《宏观经济学》课程教学资源（英文版）Lecture1- 2 Intro 2 The Data of Macroeconomics

Worth: Mankiw Economics 5e CHAPTER TW O The Data of macroeconomics It is a capital mistake to theorize before one has data Insensibly one begins to twist facts to suit theories, instead of theories to fit facts. Sherlock holmes Scientists, economists, and detectives have much in common: they all want to figure out what's going on in the world around them. To do this, they rely on both theory and observation. They build theories in an attempt to make sense of what they see happening. They then turn to more systematic observation to eval- uate the theories validity. Only when theory and evidence come into line do they feel they understand the situation. This chapter discusses the types of obser vation that economists use to develop and test their theories Casual observation is one source of information about what's happening in the economy. When you go shopping, you see how fast prices are rising. When you look for a job, you learn whether firms are hiring. Because we are all partic ipants in the economy, we get some sense of economic conditions as we go bout our lives A century ago, economists monitoring the economy had little more to go on than these casual observations. Such fragmentary information made economic policymaking all the more difficult. One persons anecdote would suggest the economy was moving in one direction, while a different persons anecdote would suggest it was moving in another. Economists needed some way to com- bine many individual experiences into a coherent whole. There was an obvious solution: as the old quip goes, the plural of"" is"data Today, economic data offer a systematic and objective source of information and almost every day the newspaper has a story about some newly released statis- tic. Most of these statistics are produced by the government. Various government agencies survey households and firms to learn about their economic activity- how much they are earning, what they are buying, what prices they are charging, whether they have a job or are looking for work, and so on. From ese sur various statistics are computed that summarize the state of the economy. Econo- mists use these statistics to study the economy; policymakers use them to moni- tor developments and formulate policies This chapter focuses on the three statistics that economists and policymakers use most often. Gross domestic product, or GDP, tells us the nations total income User JOENA: Job EFF01418: 6264_ch02: Pg 15: 24933 #/eps at 1004 I Tue,Feb12,20028:404M

User JOEWA:Job EFF01418:6264_ch02:Pg 15:24933#/eps at 100% *24933* Tue, Feb 12, 2002 8:40 AM Scientists, economists, and detectives have much in common: they all want to figure out what’s going on in the world around them.To do this, they rely on both theory and observation.They build theories in an attempt to make sense of what they see happening.They then turn to more systematic observation to eval￾uate the theories’ validity. Only when theory and evidence come into line do they feel they understand the situation.This chapter discusses the types of obser￾vation that economists use to develop and test their theories. Casual observation is one source of information about what’s happening in the economy.When you go shopping, you see how fast prices are rising.When you look for a job, you learn whether firms are hiring. Because we are all partic￾ipants in the economy, we get some sense of economic conditions as we go about our lives. A century ago, economists monitoring the economy had little more to go on than these casual observations. Such fragmentary information made economic policymaking all the more difficult. One person’s anecdote would suggest the economy was moving in one direction, while a different person’s anecdote would suggest it was moving in another. Economists needed some way to com￾bine many individual experiences into a coherent whole.There was an obvious solution: as the old quip goes, the plural of “anecdote” is “data.” Today, economic data offer a systematic and objective source of information, and almost every day the newspaper has a story about some newly released statis￾tic. Most of these statistics are produced by the government.Various government agencies survey households and firms to learn about their economic activity— how much they are earning, what they are buying, what prices they are charging, whether they have a job or are looking for work, and so on. From these surveys, various statistics are computed that summarize the state of the economy. Econo￾mists use these statistics to study the economy; policymakers use them to moni￾tor developments and formulate policies. This chapter focuses on the three statistics that economists and policymakers use most often. Gross domestic product, or GDP, tells us the nation’s total income | 15 The Data of Macroeconomics 2CHAPTER It is a capital mistake to theorize before one has data.Insensibly one begins to twist facts to suit theories, instead of theories to fit facts. — Sherlock Holmes TWO

Worth: Mankiw Economics 5e and the total expenditure on its output of goods and services. The consumer price index, or CPl, measures the level of prices. The unemployment rate tells us the fraction of workers who are unemployed. In the following pages, we see how these statistics are computed and what they tell us about the econom 2-1 Measuring the Value of Economic Activity: Gross domestic product Gross domestic product is often considered the best measure of how well the economy is performing. This statistic is computed every three months by the bu- reau of Economic Analysis(a part of the U.S. Department of Commerce) from a large number of primary data sources. The goal of GDP is to summarize in a sin- gle number the dollar value of economic activity in a given period of time. There are two ways to view this statistic. One way to view gDp is as the total income of everyone in the economy. Another way to view GDP is as the total expendi ture on the econommy's output of goods and services. From either viewpoint, it is clear why GDP is a gauge of economic performance. GDP measures something peo- ple care about--their incomes Similarly, an economy with a large output of pods and services can better satisfy the demands of households, firms, and the government. How can GDP measure both the economy's income and the expenditure on its output? The reason is that these two quantities are really the same: for the economy as a whole, income must equal expenditure. That fact, in turn, follows from an even more fundamental one: because every transaction has both a buyer and a seller, every dollar of expenditure by a buyer must become a dollar of in come to a seller. When Joe paints Jane's house for $1, 000, that $1,000 is income to Joe and expenditure by Jane. The transaction contributes $1,000 to GDP, re- gardless of whether we are adding up all income or adding up all expenditure To understand the meaning of GDP more fully, we turn to national income accounting, the accounting system used to measure GDP and many related statistics Income, Expenditure, and the Circular Flow Imagine an economy that produces a single good, bread, from a single input, labor. Figure 2-1 illustrates all the economic transactions that occur between households and firms in this economy. The inner loop in Figure 2-1 represents the flows of bread and labor. The households sell their labor to the firms The firms use the labor of their workers to produce bread, which the firms in turn sell to the households. Hence, labor flows from households to firms and bread fows from firms to households. The outer loop in Figure 2-1 represents the corresponding flow of dollars The households buy bread from the firms. The firms use some of the revenue User JoENA: Job EFFo1418: 6264_ch02: Pg 16: 24934#/eps at 1004 mI Tue,Feb12,20028:404M

