorrect because the individual statements are not all true. The option claiming GDP would be understated contradicts the logic of double counting, which clearly leads to an overstatement. Thus, these options do not correctly describe the effect of including intermediate goods.

Common Pitfalls:
Some students confuse intermediate and final goods and think that more items in the GDP calculation always give a more complete picture. They may also mix up issues of inflation and price level changes with the structural problem of double counting. To avoid these pitfalls, remember that the purpose of excluding intermediate goods is to measure the value of final output only once. When in doubt, think in terms of value added at each stage of production, which provides an alternative way to calculate GDP that naturally avoids double counting.

Final Answer:
Therefore, if intermediate goods and services were included along with final goods in the GDP calculation, the measured value of GDP would be overstated due to double counting of the same production value at multiple stages.