Jan. 18 to Feb. 18 Comment Cards

January 24

   Q1: With inequity, why can't the government enforce a basic way of living? The rich mostly never spend their money. It's just knowing that they have it. Can't they at least use it to help the less fortunate?

   Response: Although we do have programs to provide some income guarantees and to redistribute income (progressive taxes, for example, by which upper income groups are taxed at a higher rate than lower income households; the minimum wage, unemployment benefits and so-called Temporary Assistance for Needy Families) we still have huge holes in the "social safety net". Over 40 million people in the U.S. have no health insurance and the income distribution has grown more unequal as programs for the needy have been cut or increased at a rate less than inflation. One reason for this is that those in public office who hold the dominate view believe the market system works well enough and that government intervention to help the poor will create inefficiencies.

February 7

Q1: According to Okun's Law, if the unemployment rate rises 10% will there be a 30% fall in GDP? Are people who are on strike included in the counting of unemployed people?

R1: When the unemployment rate rose from near full employment to 25% from 1929 to 1933, the GDP fell by half. That's a two-to-one ratio. Arthur Okun took data from over 50 years of the U.S. economy, so he based it on the past relationship between unemployment changes and GDP changes. If the past is prologue of the future, then yes a 10% rise in unemployment should cause GDP to fall by between 20 to 30 percentage points. People on strike are not counted as unemployed because they are not looking for a job. Regarding your other question -- if productivity increases then GDP can increase while the unemployment rate stays the same. Okun's law is based on a ceteris paribus condition (other things remain the same).

Q2: If you are in school and employed are you considered part of the workforce or are you strictly a student?

R2: If you are employed you're part of the labor force. If you answer the survey question, "Are you currently working for pay?" with a no and follow by answering the question, "Why not?" with, "I am a student", you will not be counted as a part of the labor force and hence not one of the unemployed.

Q3: ...you cannot get into someone's head, and people write down what they think the person given the study (employment survey) wants to hear, how true do you think the study results are? How can you trust the results?

R3: They have corroborated the results with surveys of industry layoffs, unemployment benefit applicants and other studies. 

February 10

Q1: Why is the Euro worth more than the U.S. dollar?

R1: To rephrase -- the Euro has increased in value relative to the dollar (a Euro is worth more dollars than five years ago and, in turn, the dollar is worth fewer Euros). The exchange rate of a currency is a function, in part, of the supply of the currency on international markets (i.e., dollar holdings at foreign central banks) and the demand for the currency. A U.S. dollar is demanded when a foreign person, business or government wants a dollar's worth of U.S. goods or services. In turn, when we want more Chinese goods we are exchanging dollars for yuans which allows us to buy those goods. Since we're buying more European goods and Chinese goods than they're buying of our goods, the dollar falls in value relative to foreign currency. The war in Iraq also involves an outflow of U.S. currency, increasing the supply of it relative to its demand. 

Q2: Who is affected more by inflation or rising prices, sellers or manufacturers?

R2: A manufacturer is a seller. If you mean retail seller as opposed to manufacturer, then that is an interesting question. It would likely depend on the kind of industry. In the case of the oil industry, it's easier for the petroleum company to pass on higher costs (labor, materials etc.) to the retail seller of petroleum products because there are fewer oil companies (i.e., more like a monopoly) and many retail sellers of petroleum products (more like perfect competitors). The local service station that has many rivals finds it more difficult to pass on higher prices of oil to motorists. They are more likely to have their profits squeezed.

Q3: Why are there positives and negatives to market failure? Wouldn't positives help out the market and help it succeed?

R3: A positive externality (also called an external benefit) means that people receive the benefit of a good or service without having to pay for it. They are free riders. As a consequence, the free market will likely produce less of that good or service than society really wants. No private business person could afford to construct and operate a lighthouse if everyone can receive the benefits of the light without paying for it. A market only works well if the seller can restrict the benefits to those who pay for them.

Q4: How is a public good, a failure?

R4: The private market system will not produce enough of a public good (a good whose benefit cannot be restricted to those who pay). There will be free riders for snowplowing services, fire-fighting, vaccinations and national defense. The private market will therefore not provide enough of these because there will always be people who refuse to pay since they get the benefit anyway. So, the private market fails. Only government with the power to tax all of us will be capable of providing sufficient quantities of these goods.

Q5: In terms of national income accounting, what happens with Salvation Army and Goodwill and stores of that nature that take products (clothes, furniture etc.) that have already been taxed and accounted for in GDP?

R5: These are non-profit organizations. If you sell a used car and make a profit, that is income and must be included in GDP. 

Q6: I would like if you went over how to do the math for the homework before it is due. I needed a longer review for the test -- we were pushed for time.

R6: Homework help has been on the website since the beginning of the semester for all the problem sets through to the semester's end. The study guide is also on the website. We completed all but questions about the labor force in Friday's review.