User JOEWA:Job EFF01418:6264_ch02:Pg 16:24934#/eps at 100% *24934* Tue, Feb 12, 2002 8:40 AM and the total expenditure on its output of goods and services. The consumer price index, or CPI, measures the level of prices.The unemployment rate tells us the fraction of workers who are unemployed. In the following pages, we see how these statistics are computed and what they tell us about the economy. 2-1 Measuring the Value of Economic Activity: Gross Domestic Product Gross domestic product is often considered the best measure of how well the economy is performing.This statistic is computed every three months by the Bu￾reau of Economic Analysis (a part of the U.S. Department of Commerce) from a large number of primary data sources.The goal of GDP is to summarize in a sin￾gle number the dollar value of economic activity in a given period of time. There are two ways to view this statistic. One way to view GDP is as the total income of everyone in the economy.Another way to view GDP is as the total expendi￾ture on the economy’s output of goods and services. From either viewpoint, it is clear why GDP is a gauge of economic performance. GDP measures something peo￾ple care about—their incomes. Similarly, an economy with a large output of goods and services can better satisfy the demands of households, firms, and the government. How can GDP measure both the economy’s income and the expenditure on its output? The reason is that these two quantities are really the same: for the economy as a whole, income must equal expenditure.That fact, in turn, follows from an even more fundamental one: because every transaction has both a buyer and a seller, every dollar of expenditure by a buyer must become a dollar of in￾come to a seller.When Joe paints Jane’s house for $1,000, that $1,000 is income to Joe and expenditure by Jane.The transaction contributes $1,000 to GDP, re￾gardless of whether we are adding up all income or adding up all expenditure. To understand the meaning of GDP more fully, we turn to national income accounting, the accounting system used to measure GDP and many related statistics. Income, Expenditure, and the Circular Flow Imagine an economy that produces a single good, bread, from a single input, labor. Figure 2-1 illustrates all the economic transactions that occur between households and firms in this economy. The inner loop in Figure 2-1 represents the flows of bread and labor. The households sell their labor to the firms.The firms use the labor of their workers to produce bread, which the firms in turn sell to the households. Hence, labor flows from households to firms, and bread flows from firms to households. The outer loop in Figure 2-1 represents the corresponding flow of dollars. The households buy bread from the firms.The firms use some of the revenue 16 | PART I Introduction

Worth: Mankiw Economics 5e 2 The data of 117 g he Circular Flow This Income(S) figure illustrates the flows between firms and households nomy that produces good, bread, fre inner loop represent the flows of labor and bread. households sell their labor to firms and the firms sell the bread Household they produce to loop represents the corresponding flows of dollars: households pay the firms for the bread and the firms pay wages Goods(bread Expenditure(S economy, GDP is both the total expenditure bread and the total income from the production of bread from these sales to pay the wages of their workers, and the remainder is the profit belonging to the owners of the firms(who themselves are part of the household sector). Hence, expenditure on bread flows from households to firms, and in- come in the form of wages and profit flows from firms to households GDP measures the How of dollars in this economy. We can compute it in two ays. GDP is the total income from the production of bread, which equals the sum of wages and profit-the top half of the circular flow of dollars. GDP is also the total expenditure on purchases of bread--the bottom half of the circular How of dollars. To compute GDP, we can look at either the flow of dollars from firms to households or the fow of dollars from households to firms These two ways of computing GDP must be equal because the expenditure of buyers on products is, by the rules of accounting, income to the sellers of those products. Every transaction that affects expenditure must affect income, and every transaction that affects income must affect expenditure. For example, suppose that a firm produces and sells one more loaf of bread to a household Clearly this transaction raises total expenditure on bread, but it also has an equal effect on total income. If the firm produces the extra loaf without hiring any more labor(such as by making the production process more efficient), then profit increases. If the firm produces the extra loaf by hiring more labor, then wages increase In both cases, expenditure and income increase equally User JOENA: Job EFF01418: 6264_ch02: Pg 17:24935#/eps at 1004 IlmI Tue,Feb12,20028:404M

User JOEWA:Job EFF01418:6264_ch02:Pg 17:24935#/eps at 100% *24935* Tue, Feb 12, 2002 8:40 AM from these sales to pay the wages of their workers, and the remainder is the profit belonging to the owners of the firms (who themselves are part of the household sector). Hence, expenditure on bread flows from households to firms, and in￾come in the form of wages and profit flows from firms to households. GDP measures the flow of dollars in this economy. We can compute it in two ways. GDP is the total income from the production of bread, which equals the sum of wages and profit—the top half of the circular flow of dollars. GDP is also the total expenditure on purchases of bread—the bottom half of the circular flow of dollars.To compute GDP, we can look at either the flow of dollars from firms to households or the flow of dollars from households to firms. These two ways of computing GDP must be equal because the expenditure of buyers on products is, by the rules of accounting, income to the sellers of those products. Every transaction that affects expenditure must affect income, and every transaction that affects income must affect expenditure. For example, suppose that a firm produces and sells one more loaf of bread to a household. Clearly this transaction raises total expenditure on bread, but it also has an equal effect on total income. If the firm produces the extra loaf without hiring any more labor (such as by making the production process more efficient), then profit increases. If the firm produces the extra loaf by hiring more labor, then wages increase. In both cases, expenditure and income increase equally. CHAPTER 2 The Data of Macroeconomics | 17 figure 2-1 Income ($) Labor Goods (bread ) Expenditure ($) Households Firms The Circular Flow This figure illustrates the flows between firms and households in an economy that produces one good, bread, from one input, labor. The inner loop represents the flows of labor and bread: households sell their labor to firms, and the firms sell the bread they produce to households. The outer loop represents the corresponding flows of dollars: households pay the firms for the bread, and the firms pay wages and profit to the households. In this economy, GDP is both the total expenditure on bread and the total income from the production of bread

