You decide to purchase a used car (or a house, or anything used for that matter) from a used car dealer. The car's price is $2,500 (and for some reason you do not negotiate, always negotiate!). Out of that $2,500, $800 of it is considered profit for the dealer (meaning that he paid $1,700 for the car). How would this trade enter into Gross Domestic Product (GDP)?
Possible answers given include:
1) All of it: in this scenario the entire $2,500 would be included in GDP
2) The profit or "value added" (note that value added is in quotes because the actual value added is debatable): or the $800 because of an increase in consumption.
3) The value of the car - profit: or $1,700 (I can't think of a logical reason why this could be right)
-or-
4) None of it.
Remember that GDP is calculated using only FINAL goods. Intermediate goods and services are not include in the calculate, so we can immediately get rid of options 1 and 3. Right now it seems as though 4 is the best answer because we do not include used item sales in GDP measures. To count the sale of a used car would be a form of double counting since it was already counted in GDP when it was first produced, and this is wrong.
HOWEVER, the service provided by the used car salesman is something that did occur this year and needs to be included in the GDP measure. So the correct answer is actually 2, because certain actions by the car dealer such as cleaning, displaying, advertising, etc. are current and creating value because someone was willing to pay for it.
TLDR: Include the profit, but not used car value.
Example, car produced in 2012 sells for $14,000:
We include $14,000 in 2012 GDP
Car is then bought by a used car salesman for $7,000 in 2013, NO ENTRY for GDP in 2013
Car is then sold by this used car salesman for $8,000 in 2014, the difference (value added) of $1,000 would be added to GDP in 2014 as a service (consumption)
