Is the GDP artificially increased by repeatedly buying and selling the same product?

Question

One way to calculate the GPD (Gross Domestic Product) of a country is essentially adding up all spending by the country in a year (individuals, governament and companies). Let us know consider this situation: A and B are two citizens of the same country. On January A pays B 100 and gets his car. After two months, B pays A 100 and gets his car back. At the end A and B have the same cash and cars they had at the beginning, so basically nothing has changed.

Question: these two two spending events, so this would increase the GDP by 100+100=200, but nothing has changed, so it seems to me that this way of measuring the GDP is meaningless.

Answer 1

No.

1. GDP only records spending on final goods and services. When firms trade things between each other it is not generally included in GDP.

2. Expenditure on second hand sales between regular people are not included at all. If you sell your car on craigslist it wont enter GDP.

Hence what you describe does not affect vale of GDP at all.

Answer 2

No, that's not how GDP is determined. GDP, or Gross Domestic Product, is determined in several alternative (theoretically similar) ways.

Production Approach: GDP is the sum total of the "market value" of all goods and services produced in the economy over a given time period (usually a year).

Income Approach: GDP is the sum total of all incomes earned by individuals and businesses, including wages and profits in a given time period.

Expenditure Approach: GDP is the sum total of all expenditures or spending made in the economy, typically given in the equation $C + I + G + (X - M)$ where $C$ = Final consumption of individuals and businesses but importantly not spending between individuals like your scenario, $I$ = Investment by businesses, $G$ = Government spending (including gov investment, $X$ = Value of exports, and $M$ = Value of imports.

GDP became the dominant metric for conducting comparative analysis of the growth between nation states in the late 20th Century, replacing the less widely used Gross National Income (GNI) which is simply the total income earned by a nation's residents and businesses, including any income from abroad. It captures overseas dividends and investment income repatriated to the home economy.

$$ GNI = GDP + (Net \, income \, from \, assets \, abroad \, - \,net\, outflow\, to\, foreign\, assets) $$

It's important to say that GDP, and indeed most single value economic metrics, is a deeply flawed indicator of a nation's well-being and individual prosperity. It crudely indicates how much is produced by a country but goes no further into how that production is distributed or used. It also fails to account for negative externalities such as pollution and environment or social degradation. It also completely misses out entire spheres of society such as household management and human caring. The modern world, dominated by theoretical economists, kneels at the alter of GDP growth at our peril.