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,Feb12,20028:404MUser 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