Consider how each of the following events is likely to affect real GDP? Do you t
ID: 1230241 • Letter: C
Question
Consider how each of the following events is likely to affect real GDP? Do you think the change in real GDP reflects a similar change in economic well-being?a. A hurricane in Florida forces Disney World to shut down for a month.
b. The discovery of a new, easy-to-grow strain of wheat increases farm harvests.
c. Increased hostility between unions and management sparks a rash of strikes.
d. Firms throughout the economy experience falling demand, causing them to lay off workers.
e. Congress passes new environmental laws that prohibit firms from using productions methods that emit large quantities of pollution.
f. More high-school students drop out of school to take jobs mowing lawns.
g. Fathers around the country reduce their work-weeks to spend more time with their children.
Explanation / Answer
A. A hurricane in Florida forces Disney World to shut down for a month. Potential visitors to the Park are unable to spend as planned on this consumption/ service, while the Park does not earn the corresponding income it could have earned. Real GDP falls and so does welfare. B. The discovery of a new, easy-to-grow strain of wheat increases farm harvests. The new technology makes production more efficient, so that the farmers may produce more output per (man- and machine-) hour; this increased productivity is likely to translate into increased output; for instance, the farmers may choose to work and invest as hard as before and to produce more (the fact that the increased farm output is likely to lower the price of wheat is irrelevant since the question is concerned with Real GDP, not Nominal GDP); or the farmers may choose to work less at the farm and to expend more labor and investment in another production activity, in which case Real GDP rises because of that other activity; or the farmers may choose to enjoy more leisure, in the latter case Real GDP does not rise; in all cases, well-being rises. C. Congresses passes new environmental laws that prohibit firms from using production methods that emit large quantities of pollution. The immediate effect is to raise Real GDP, since students add to the labor force; and consequently well-being rises. However, education raises the future productivity of the workers and, therefore, their future well-being (the greater productivity may translate into higher production or higher leisure, depending on each person’s preferences). By taking unskilled lawn-mowing jobs, students forgo the opportunity to raise their future skills. If they freely choose to do so, the principle of revealed preference suggests that they must be better off doing so; either because they have weighed future benefits against present sacrifices or because they do not care about the future at all – if the drop-outs don’t care about their future, why should economists care about it for them ? However, if markets fail to channel loanable funds to the most productive uses, students may be unable to borrow to finance their education; this market failure would commend some degree of intervention. It may also be that society as a whole benefits from having educated citizens – fewer graffitis in the subway, fewer elected politicians hurling bananas at each other. D. An individual sells a used car to another individual. E. Fathers around the country voluntarily reduce their workweeks to spend more time with their children. Real GDP falls since the fathers work less, well-being rises since the fathers choose to forgo labor hours for leisure hours.
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