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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.

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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.

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  • $\begingroup$ thank you. Understood. You answered my question. I'd like to select your answer but I don't have the previlegies yet $\endgroup$
    – Fuzzy
    Commented Sep 27, 2023 at 14:04
  • $\begingroup$ But, if a car is re-sold, monetary transaction takes place which can then increase disposable income for the seller, and then increase GDP that way, correct? $\endgroup$ Commented Sep 28, 2023 at 15:40
  • $\begingroup$ @KwameBrown no if you sell your car on craigslist even though transaction is taking place it is not recorded in GDP. If we talk about second hand dealership only the difference between what the second hand dealership bought the car and sale value would be added to the GDP as that means that the car dealership had to somehow improve/fix the old car or add value through some other way (good marketing) otherwise the car could not be sold for more than the dealership bought it so that difference would be added to GDP because that is new value created, but still you do not record the value of that $\endgroup$
    – 1muflon1
    Commented Sep 28, 2023 at 21:19
  • $\begingroup$ car only the (usually) relatively small increase in value $\endgroup$
    – 1muflon1
    Commented Sep 28, 2023 at 21:21
  • $\begingroup$ @1muflon1 I agree, the re-selling of the car may not mechanically increase GDP, but the re-selling of the car would increase someone's income (the seller's) who can then increase their demand somewhere else, leading to a real increase in GDP through increased aggregate demand. Correct? $\endgroup$ Commented Sep 28, 2023 at 22:05
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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.

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