If a local shop buys a used motorcycle for $1,000, makes repairs and refurbishes it, then resells it for $2,500, the
A) shop contributes value added equal to $1,500, but nothing is added to GDP.
B) shop contributes value added equal to $1,500, and consequently $1,500 is added to GDP.
C) shop contributes nothing to production because only existing goods are involved.
D) shop contributes value added equal to $2,500, but only $1,500 is added to GDP.

Question

Quizplus · Accepted Answer

The shop's contribution to the economy is the value added, which is the difference between the selling price and the cost of inputs (in this case, the cost of the used motorcycle and the repairs). Therefore, the value added is $1,500 and this amount is added to GDP as a result of the shop's activity.

If a Local Shop Buys a Used Motorcycle for $1,000