Worth: Mankiw Economics 5e 18 PART IIntroduction Stocks and flows Many economic variables measure a quantity of! understand that this means that it is $10 trillion something-a quantity of money, a quantity ofi per year .(Equivalently, we could say that U.S GDP is $317,000 per second. tween two types of quantity variables: stocks and Stocks and flows are often related. In the point in time, whereas a flow is a quantity mea-i The stock of water in the tub represents the accu- sured per unit of time mulation of the flow out of the faucet. and the The bathtub, shown in Figure 2-2, is the clas- flow of water represents the change in the stock. sic example used to illustrate stocks and flows.i When building theories to explain economic vari- The amount of water in the tub is a stock: it is the ables it is often useful to determine whether the uantity of water in the tub at a given point in i variables are stocks or flows and whether any re- time. The amount of water coming out of the i lationships link them faucet is a flow: it is the quantity of water being Here are some examples of related stocks and dded to the tub per unit of time. Note that wei flows that we study in future chapters measure stocks and flows in different units. Wei> A person's wealth is a stock; income and ex- say that the bathtub contains 50 gallons of water, but that water is coming out of the faucet at 5 penditure are flows The number of unemployed people is a stock; GDP is probably the most important flow the number of people losing their jobs is a flow. variable in economics: it tells us how many dol-i The amount of capital in the economy is a lars are flowing around the economy's circular stock; the e amount flow per unit of time. When you hear someone> The government debt is a stock; the govern say that the U.S. GDP is $10 trillion, you should ment budget deficit is a flow. figure 2-2 Stock Stocks and Flows The amount of water in a bathtub is a stock. it is a quantity measured at a given moment in time. The amount of water coming out of the faucet is a flow per unit of time Rules for Computing GDP In an economy that produces only bread, we can compute gDP by adding up the total expenditure on bread. Real economies, however, include the produc- tion and sale of a vast number of goods and services. To compute GDP for such a complex economy, it will be helpful to have a more precise definition: gre User JOENA: Job EFF01418: 6264_ch02: Pg 18: 24936 #/eps at 1004 II Tue,Feb12,20028:404M

User JOEWA:Job EFF01418:6264_ch02:Pg 18:24936#/eps at 100% *24936* Tue, Feb 12, 2002 8:40 AM Rules for Computing GDP In an economy that produces only bread, we can compute GDP by adding up the total expenditure on bread. Real economies, however, include the produc￾tion and sale of a vast number of goods and services.To compute GDP for such a complex economy, it will be helpful to have a more precise definition: gross 18 | PART I Introduction FYI Many economic variables measure a quantity of something—a quantity of money, a quantity of goods, and so on. Economists distinguish be￾tween two types of quantity variables: stocks and flows. A stock is a quantity measured at a given point in time, whereas a flow is a quantity mea￾sured per unit of time. The bathtub, shown in Figure 2-2, is the clas￾sic example used to illustrate stocks and flows. The amount of water in the tub is a stock: it is the quantity of water in the tub at a given point in time. The amount of water coming out of the faucet is a flow: it is the quantity of water being added to the tub per unit of time. Note that we measure stocks and flows in different units. We say that the bathtub contains 50 gallons of water, but that water is coming out of the faucet at 5 gallons per minute. GDP is probably the most important flow variable in economics: it tells us how many dol￾lars are flowing around the economy’s circular flow per unit of time. When you hear someone say that the U.S. GDP is $10 trillion, you should Stocks and Flows understand that this means that it is $10 trillion per year. (Equivalently, we could say that U.S. GDP is $317,000 per second.) Stocks and flows are often related. In the bathtub example, these relationships are clear. The stock of water in the tub represents the accu￾mulation of the flow out of the faucet, and the flow of water represents the change in the stock. When building theories to explain economic vari￾ables, it is often useful to determine whether the variables are stocks or flows and whether any re￾lationships link them. Here are some examples of related stocks and flows that we study in future chapters: ➤ A person’s wealth is a stock; income and ex￾penditure are flows. ➤ The number of unemployed people is a stock; the number of people losing their jobs is a flow. ➤ The amount of capital in the economy is a stock; the amount of investment is a flow. ➤ The government debt is a stock; the govern￾ment budget deficit is a flow. figure 2-2 Flow Stock Stocks and Flows The amount of water in a bathtub is a stock: it is a quantity measured at a given moment in time. The amount of water coming out of the faucet is a flow: it is a quantity measured per unit of time

