FACTS AND TOOLS

Question 26.26

11. Attach the appropriate fractions to the “long-term averages” in Figure 26.6. (Some fractions will be left over.) These fractions may turn out to be more memorable than the exact percentages in the figure.

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1. Calculate GDP in this simple economy:

Consumer purchases: $100 per year

Investment purchases: $50 per year

Government purchases: $20 per year

Total exports: $50 per year

Total imports: $70 per year

2. Since World War II, who were the only three recession-free U.S. presidents? (We’ll revisit the question of how presidents matter for the economy in later chapters.)

3. We noted that “government purchases” don’t include all government spending. A big part of what the U.S. government does is transfer money from one person to another. Social Security (payments to retirees), and Medicare and Medicaid (paying for medical care for the elderly and the poor) make up most of these “government transfers.” We’ll look into this in more detail in Chapter 36, but right now, let’s see how big “government transfers” are and how fast they’ve grown in the federal government’s budget. The figures in this table are all in non-inflation-adjusted dollars. Complete the table.

4. Let’s see what fraction of the economic pie goes to workers in the form of wages, and let’s see if it has changed over the years. The “wage share” seems like it should be easy to calculate, but there’s a problem. That problem brings us back to the big idea of opportunity cost. The problem itself is straightforward: When a small business owner makes money, should we count that as “wages” or as “profit?” Usually, a small business owner is working at the business most days, doing the kinds of tasks that you could easily pay someone else to do: In other words, from the looking-in-the-window perspective, a business owner looks like a worker, and workers earn wages. But since the owner gets to keep all the profits that are left over after paying off the other workers and the bank, it looks like the money that he or she earns should count as profit.

What to do? The best solution is to calculate the “opportunity cost” of the business owner’s time: In other words, estimate roughly how much the business owner would get paid if he or she were working as an employee. It tells us how much of the business owner’s income is truly wage income.

The second best solution, which we’ll use in this question, is to just guess that one-third, one-half, or two-thirds of the business owner’s income is really wages, and the rest is profit. As so often in economics, we make some assumptions; Let’s see if that changes our view of the economy. Using this measure, let’s see what has happened to the slice of the pie going to workers:

Using these data, complete the following table:

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So, now that you’ve calculated this, does it appear that “wage share” has risen by more than 5%, fallen by more than 5%, or stayed roughly the same over the decades? Does the one-third, one-half, or two-thirds business owner adjustment affect this conclusion?

5. Let’s figure out GDP for Robinson Crusoe.

6. Let’s think about an economically sound way to measure the value of leisure. To keep this simple, we’ll just think about the value of leisure to people who could work but who decide to stay home. Also, we won’t think about how much actual workers value their free time, or about how much children and retirees value their time.

In a standard supply and demand labor model, firms “demand” labor, while workers “supply” labor. Let’s think about a labor market that is in equilibrium, with a wage of $20 per hour (close to the U.S. average) and with 150 million Americans working out of a total of 225 million working-age Americans.

Leisure-augmented GDP = Regular GDP + Total monetary value of leisure

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If the average working person works 2,000 hours per year (that’s a 40-hour week for 50 weeks a year), then what is the leisure-augmented value of U.S. GDP?

7. Consider the following two claims. The first would be a typical statement in the magazine The Nation, while the second would be a typical statement in the magazine National Review:

Europeans have strong labor unions, so their workers get a bigger share of the pie than American workers.

Since European businesses are highly regulated, they have little incentive to make big profits. Therefore, they get a much smaller share of national product than American workers.

It is true that Europeans have stronger labor unions than Americans, and it is true that European businesses face higher regulatory burdens than American businesses. But with that in mind, what is wrong with these two statements? What fact are they ignoring? And what does that fact tell us about what strong unions and high levels of government regulation can’t do?

8. The underground economy and other nonpriced production make it difficult to accurately measure the precise level of GDP. But GDP could still be very accurate for measuring changes in the economy. If Janet Yellen, the Federal Reserve head, is trying to find out whether the U.S. economy has gone into a recession, are the difficulties of measuring nonpriced production likely to be important problems for her purposes? How is this like always wearing your shoes when you step on the bathroom scale?

10. Let’s sum up some basic facts of U.S. economic history with numbers:

11. What is the difference between a nation’s wealth and its GDP? How are the two related?

1. During World War II, the government did a good job measuring nominal GDP. But if the price level was calculated incorrectly, we might get a completely wrong idea about what happened with real GDP. During World War II, price ceilings were in place. That means that some things that would’ve been expensive were instead artificially cheap. Within a few years of the war’s end, price controls finally ended, and the price level spiked up about 20%. If the true price level during the war was actually 20% higher than reported, would that mean real GDP is higher than the official number in question 10b in the previous section, lower than that number, or is it still the same as that number?

2. If U.S. government statistics counted education spending as part of investment, which of the following would rise, which would fall, and which would remain unchanged? (Note: You might use rise, fall, and stay unchanged more than once each or you might not.)

Consumption

Investment

Gross domestic product

3. If U.S. government statistics counted people who are receiving unemployment benefits as people who are “government employees” hired to “search for work,” which of the following would rise, which would fall, and which would remain unchanged? (Note: You might use rise, fall, and unchanged more than once each or you might not.)

Consumption

Government purchases

Gross domestic product

4. According to legend, some government

employees do very little work. If this legend is true enough to be important, then we may be measuring GDP incorrectly. Officially, we say that these are “employed workers” but to a great extent these “employees” are really unemployed in any useful task; they are receiving transfer payments and watching YouTube for 40 hours per week. If, instead, government statistics counted these YouTube-watching government employees as simply retired or unemployed, which of the following would rise, which would fall, and which would remain unchanged? (Note: You might use rise, fall, and unchanged more than once each or you might not.)

Consumption

Government purchases

Gross domestic product

!launch! WORK IT OUT

1. Used textbooks sold at your college bookstore

2. Used books sold at a garage sale

3. Cars made in the United States at a Toyota factory

4. Cars made in Germany at a General Motors factory

5. The price paid by a German tourist when staying at a New York City hotel

6. The price paid by an American tourist staying at a Berlin hotel

7. A ticket for a Yankees game