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The second-hand market and GDP

This Christmas, more people are considering giving second-hand (or ‘pre-loved’) goods as presents. This allows them to afford better-quality presents and to save money at a time when a large proportion of the population are finding that their finances are stretched. This continues a trend towards buying second-hand products – a trend driven by the rise of various online retailers, such as Vinted and Preloved, and a growing online presence of charity shops, as well as extensive use of established platforms, such as Facebook Marketplace, eBay, Depop, Gumtree and Nextdoor.

Clearly, people gain from buying and selling second-hand items – part of the ‘circular economy’. But what are the implications for gross domestic product (GDP)? After all, GDP is one of the main indicators of the size of an economy, and growth in GDP is probably the most widely-used measure of economic progress. Are second-hand transactions captured in GDP?

If you directly sell your own second-hand items, this does not count towards GDP. There is no new product being made. The items are only counted when they are first produced. Any service you provide to the purchaser (and to yourself) is in a similar category to housework, childcare, DIY and other services that people provide to themselves, household members and friends. But like such services, there is a strong argument that they should be.

Likewise, the environmental benefits (positive externalities) of recycling products, rather than throwing them away or hoarding them, are not counted. In fact, if reusing products causes fewer new products to be made, this would be counted as subtracting from GDP.

If, however, you set up a business by buying and selling second-hand items, the service you provide would contribute towards GDP. What would be counted would the value added to the product – captured through the difference in the purchase and selling prices. In fact, HMRC has warned people that buying and selling second-hand items is taxable, as it counts as self-employment for tax purposes. But it is only this value added that counts. If you buy an item on Vinted, only the value added by Vinted counts towards GDP.

As no production takes place, the purchase of second-hand items adds either nothing to GDP or just the service of a retailer. It is effectively just a transfer of goods and money. If buying second-hand items means that you buy fewer new ones, then that would cause GDP to fall if the response of firms is to produce fewer newer items. However, the person selling the second-hand items will gain revenue, which could be used to buy new items. If that increased production, that would boost GDP. The net effect on GDP of this transfer of goods and money in the second-hand market will be pretty small.

Yet, clearly, the second-hand market provides a welfare gain to both sellers and purchasers – a gain that is likely to grow as the use of second-hand markets increases. At Christmas time, it provides a timely warning of the limitations of using GDP to measure wellbeing.

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Questions

  1. What other items or activities affecting human wellbeing are not counted in GDP?
  2. Name some goods and services that are produced, and hence are included in GDP, but which can be classed as ‘bads’.
  3. For what reasons might a country have a high GDP per capita but a poor average level of wellbeing?
  4. How might GDP figures be adjusted for international comparison purposes?
  5. Would it be possible to adjust GDP figures to take account of externalities in production (negative and positive)? If so, how?
  6. Production involves human costs. To what extent does GDP take this into account?
  7. What is meant by the circular economy? How might you have a ‘circular’ Christmas?