Final goods

When a country adds up everything it produced, it has to be careful not to count the same value twice.

Think about a loaf of bread. Somebody grew the wheat, somebody milled it into flour, somebody baked the loaf. If you add the value of the wheat, the flour and the loaf together, you have counted the wheat 3 times.

So national income counts only the final item — the loaf. The wheat and the flour are intermediate goods, used up along the way.

A final good is one that gets consumed rather than fed back into making something else.

Where the term is used. Section 5.3.1 sets out 3 methods of measuring GDP: the product method, the income method and the expenditure method. Final goods belong to the first.

The definition. Under the product method, "economists calculate money value of all final goods and services produced in the economy during a specified period. Final goods refer to only those goods which are consumed by economy participants and not the ones used in further production processes (intermediate goods)."

Why the restriction exists. The product method measures GDP as an aggregated flow of goods and services from the different sectors — agriculture, industry and services — with total output computed as the sum of the outputs of the various sectors. Counting intermediate goods as well as final ones would add the same value in at every stage it passed through.

The cross-check. The workbook notes that in practice all 3 counting methods "produce similar results with minor differences for several reasons including errors in the statistics." The final-goods rule is part of what makes the product method agree with the other 2.

On figures. The passage defining final goods carries no number. The one figure the workbook does attach to the product method is its observation that "the service sector constitutes 60% of India's GDP at factor cost," which is about sector composition rather than about the final-goods test itself.

Illustrative, using the workbook's own product-method logic. A wheat-to-bread chain in one year.

Add all 3 and you get Rs 89. That figure is wrong for national income, because the Rs 18 of wheat is inside the Rs 26 of flour, which is inside the Rs 45 loaf.

Only the loaf is a final good — it is consumed by an economy participant, not used in further production. So the product method counts Rs 45.

The same answer arrives if you add the value each stage created: Rs 18 by the farmer, Rs 8 by the miller, Rs 19 by the bakery. Rs 18 + Rs 8 + Rs 19 = Rs 45.

Now change one fact. If the bakery sells that Rs 45 of bread to a restaurant, which serves it in a Rs 120 meal, the bread has become an intermediate good and Rs 120 is the final figure — not Rs 165.

Chapter 5.3.1 (National Income) is one of the most heavily examined sections in the paper, and the product method is where final goods appear.

The chapter's Sample Question 2 asks which methods national income can be measured through, with "All the above" as the answer — so the 3 methods must be known as a set. The final-goods definition then supports the harder question: given a list of items, which would be counted in GDP under the product method. Steel sold to a car maker would not be; a car sold to a household would be.

• Intermediate goods are excluded, not netted off. The test is whether the good is used in further production, not whether it was cheap.
• The same physical good can be final or intermediate depending on who buys it. Flour bought by a household is a final good; the identical flour bought by a bakery is intermediate.
• The rule belongs to the product method. The expenditure method arrives at the same total from private consumption, government spending, gross capital formation and net exports instead.
• All 3 methods should broadly agree. The workbook says they produce similar results with minor differences, so a question implying they measure different things is wrong.
• Per capita income, not national income, is the workbook's better measure of living standards. That contrast sits in the same section and is examined alongside it.