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,Feb12,20028:404MUser 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