Worth: Mankiw Ecol 2 The Data of macroeco domestic product(GDP) is the market value of all final goods and services produced within an economy in a given period of time. To see how this definition is applied, let's dis- cuss some of the rules that economists follow in constructing this statistic Adding Apples and Oranges The U.S. economy produces many different goods and services--hamburgers, haircuts, cars, computers, and so on GDP combines the value of these goods and services into a single measure. The diver- sity of products in the economy complicates the calculation of GDP because different products have different values Suppose, for example, that the economy produces four apples and three oranges How do we compute GDP? We could simply add apples and oranges and conclude that GDP equals seven pieces of fruit. But this makes sense only if we thought ap- oles and oranges had equal value, which is generally not true. This would be even leaner if the economy had produced four watermelons and three grapes.) To compute the total value of different goods and services, the national in- come accounts use market prices because these prices reflect how much people are willing to pay for a good or service. Thus, if apples cost $0. 50 each and or nges cost $1.00 each, GDP would be GDP = (Price of Apples x Quantity of Apples +(Price of Oranges X Quantity of Oranges) (S0.50×4)+($1.00×3) GDP equals $5.00--the value of all the apples, $2.00, plus the value of all the Used Goods When the Topps Company makes a package of baseball cards and ells it for 50 cents. that 50 cents is added to the nation's gDP But what about when a collector sells a rare Mickey Mantle card to another collector for $500? That $500 is not part of GDP GDP measures the value of currently produced goods and services. The sale of the Mickey Mantle card reflects the transfer of ar sset, not an addition to the economy s income. Thus, the sale of used goods t included as part of GDP. The Treatment of Inventories Imagine that a bakery hires workers to produce more bread, pays their wages, and then fails to sell the additional bread. How does this transaction affect GDP? The answer depends on what happens to the unsold bread. Let's first suppos that the bread spoils. In this case, the firm has paid more in wages but has not re- eived any additional revenue, so the firms profit is reduced by the amount that wages are increased. Total expenditure in the economy hasnt changed because no one buys the bread. Total income hasn't changed either--although more distributed as wages and less as profit. Because the transaction affects neither ex- penditure nor income, it does not alter GDP. Now suppose, instead, that the bread is put into inventory to be sold later. In this case, the transaction is treated differently. The owners of the firm are assumed to have"purchased"the bread for the firms inventory, and the firms profit is not User JOENA: Job EFF01418: 6264_ch02: Pg 19: 24937#/eps at 1004 I l Tue,Feb12,20028:404M

User JOEWA:Job EFF01418:6264_ch02:Pg 19:24937#/eps at 100% *24937* Tue, Feb 12, 2002 8:40 AM domestic product (GDP) is the market value of all final goods and services produced within an economy in a given period of time. To see how this definition is applied, let’s dis￾cuss some of the rules that economists follow in constructing this statistic. Adding Apples and Oranges The U.S. economy produces many different goods and services—hamburgers, haircuts, cars, computers, and so on. GDP combines the value of these goods and services into a single measure.The diver￾sity of products in the economy complicates the calculation of GDP because different products have different values. Suppose,for example,that the economy produces four apples and three oranges. How do we compute GDP? We could simply add apples and oranges and conclude that GDP equals seven pieces of fruit. But this makes sense only if we thought ap￾ples and oranges had equal value, which is generally not true. (This would be even clearer if the economy had produced four watermelons and three grapes.) To compute the total value of different goods and services, the national in￾come accounts use market prices because these prices reflect how much people are willing to pay for a good or service.Thus, if apples cost $0.50 each and or￾anges cost $1.00 each, GDP would be GDP equals $5.00—the value of all the apples, $2.00, plus the value of all the oranges, $3.00. Used Goods When the Topps Company makes a package of baseball cards and sells it for 50 cents, that 50 cents is added to the nation’s GDP. But what about when a collector sells a rare Mickey Mantle card to another collector for $500? That $500 is not part of GDP. GDP measures the value of currently produced goods and services.The sale of the Mickey Mantle card reflects the transfer of an asset, not an addition to the economy’s income.Thus, the sale of used goods is not included as part of GDP. The Treatment of Inventories Imagine that a bakery hires workers to produce more bread, pays their wages, and then fails to sell the additional bread. How does this transaction affect GDP? The answer depends on what happens to the unsold bread. Let’s first suppose that the bread spoils. In this case, the firm has paid more in wages but has not re￾ceived any additional revenue, so the firm’s profit is reduced by the amount that wages are increased. Total expenditure in the economy hasn’t changed because no one buys the bread. Total income hasn’t changed either—although more is distributed as wages and less as profit. Because the transaction affects neither ex￾penditure nor income, it does not alter GDP. Now suppose, instead, that the bread is put into inventory to be sold later. In this case, the transaction is treated differently. The owners of the firm are assumed to have “purchased’’ the bread for the firm’s inventory, and the firm’s profit is not GDP = (Price of Apples × Quantity of Apples) + (Price of Oranges × Quantity of Oranges) = ($0.50 × 4) + ($1.00 × 3) = $5.00. CHAPTER 2 The Data of Macroeconomics | 19

Worth: Mankiw Economics 5e 20|PA reduced by the additional wages it has paid. Because the higher wages raise total income, and greater spending on inventory raises total expenditure, the econ- omy s GDP rises What happens later when the firm sells the bread out of inventory? This case is much like the sale of a used good. There is spending by bread consumers, but there vestment in inventory is counted as expenditure by the firm owners. Thur ei is inventory disinvestment by the firm. This negative spending by the firm offsets th positive spending by consumers, so the sale out of inventory does not affect GL The general rule is that when a firm increases its inventory of goods, this in duction for inventory increases GDP just as much as production for final sale. A sale out of inventory, however, is a combination of positive spending(the pur- chase)and negative spending(inventory disinvestment), so it does not influence GDP. This treatment of inventories ensures that GDP reflects the economy current production of goods and services Intermediate Goods and Value Added Many goods are produced in stages raw materials are processed into intermediate goods by one firm and then sold to another firm for final processing. How should we treat such products when computing GDP? For example, suppose a cattle rancher sells one-quarter pound of meat to McDonald's for $0.50, and then McDonalds sells you a hamburger for $1.50 Should GDP include both the meat and the hamburger (a total of $2.00), or just the hamburger($1. 50)? The answer is that GDP includes only the value of final goods. Thus, the ham burger is included in GDP but the meat is not: GDP increases by $1.50, not by $2.00. The reason is that the value of intermediate goods is already included as part of the market price of the final goods in which they are used To add the intermedi- ate goods to the final goods would be double counting-that is, the meat would be ounted twice. Hence, GDP is the total value of final goods and services produced One way to compute the value of all final goods and services is to sum the value added at each stage of production. The value added of a firm equals the alue of the firms output less the value of the intermediate goods that the firm purchases. In the case of the hamburger, the value added of the rancher is $0.50 g that the rancher bought no intermediate goods), and the value added of McDonald's is $1.$0.50. or $1.00. Total value added is $0.50+$1. 00 which equals $1.50. For the economy as a whole, the sum of all value added must equal the value of all final goods and services. Hence, GDP is also the total value added of all firms in the economy. Housing Services and Other Imputations Although most goods and services are valued at their market prices when computing GDP, some are not sold in the marketplace and therefore do not have market prices. If GDP is to include the value of these goods and services, we must use an estimate of their value. Such an estimate is called an imputed value Imputations are especially important for determining the value of housing. A person who rents a house is buying housing services and providing income for the landlord; the rent is part of GDP, both as expenditure by the renter and as income for the landlord. Many people, however, live in their own homes. Although they do not pay rent to a landlord, they are enjoying housing services similar to those that User JOENA: Job EFF01418: 6264_ch02: Pg 20: 24938#/eps at 1004 I l Tue,Feb12,20028:404M

