1 If Jones trades a used car to Smith for 5000 nothing new i

1. \"If Jones trades a used car to Smith for $5,000, nothing new is created. Thus, there is no way the transaction can improve the welfare of people.\" Is this statement true? Why or why not?

Solution

The statement is not true. It is true that the value of used car will not be included in calculation of Gross Domestic Product of the nation. This is because it will lead to double counting problem of GDP. However, the car can be of great utility for Jones and increase the welfare of Jones and also total surplus. Thus, it is incorrect to say that the transaction will not improve the welfare of people.