Question

1. Consider two scenarios. Under scenario A, I sell my 1991 Taurus Station Wagon to my neighbor for $600 Under scenario B, I get $600 from an auto dealer for trading in the Taurus, who later in the same year sells the Taurus to my neighbor for $1,000. What happens to GDP under each scenario? Do you think the fact that GDP is affected differently in the two scenarios is a strength or a weakness with this measure of output? Briefly explain.

Answer 1

In scenario A, GDP will remain unchanged since GDP ignores transactions regarding used goods.

In scenario B, GDP will increase by $600 which is the commission income from the car dealer. But the sale value of $1,000 when dealer resells the car will not be included in GDP.

This difference in treatment of inclusion in GDP is a strength. The reason is in the year of production and/or original sale of the car (1991), its value added was included in GDP of 1991. Including the sale transaction in a later year will amount to double counting, which is avoided by excluding such transactions in the year of resale.