User JOEWA:Job EFF01418:6264_ch02:Pg 20:24938#/eps at 100% *24938* Tue, Feb 12, 2002 8:40 AM reduced by the additional wages it has paid. Because the higher wages raise total income, and greater spending on inventory raises total expenditure, the econ￾omy’s GDP rises. What happens later when the firm sells the bread out of inventory? This case is much like the sale of a used good.There is spending by bread consumers, but there is inventory disinvestment by the firm.This negative spending by the firm offsets the positive spending by consumers, so the sale out of inventory does not affect GDP. The general rule is that when a firm increases its inventory of goods, this in￾vestment in inventory is counted as expenditure by the firm owners.Thus, pro￾duction for inventory increases GDP just as much as production for final sale.A sale out of inventory, however, is a combination of positive spending (the pur￾chase) and negative spending (inventory disinvestment), so it does not influence GDP. This treatment of inventories ensures that GDP reflects the economy’s current production of goods and services. Intermediate Goods and Value Added Many goods are produced in stages: raw materials are processed into intermediate goods by one firm and then sold to another firm for final processing. How should we treat such products when computing GDP? For example, suppose a cattle rancher sells one-quarter pound of meat to McDonald’s for $0.50, and then McDonald’s sells you a hamburger for $1.50. Should GDP include both the meat and the hamburger (a total of $2.00), or just the hamburger ($1.50)? The answer is that GDP includes only the value of final goods.Thus, the ham￾burger is included in GDP but the meat is not: GDP increases by $1.50, not by $2.00.The reason is that the value of intermediate goods is already included as part of the market price of the final goods in which they are used.To add the intermedi￾ate goods to the final goods would be double counting—that is, the meat would be counted twice. Hence, GDP is the total value of final goods and services produced. One way to compute the value of all final goods and services is to sum the value added at each stage of production.The value added of a firm equals the value of the firm’s output less the value of the intermediate goods that the firm purchases. In the case of the hamburger, the value added of the rancher is $0.50 (assuming that the rancher bought no intermediate goods), and the value added of McDonald’s is $1.50 − $0.50, or $1.00. Total value added is $0.50 + $1.00, which equals $1.50. For the economy as a whole, the sum of all value added must equal the value of all final goods and services. Hence, GDP is also the total value added of all firms in the economy. Housing Services and Other Imputations Although most goods and services are valued at their market prices when computing GDP, some are not sold in the marketplace and therefore do not have market prices. If GDP is to include the value of these goods and services, we must use an estimate of their value. Such an estimate is called an imputed value. Imputations are especially important for determining the value of housing. A person who rents a house is buying housing services and providing income for the landlord; the rent is part of GDP, both as expenditure by the renter and as income for the landlord.Many people,however,live in their own homes.Although they do not pay rent to a landlord, they are enjoying housing services similar to those that 20 | PART I Introduction

Worth: Mankiw Economics 5e CHAPTER 2 The Data of Macroeconomics |21 renters purchase To take account of the housing services enjoyed by homeowners, GDP includes the"rent"that these homeowners"pay"to themselves. Of course, homeowners do not in fact pay themselves this rent. The Department of Com- merce estimates what the market rent for a house would be if it were rented and includes that imputed rent as part of GDP. This imputed rent is included both in the homeowner's expenditure and in the homeowner's income Imputations also arise in valuing government services. For example, police of ficers, firefighters, and senators provide services to the public. Giving a value to these services is difficult because they are not sold in a marketplace and therefore do not have a market price. The national income accounts include these services in gdp by valuing them at their cost. That is, the wages of these public servants are used as a measure of the value of their output In many cases, an imputation is called for in principle but, to keep things sim- ple, is not made in practice. Because GDP includes the imputed rent on owner- occupied houses, one might expect it also to include the imputed rent on cars, lawn mowers, jewelry, and other durable goods owned by households. Yet the ralue of these rental services is left out of GDP. In addition, some of the output of the economy is produced and consumed at home and never enters the mar ketplace. For example, meals cooked at home are similar to meals cooked at a restaurant, yet the value added in meals at home is left out of GDP. Finally, no imputation is made for the value of goods and services sold in the derground economy. The underground economy is the part of the economy that people hide from the government either because they wish to evade taxation or because the activity is illegal. Domestic workers paid "off the books "is one ex- ple. The illegal drug trade is another Because the imputations necessary for computing GDP are only approximate, and because the value of many goods and services is left out altogether, GDP is an imperfect measure of economic activity. These imperfections are most prob- lematic when comparing standards of living across countries. The size of the un- derground economy, for instance, varies from country to country. Yet as long as the magnitude of these imperfections remains fairly constant over time, GDP useful for comparing economic activity from year to year Real GdP Versus Nominal gdp Economists use the rules just described to compute GDP, which values the econ- omy's total output of goods and services. But is gDP a good measure of eco- nomic well-being? Consider once again the economy that produces only apples and oranges. In this economy GDp is the sum of the value of all the apples pro- duced and the value of all the oranges produced. That is GDP=(Price of Apples X Quantity of Apples) +(Price of Oranges X Quantity of Oran Notice that GDP can increase either because prices rise or because quantities rise It is easy to see that gDP computed this way is not a good gauge of eco- nomic well-being. That is, this measure does not accurately reflect how well the User JOENA: Job EFF01418: 6264_ch02: Pg 21: 24939 #/eps at 1004 Ig Tue,Feb12,20028:404M

