While estimating the current year's GDP by the expenditure method, how should the purchase of a second-hand car through a dealer be treated?
Answer and explanation
Correct answer: Exclude the car's resale price, but include the dealer's commission service
The second-hand car was produced and counted in GDP in an earlier year. Including its complete resale price in the current year would count the same physical output again and cause double counting. The dealer, however, supplies a new brokerage or intermediation service during the current year. The dealer's commission is payment for that current service and is therefore included in current GDP. Thus only the old car's resale value is excluded, while the service charge is included.
Frequently asked questions
What is the correct answer to this question?
Exclude the car's resale price, but include the dealer's commission service
Why is this the correct answer?
The second-hand car was produced and counted in GDP in an earlier year. Including its complete resale price in the current year would count the same physical output again and cause double counting. The dealer, however, supplies a new brokerage or intermediation service during the current year. The dealer's commission is payment for that current service and is therefore included in current GDP. Thus only the old car's resale value is excluded, while the service charge is included.
Which subject and chapter does this question cover?
This is a Class 12 Economics question. Chapter: National Income and Related Aggregates. Topic: Methods of calculating national income - Expenditure Method.
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