February 2 to 9

February 2

Q1: How do they come up with the base year price?

A: Since they use chain-weighted price indexes now, there is no single base year, instead it's a moving average of several years so that changes in the composition of prices across commodities is accounted for. See the discussion of this on page 101.

Q2: Does GNP include GDP?

A: There is overlap (like venn diagrams) but one is not wholly absorbed by the other.

Q3: Is this done for other countries (calculation of GDP)?

A: yes. Go to the Coolsite link in the website and you'll find comparable data for foreign countries.

Q4: Why is GDP used more than GNP?

A: Because the changes in GDP are reflected in the changes in employment and income of Americans within the United States.

Q5: Could you explain the concept of external benefit (as it affects supply and demand) again?

A: An external benefit is one that is received by a surrounding community or the greater society, but not by either the seller or the buyer of a good. If, for example, it is better to use a clean burning fuel (although it is more expensive) than the current fuel a producer uses, neither the seller nor buyer has an intrinsic economic incentive to change. But given the external benefit of cleaner air for the surrounding community, the social demand for the cleaner burning fuel should be higher and to the right (vertically higher by the amount of the per unit value of the external benefit). To ensure this occurs, producers could be given subsidies to buy the cleaner burning fuel, thereby raising the demand curve to the social demand curve level. The problem is in measuring the true value of the benefit. It could be measured by the level of medical costs saved as a result of using the cleaner burning fuel. Even that is a controversial calculation.

February 6

Q6: Is GDP per capita ever broken down by city or state for comparison?

A: There are data for employment, value of output and income, for example, disaggregated by state, county and city. The City/County Data Book is one source and there are various indices available on the link I mentioned above.

Q7: Who pays social security taxes?

A: The employer pays half of the 7.65 percent tax and the other half comes out of the worker's check. The absolute tax goes no higher than .0765 x $84,500 (approx.), which means that a millionaire pays the same tax as someone who makes $84,500 -- a considerably smaller percentage of the wealthy person's income.

Q8: I don't necessarily think having a surplus of goods is always bad. You can sell those goods for a cheaper price allowing for consumers to know of your products, you will then be able to pedal your new line of products.

A: But we're talking about the macroeconomy, not the situation of just a single business. Whether or not it's good for a single business to have a temporary increase in its inventory, it is never a good thing for all industries to have a sudden increase in inventories. This translates into a greater number of workers without jobs and a dramatic fall off in spending. when, in response, all firms lower their prices they are worse off. Your one entrepreneur has lowered his prices and so have his competitors. His sales don't increase and his revenues fall. 

Q9: How can you take a combined GDP and then break down the national income into specific jobs when each business/job is entirely different?

A: Actually the GDP calculations are not reduced finally to individual industries or jobs, instead that calculation is done from the bottom up, so to speak. Individual jobs are accounted for by a system that uses SIC (standard industrial classification) codes. Beginning with the six-digit SIC level, data are collected on the number of jobs, then businesses, industries and sectors until you reach the economy generally. Check out the Bureau of Labor Statistics link through the Resources for Economists website that you can find through Cool Sites on my webpage to find out more.

Q10: In the circular schema, what would be the effect if one area was to be eliminated? Could the schema still function?

A: I think if the household sector were wiped out someone might notice, eh?

Q11: How does the black market play into the circular schema? Does it make a difference?

A: The black market is the underground economy, which is a leakage from the visible income-consumption stream, i.e., it's not counted in GDP and it's not subject to taxation. It can be said to contribute to the economic well-being of Americans to the extent it's healthy (I would think you'd want to subtract the drug trade). 

February 9

Q1: How have expansion of new fields of technology, production ... etc. affected the growth, or lack thereof, of the labor force?

