Question

How would the domestic product be affected by the following transaction? Give reasons for your answer:

Sale of an old car by its owner and purchase of a new scooter with the money.

Answer 1

1. The sale of an old car by its owner has no effect on domestic product because it is merely a transfer of ownership of an existing asset. The car was already counted in national income when it was produced, and including it again would lead to double-counting.
2. The purchase of a new scooter would increase the gross domestic product because it represents current production. The value of the new scooter is part of the current year’s output of goods and services, which is what the gross domestic product measures.