User JOEWA:Job EFF01418:6264_ch02:Pg 21:24939#/eps at 100% *24939* Tue, Feb 12, 2002 8:40 AM renters purchase.To take account of the housing services enjoyed by homeowners, GDP includes the “rent’’ that these homeowners “pay’’ to themselves. Of course, homeowners do not in fact pay themselves this rent.The Department of Com￾merce estimates what the market rent for a house would be if it were rented and includes that imputed rent as part of GDP. This imputed rent is included both in the homeowner’s expenditure and in the homeowner’s income. Imputations also arise in valuing government services. For example, police of- ficers, firefighters, and senators provide services to the public. Giving a value to these services is difficult because they are not sold in a marketplace and therefore do not have a market price.The national income accounts include these services in GDP by valuing them at their cost.That is, the wages of these public servants are used as a measure of the value of their output. In many cases, an imputation is called for in principle but, to keep things sim￾ple, is not made in practice. Because GDP includes the imputed rent on owner￾occupied houses, one might expect it also to include the imputed rent on cars, lawn mowers, jewelry, and other durable goods owned by households.Yet the value of these rental services is left out of GDP. In addition, some of the output of the economy is produced and consumed at home and never enters the mar￾ketplace. For example, meals cooked at home are similar to meals cooked at a restaurant, yet the value added in meals at home is left out of GDP. Finally, no imputation is made for the value of goods and services sold in the underground economy.The underground economy is the part of the economy that people hide from the government either because they wish to evade taxation or because the activity is illegal. Domestic workers paid “off the books” is one ex￾ample.The illegal drug trade is another. Because the imputations necessary for computing GDP are only approximate, and because the value of many goods and services is left out altogether, GDP is an imperfect measure of economic activity.These imperfections are most prob￾lematic when comparing standards of living across countries.The size of the un￾derground economy, for instance, varies from country to country.Yet as long as the magnitude of these imperfections remains fairly constant over time, GDP is useful for comparing economic activity from year to year. Real GDP Versus Nominal GDP Economists use the rules just described to compute GDP, which values the econ￾omy’s total output of goods and services. But is GDP a good measure of eco￾nomic well-being? Consider once again the economy that produces only apples and oranges. In this economy GDP is the sum of the value of all the apples pro￾duced and the value of all the oranges produced.That is, Notice that GDP can increase either because prices rise or because quantities rise. It is easy to see that GDP computed this way is not a good gauge of eco￾nomic well-being.That is, this measure does not accurately reflect how well the GDP = (Price of Apples × Quantity of Apples) + (Price of Oranges × Quantity of Oranges). CHAPTER 2 The Data of Macroeconomics | 21

Worth: Mankiw Economics 5e Conomy can satisfy the demands of households, firms, and the government. If prices doubled without any change in quantities, GDP would double. Yet it would be misleading to say that the economy's ability to satisfy demands has doubled, because the quantity of every good produced remains the same Econ- omits call the value of goods and services measured at current prices nomina GDP A better measure of economic well-being would tally the economy's output of goods and services and would not be influenced by changes in prices. For this purpose, economists use real GDP, which is the value of goods and services measured using a constant set of prices. That is, real GDP shows what would have happened to expenditure on output if quantities had changed but prices had not To see how real GDP is computed, imagine we wanted to compare output in 2002 and output in 2003 in our apple-and-orange economy We could begin by hoosing a set of prices, called base-year prices, such as the prices that prevailed in 2002. Goods and services are then added up using these base-year prices to value the different goods in both years. Real GDP for 2002 would be Real gDp=(2002 Price of Apples X 2002 Quantity of Apples) +(2002 Price of Oranges X 2002 Quantity of Oranges) Similarly, real GDP in 2003 would be Real gDp=(2002 Price of Apples X 2003 Quantity of Apples) +(2002 Price of Oranges X 2003 Quantity of Oranges) And real GDP in 2004 would be Real gdp=(2002 Price of Apples X 2004 Quantity of Apples) +(2002 Price of Oranges x 2004 Quantity of oranges) Notice that 2002 prices are used to compute real GDP for all three years. Because he prices are held constant, real GDP varies from year to year only if the quanti- ties produced vary. Because a society's ability to provide economic satisfaction for its members ultimately depends on the quantities of goods and services produced, real GDP provides a better measure of economic well-being than nominal GDP The GdP Deflator From nominal GDP and real GDp we can compute a third statistic: the gdp de fator. The GDP deflator, also called the implicit price deflator for GDP, is defined as the ratio of nominal gdp to real gDp Nominal GDP DP Deflator Real GDP The GDp deflator reflects what's happening to the overall level of prices in the economy To better understand this, consider again an economy with only one good, bread. If P is the price of bread and Q is the quantity sold, then nominal gDP is User JOENA: Job EFF01418: 6264_cho2: Pg 22: 24940#/eps at 1009 Illl Tue,Feb12,20028:404M