A: There is not a clear answer to this question ~ it's debatable. Some argue that technological advances have reduced employment in certain fields. We should be clear first about the distinction between the labor force and employment. The main causes of increases in the size of the labor force (and remember it has grown faster than the population) has more to do with the number who reach 17 years of age relative to those who reach retirement age and the increase in those seeking work out of the existing population. The one connection between technology and increases in labor force size is perhaps through advances in household conveniences that have reduced the drudgery of such work, allowing more house workers to enter the paid workforce. Lastly, there is a positive connection between increases in production and more people entering the labor force. If people who were previously discouraged workers believe they now can find a job, they will enter the labor force and begin looking.

Q2: Is it appropriate for Walmart and other corporations to take life insurance policies out on their employees and then spend the gains?

A: The market is not a place to expect a high degree of morality. One would like to believe that corporations would pay some of the death benefits to the surviving spouse and children. However, the reason corporations do this is presumably to recover the costs of training workers -- again a very self-interested motive.

Q3: I believe that with increasing population and new machinery, the unemployment rate will continue to rise. I don't really see us ever gaining control over this situation.

A: Remember, the system cannot go for long with unemployment constantly rising. Markets need consumers and without income-producing employment, demand for output will collapse. Of course, this happened in the Great Depression of the 1930s and eventually government intervention, bringing injections of new spending, allowed the economy to recover. The text refers to the Employment Act of 1946 which turned over responsibility to achieve full employment to the Federal Government. If the unemployment rate gets close to double digit levels, there will be a public clamor for the government to act.

Q4: I'm not part of the labor force ... :( But I work 11-hour days all summer. How do they decide? Is it just because I am a seasonal worker?

A: You are a part of the labor force during the summer. Seasonal workers are considered members of the labor force during the period they are working. That's why the labor force always increases during the Christmas holidays when workers enter the paid work force as sales clerks etc.

Q4: What is the employment/unemployment ratio of men and women? Any numbers or estimated percentages?

A: The textbook gives you those figures on page 116.

Q5: Do you feel that a reason discouraged workers have increased over the past few years is because employers are looking to employ people with lots of experience, such as [those with] a degree or practical experience?

A: Perhaps, but the number and percentage of Americans with advanced degrees has increased over the last decade, so it's difficult to blame the lack of a skilled, literate labor force for people dropping out.

Q6: Calculating real income is very confusing.

A: I hope it's easier after Wednesday's explanation. For the first year, simply divide nominal income by 1 + rate of inflation for that year. For the second and succeeding years, divide nominal income by (last year's deflator) x 1 + current year's rate of inflation. For example:

                           nominal income    inflation rate     deflator          real income

      Base Year         $20,000

               1              $20,000                  .03                 1.03              $19,417

               2                20,000                  .04         1.03(1.04)=1.0712   18,671      

               3                30,000                  .02      1.0712(1.02)=1.093    27,447

Q7: Why am I not considered part of the labor force? I work 25 hours and attend college full-time. I have always considered myself part of the labor force.

A: You are counted as an employed member of the labor force. If you were not working and in college, the Department of Labor would not count your unemployment because you presumably have voluntarily dropped out to attend school.

Q8: What by definition if nominal income and real income?

A: Nominal income is the dollar amount of one's income, i.e., that which appears on your paycheck. Real income is nominal income discounted for price increases since the base year. This allows for a comparison between different year's incomes to determine changes in the standard of living of Americans. If money (nominal) incomes rise but prices rise faster, then we are actually worse off. On the contrary, if nominal income falls, but prices fall faster, then we are actually better off -- our smaller incomes can buy more goods. Nominal income hides this.

  [Program Note: Non-native speakers can use translation dictionaries for tests, but not specially written index cards with individual economic terms translated.]

Q9: Could you explain the theory of "trickle down economics" as it pertains to the notion that cutting taxes stimulates the economy?

A: Yes, with the proviso that explaining it and believing in it are two different kettles of fish. The story goes: Give a wealthy person a tax cut and as a result of this sudden largesse, s/he will hire more workers and/or increase his/her workers' wages. Since the recent tax cuts that have benefited the wealthiest Americans have been followed by only small increases in jobs, this theory has been further undermined. For more on this you might read a recent New York Times column by economist Paul Krugman.