Question

1. What are industry examples in international trade where economics of scale are relevant?

2. what are the arguments for and against requiring the U.S. federal budget to be balanced?

3. How well GPD measures tue well-being of society?

Answer 1

1. Economies of scale are most likely to be found in industries with large fixed costs in production. Fixed costs are those costs that must be incurred even if production were to drop to zero. For example, fixed costs arise when large amounts of capital equipment must be put into place even if only one unit is to be produced and if the costs of this equipment must still be paid even with zero output. In this case, the larger the output, the more the costs of this equipment can be spread out among more units of the good. Large fixed costs and hence economies of scale are prevalent in highly capital-intensive industries such as chemicals, petroleum, steel, automobiles, and so on.

2. Arguments For Balancing the Budget

The long-running argument for urgently balancing the U.S. budget goes something like this: The ever-rising U.S. debt will eventually cause investors to question the government's ability to repay its debts, resulting in surging interest rates that will quash private-sector investment as well as the economy. If interest rates rise too quickly, the government would find it very difficult to afford interest payments on the national debt, leading to default or still higher inflation.

In addition, they say, running large deficits when an economy is at full employment can shift economic activity from the private sector to the public sector, tamping down growth in the long run.

No Need to Worry About Deficits for Now

The more mainstream view among economists is that the nation's debt may ultimately become a problem, but it's not one we need to face by balancing the budget right now. They cite current conditions, including historically low interest rates, which indicate that investors don't see the debt as much of a problem either. U.S. government bonds are still considered the safest investments on Earth, and decades of predictions of bond-market doom have yet to be realized.

One reason economists caution against taking drastic measures to balance the budget is the impact it would have on the economy. Balancing the budget would require steep spending cuts and tax increases—which would amount to a double body blow to the U.S. economy. This could actually increase the deficit by lowering tax revenue and causing the government to spend more on social programs.

These Economists Say Deficits Don't Matter—To a Point

One view of government deficits and debt that has risen to prominence in recent years is that of Modern Monetary Theory (MMT). Proponents of MMT, usually liberal economists and politicians, argue that deficits and debts generally don't matter because the government, unlike a household, can simply print more money. The catch: This theory only holds when inflation is weak or at least contained. Government borrowing becomes a problem only when it raises aggregate demand to inflationary levels, MMT proponents say.

Arguments Against a Balanced Budget Law

Many conservatives have suggested passing a law or even a Constitutional amendment requiring the government to balance its budget. But most mainstream economists argue this would be a risky way to tackle the debt, one that could hamstring the government in times of economic crisis or other emergencies when additional spending is required.

3. Standard of living is a broad term that encompasses many factors—including some that are not bought and sold in the market and some that are. The level of GDP per capita, for instance, captures some of what we mean by the term standard of living, as illustrated by the fact that most of the migration in the world involves people who are moving from countries with relatively low GDP per capita to countries with relatively high GDP per capita.

To understand the limitations of using GDP to measure the standard of living, it is useful to spell out some things that GDP does not cover that are relevant to standard of living.

Limitations of GDP as a measure of standard of living

Because many factors that contribute to people's happiness are not bought and sold, GDP is a limited tool for measuring standard of living. To understand it's limitations better, let's take a look at several factors that are not accounted for in GDP.

GDP does not account for leisure time. The US GDP per capita is larger than the GDP per capita of Germany, but does this prove that the standard of living in the United States is higher? Not necessarily since it is also true that the average US worker works several hundred hours more per year more than the average German worker. The calculation of GDP does not take German workers extra weeks of vacation into account.

GDP includes what is spent on environmental protection, healthcare, and education, but it does not include actual levels of environmental cleanliness, health, and learning. GDP includes the cost of buying pollution-control equipment, but it does not address whether the air and water are actually cleaner or dirtier. GDP includes spending on medical care, but it does not address whether life expectancy or infant mortality have risen or fallen. Similarly, GDP counts spending on education, but it does not address directly how much of the population can read, write, or do basic mathematics.

GDP includes production that is exchanged in the market, but it does not cover production that is not exchanged in the market. For example, hiring someone to mow your lawn or clean your house is part of GDP, but doing these tasks yourself is not part of GDP.

Check out this example.

GDP has nothing to say about the level of inequality in society. GDP per capita is only an average. When GDP per capita rises by 5%, it could mean that GDP for everyone in the society has risen by 5% or that the GDP of some groups has risen by more while the GDP of others has risen by less—or even declined.

GDP also has nothing in particular to say about the amount of variety available. If a family buys 100 loaves of bread in a year, GDP does not care whether they are all white bread or whether the family can choose from wheat, rye, pumpernickel, and many others—GDP just looks at whether the total amount spent on bread is the same.

Likewise, GDP has nothing much to say about which technology and products are available. The standard of living in, for example, 1950 or 1900 was not affected only by how much money people had—it was also affected by what they could buy. No matter how much money you had in 1950, you could not buy an iPhone or a personal computer.

In certain cases, it is not clear that a rise in GDP is even a good thing. If a city is wrecked by a hurricane and then experiences a surge of rebuilding construction activity, it would be peculiar to claim that the hurricane was therefore economically beneficial. If people are led by a rising fear of crime to pay for installation of bars and burglar alarms on all their windows, it is hard to believe that this increase in GDP has made them better off. In that same vein, some people would argue that sales of certain goods, like pornography or extremely violent movies, do not represent a gain to society’s standard of living.

GDP is rough, but useful

A high level of GDP should not be the only goal of macroeconomic policy—or broader government policy. But, even though GDP does not measure the broader standard of living with any precision, it does measure production well, and it does indicate when a country is materially better or worse off in terms of jobs and incomes. In most countries, a significantly higher GDP per capita occurs hand in hand with other improvements in everyday life along many dimensions, like education, health, and environmental protection.

No single number can capture all the elements of a concept as broad as standard of living. Nonetheless, GDP per capita is a reasonable, rough-and-ready measure of the standard of living.