User JOEWA:Job EFF01418:6264_ch02:Pg 22:24940#/eps at 100% *24940* Tue, Feb 12, 2002 8:40 AM economy can satisfy the demands of households, firms, and the government. If all prices doubled without any change in quantities, GDP would double.Yet it would be misleading to say that the economy’s ability to satisfy demands has doubled, because the quantity of every good produced remains the same. Econ￾omists call the value of goods and services measured at current prices nominal GDP. A better measure of economic well-being would tally the economy’s output of goods and services and would not be influenced by changes in prices. For this purpose, economists use real GDP, which is the value of goods and services measured using a constant set of prices.That is, real GDP shows what would have happened to expenditure on output if quantities had changed but prices had not. To see how real GDP is computed, imagine we wanted to compare output in 2002 and output in 2003 in our apple-and-orange economy. We could begin by choosing a set of prices, called base-year prices, such as the prices that prevailed in 2002. Goods and services are then added up using these base-year prices to value the different goods in both years. Real GDP for 2002 would be Similarly, real GDP in 2003 would be And real GDP in 2004 would be Notice that 2002 prices are used to compute real GDP for all three years. Because the prices are held constant, real GDP varies from year to year only if the quanti￾ties produced vary. Because a society’s ability to provide economic satisfaction for its members ultimately depends on the quantities of goods and services produced, real GDP provides a better measure of economic well-being than nominal GDP. The GDP Deflator From nominal GDP and real GDP we can compute a third statistic: the GDP de- flator. The GDP deflator, also called the implicit price deflator for GDP, is defined as the ratio of nominal GDP to real GDP: GDP Deflator = . The GDP deflator reflects what’s happening to the overall level of prices in the economy. To better understand this, consider again an economy with only one good, bread. If P is the price of bread and Q is the quantity sold, then nominal GDP is Nominal GDP Real GDP Real GDP = (2002 Price of Apples × 2004 Quantity of Apples) + (2002 Price of Oranges × 2004 Quantity of Oranges). Real GDP = (2002 Price of Apples × 2003 Quantity of Apples) + (2002 Price of Oranges × 2003 Quantity of Oranges). Real GDP = (2002 Price of Apples × 2002 Quantity of Apples) + (2002 Price of Oranges × 2002 Quantity of Oranges). 22 | PART I Introduction

Worth: Mankiw Economics 5e CHAPTER 2 The Data of Macroeconomics |23 the total number of dollars spent on bread in that year, Px Q. Real GDP is the number Caves o f bread produced in that year times the price of bread in some base year, Pbase x Q. The gDp deflator is the price of bread in that year elative to the price of bread in the base year, P/pbase. The definition of the GDp deflator allows us to separate nominal GDP into two parts: one part measures quantities(real GDP)and the other measures prices (the GDP deflator). That is Nominal GDP= Real GDP X GDP Deflator Nominal GDP measures the current dollar value of the output of the economy. Real GDP measures output valued at constant prices. The gDP deflator measures the price of output relative to its price in the base year. We can also write this equation as Real GDP Nominal GDP GDP Deflator In this form, you can see how the deflator earns its name: it is used to deflate (that is, take inflation out of nominal GDP to yield real GDP Chain-Weighted Measures of Real GDP We have been discussing real gdP as if the prices used to compute this measure never change from their base-year values. If this were truly the case, over time the prices would become more and more dated. For instance, the price of com- puters has fallen substantially in recent years, while the price of a year at college has risen. When valuing the production of computers and education, it would be misleading to use the prices that prevailed ten or twenty years ago. To solve this problem, the Bureau of Economic Analysis used to update period- ically the prices used to compute real GDP. About every five years, a new base year was chosen. The prices were then held fixed and used to measure year-to-year changes in the production of goods and services until the base year was updated In 1995, the bureau announced a new policy for dealing with changes in the base year. In particular, it now emphasizes chain-wveighted measures of real GDP With these new measures, the base year changes continuously over time. In essence, average prices in 2001 and 2002 are used to measure real growth from 2001 to 2002; average prices in 2002 and 2003 are used to measure real growth from 2002 to 2003; and so on. These various year-to-year growth rates are then put together to form a"chain that can be used to compare the output of goods and services between any two dates This new chain-weighted measure of real GDP is better than the more tradi- tional measure because it ensures that the prices used to compute real GDP are never far out of date. For most purposes, however, the differences are not impor tant. It turns out that the two measures of real GDP are highly correlated with each other. The reason for this close association is that most relative prices hange slowly over time. Thus, both measures of real GDP reflect the same thing: economy-wide changes in the production of goods and services. User JOENA: Job EFF01418: 6264_ch02: Pg 23: 24941#/eps at 1004 I Tue,Feb12,20028:404M

User JOEWA:Job EFF01418:6264_ch02:Pg 23:24941#/eps at 100% *24941* Tue, Feb 12, 2002 8:40 AM the total number of dollars spent on bread in that year, P × Q. Real GDP is the number of loaves of bread produced in that year times the price of bread in some base year, Pbase × Q. The GDP deflator is the price of bread in that year relative to the price of bread in the base year, P/Pbase. The definition of the GDP deflator allows us to separate nominal GDP into two parts: one part measures quantities (real GDP) and the other measures prices (the GDP deflator). That is, Nominal GDP = Real GDP × GDP Deflator. Nominal GDP measures the current dollar value of the output of the economy. Real GDP measures output valued at constant prices.The GDP deflator measures the price of output relative to its price in the base year.We can also write this equation as Real GDP = . In this form, you can see how the deflator earns its name: it is used to deflate (that is, take inflation out of ) nominal GDP to yield real GDP. Chain-Weighted Measures of Real GDP We have been discussing real GDP as if the prices used to compute this measure never change from their base-year values. If this were truly the case, over time the prices would become more and more dated. For instance, the price of com￾puters has fallen substantially in recent years, while the price of a year at college has risen.When valuing the production of computers and education, it would be misleading to use the prices that prevailed ten or twenty years ago. To solve this problem, the Bureau of Economic Analysis used to update period￾ically the prices used to compute real GDP. About every five years,a new base year was chosen. The prices were then held fixed and used to measure year-to-year changes in the production of goods and services until the base year was updated once again. In 1995, the bureau announced a new policy for dealing with changes in the base year. In particular, it now emphasizes chain-weighted measures of real GDP. With these new measures, the base year changes continuously over time. In essence, average prices in 2001 and 2002 are used to measure real growth from 2001 to 2002; average prices in 2002 and 2003 are used to measure real growth from 2002 to 2003; and so on.These various year-to-year growth rates are then put together to form a “chain” that can be used to compare the output of goods and services between any two dates. This new chain-weighted measure of real GDP is better than the more tradi￾tional measure because it ensures that the prices used to compute real GDP are never far out of date. For most purposes, however, the differences are not impor￾tant. It turns out that the two measures of real GDP are highly correlated with each other. The reason for this close association is that most relative prices change slowly over time. Thus, both measures of real GDP reflect the same thing: economy-wide changes in the production of goods and services. Nominal GDP GDP Deflator CHAPTER 2 The Data of Macroeconomics | 23

