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,Feb12,20028:404MUser 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