please read Paul Krugman’s classic “The Mercedes Menace,” which can be found at
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Question
please read Paul Krugman’s classic “The Mercedes Menace,” which can be found at (http://web.mit.edu/krugman/www/mercedes.html) and then comment on the questions below. This is a great story about conspicuous consumption (i.e. keeping up with the Jones’ consumption). Briefly comment on the following questions.
1. On the whole, do you think this type of consumption is really good for the economy? That is, what effects will it have on the functioning of the economy? Be sure to discuss the GDP equation in your answer. Weigh the benefits in the costs. However, do not forget about personal debt issues with conspicuous consumption?
2. What does it say about where people get their happiness?
3. Do you agree or disagree with Krugman’s assessment that economists “are not supposed to be moralists.” Why or why not?
4. After you respond to question C above, consider the following two quotes: (1) by Dean William Ralph Inge who stated, “The aim of education is the knowledge not of facts but of values.” and (2) by Abraham Lincoln “The philosophy of the classroom in one generation is the philosophy of government in the next.” How much should economists say about some of the pitfalls of over consumption and personal debt decisions? For example, American's continue to borrow more for longer when they purchase their cars (https://www.edmunds.com/about/press/auto-loan-lengths-reach-all-time-high-according-to-new-edmunds-analysis.html). Please provide your thoughts.
Explanation / Answer
1) Conspicuous consumption is spending money to purchase luxury items in order to show off their status and economic power to the other people. Conspicuous consumption is good for the economy.When a person shows off his status, it will create a state of unrest amongst other individuals whowillaslo be motivated topurchase items and thus the demand rises in the market.The increase in demand in turn increases the production and supply of the goods and thus the overall GDP of the economy improves.
GDP = Consumption + Investment + Government spending + Net Exports
As Consumption increases the GDP of the economy so it is beneficial for the economy.
It also raises the personal debt as in order to own the luxury items, the individual has to take loan from the banks which increases the personaldebt.
2) People get their happiness by deriving maximum utility. Maximum utility is achieved by purchasing and consuming the items. If a person is fond of luxury cars, he achieves maximum utility and derive happiness by purchasing cars. He also gets the happiness by showing it off as a status symbol in the society.
3) Economists are not supposed to be moralists. Being a moralist a person is not supposed to envy others by showing his possessions or economic power.On the other hand, Being an economist a person is supposed to show off his possessions and luxury items in order to createan unrest amongst other people and motivate them to purchase more and more items ,thus increasing the GDP of the economy. Thus, Economists are not supposed to be moralists.
4) Overconsumption is always detrimental for the individuals. Individual's needs are unlimited and their monetary resources are limited.In order to satisfy all their unlimited desires, a person has to take personal debt.If the debt is beyond the paying capacity of the individual, the economy falls into a trap of debt and thus leading to a downfallof the economy.
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