Worth: Mankiw Economics 5e 24 PART IIntroduction Two Arithmetic Tricks for Working With Percentage Changes For manipulating many relationships in econom-(.15 percent) is approximately the sum of the ics, there is an arithmetic trick that is useful toi growth in the GDP deflator(5 percent)and the know: the percentage change of a product of two vari- growth in real GDP (3 percent) ables is approximately the sum of the percentage changes A second arithmetic trick follows as a corol- in each of the variables lary to the first: the percentage change of a ratio is ap To see how this trick works, consider an exam-i proximately rcentage change in the le. Let P denote the gdp deflator and y denote minus the percentage change in the denominator real GDP. Nominal GDP is P xY. The trick states Again, consider an example. Let y denote GDP that and L denote the population, so that Y/L is GDP The second trick states Percentage Change in(PxY) Percentage Ch P) Percentage Change in(Y/L) + Percentage Change in Y) ( Percentage Change in Y) ( Percentage Change in L) For instance, suppose that in one year, real GDP is 100 and the gDP deflator is 2; the next year,i For instance, suppose that in the first year, r real GDP is 103 and the gDP deflator is 2.1. We 100,000 and L is 100, so Y/L is 1,000; in the sec- can calculate that real GDP rose by 3 percent i ond year, Y is 110,000 and L is 103, So Y/L is and that the gdP deflator rose by 5 percent.: 1,068. Notice that the growth in GDP per person Nominal GDP rose from 200 the first year toi(6.8 percent) is approximately the growth inin- 216.3 the second year, an increase of 8.15 per-: come(10 percent) minus the growth in popula cent. Notice that the growth in nominal GDP tion(3 percent). The Components of Expenditure Economists and policymakers care not only about the economy 's total output of goods and services but also about the allocation of this output among alternative uses.The national income accounts divide gDP into four broad categories of C (C) purchases(G) Net exports(NX Y=C+I+G+NX Mathematical note: The proof that this trick works begins with the chain rule from calculus Now divide both sides of this equation by PY to obtain d(pY)/(py)=dP/p+dY/ Notice that all three terms in this equation are percentage User JOENA: Job EFF01418: 6264_cho2: Pg 24: 24942#/eps at 1009 II Tue,Feb12,20028:414M

User JOEWA:Job EFF01418:6264_ch02:Pg 24:24942#/eps at 100% *24942* Tue, Feb 12, 2002 8:41 AM The Components of Expenditure Economists and policymakers care not only about the economy’s total output of goods and services but also about the allocation of this output among alternative uses. The national income accounts divide GDP into four broad categories of spending: ➤ Consumption (C) ➤ Investment (I) ➤ Government purchases (G) ➤ Net exports (NX). Thus, letting Y stand for GDP, Y = C + I + G + NX. 24 | PART I Introduction FYI For manipulating many relationships in econom￾ics, there is an arithmetic trick that is useful to know: the percentage change of a product of two vari￾ables is approximately the sum of the percentage changes in each of the variables. To see how this trick works, consider an exam￾ple. Let P denote the GDP deflator and Y denote real GDP. Nominal GDP is P × Y. The trick states that Percentage Change in (P × Y) ≈ (Percentage Change in P) + (Percentage Change in Y). For instance, suppose that in one year, real GDP is 100 and the GDP deflator is 2; the next year, real GDP is 103 and the GDP deflator is 2.1. We can calculate that real GDP rose by 3 percent and that the GDP deflator rose by 5 percent. Nominal GDP rose from 200 the first year to 216.3 the second year, an increase of 8.15 per￾cent. Notice that the growth in nominal GDP Two Arithmetic Tricks for Working With Percentage Changes (8.15 percent) is approximately the sum of the growth in the GDP deflator (5 percent) and the growth in real GDP (3 percent).1 A second arithmetic trick follows as a corol￾lary to the first: the percentage change of a ratio is ap￾proximately the percentage change in the numerator minus the percentage change in the denominator. Again, consider an example. Let Y denote GDP and L denote the population, so that Y/L is GDP per person. The second trick states Percentage Change in (Y/L) ≈ (Percentage Change in Y) − (Percentage Change in L). For instance, suppose that in the first year, Y is 100,000 and L is 100, so Y/L is 1,000; in the sec￾ond year, Y is 110,000 and L is 103, so Y/L is 1,068. Notice that the growth in GDP per person (6.8 percent) is approximately the growth in in￾come (10 percent) minus the growth in popula￾tion (3 percent). 1 Mathematical note:The proof that this trick works begins with the chain rule from calculus: d(PY) = Y dP + P dY. Now divide both sides of this equation by PY to obtain d(PY)/(PY) = dP/P + dY/Y. Notice that all three terms in this equation are percentage changes