Econ Homework - Apr. 8

Economics Homework- Why Do We Neglect Leisure and Cheer For Divorce?
1. The CIA uses GDP as an indicator of economic activity in countries around the world. How would you explain to a noneconomist CIA director what GDP can and cannot tell the CIA about those countries?
GDP (gross domestic product) is a measure of the total market value of all final goods and services produced in a given year. Economists use GDP as a device to measure the economic growth. GDP does not measure various goods and services and thus it is not a good measurement of the well-being of society. Nonmarket transactions are not accounted for in GDP measurements, for example, the services of homemakers. Since the transactions don’t show up in the GDP, the measured GDP is undervalued. Leisure is also not measured in GDP. If a country enforces a 90 hour work week, the GDP will surely increase exponentially, but the happiness of the workers, which is not account for in GDP, will decline. Vice versa, if a country regulates to a 30 hour work week, the GDP will decline, but the workers will be happier. Thus this is not a good indication of the well-being of society. Improved product quality is also not accounted for in the measurement of GDP. A computer 10 years ago would have cost on average $3000 where as now a computer for $3000 would get you close to the best one in the market, yet the GDP would be the same. GDP is thus only a quantitative measurement and not qualitative. GDP also fails to measure the transactions in the underground economy. Transactions in the underground economy include that of gamblers, smugglers, prostitutes, stolen goods, drug growers, drug dealers, etc. These people do not report their incomes to the government.

2. Prostitution, gambling, and some types of drugs use are legal in some countries and illegal in others. What implication does this have for international GDP comparisons? What other issues might cloud such comparisons?
Comparing the GDP of countries with different laws in prostitution, gambling, and some other types of drug use would be inaccurate. The underground economy is a portion of the entire economy and thus in a country where such acts are illegal, the GDP is lower than a country in which the acts are legal.

3. In 1996, champion bicycle racer Lance Armstrong was diagnosed with cancer and spent, perhaps, $60,000 on surgery and chemotherapy. Each year from 1999 to 2005, Armstrong shared a $400,000 prize in the Tour de France bike race. For the purpose of this exercise, let’s ignore the money that Armstrong made from endorsements and other sources and assume that the prize money was divided evenly among Armstrong and his nine team-mates. In which year did Armstrong make the largest contribution to GDP? In which year do you think he had the lowest level of individual welfare? In which year do you think he had the highest level of individual welfare? Discuss the relationships among income, output and your own happiness.
In 1996, Lance Armstrong made the largest contributor to GDP as he spent $60,000 on surgery and chemotherapy whereas in other years he receives $40,000 for winning the Tour de France. 1996 was also the year where Armstrong had his lowest level of individual welfare, due to his cancer treatment. The highest level of individual welfare probably came either during his first or last year of winning the Tour de France. Income is somewhat an indication of happiness as usually higher income leads to more happiness. Higher GDP does not indicate that society is doing better.

4. Categorize each of the following items as being in or out of US GDP in the relevant year:
a. Lance Armstrong’s winning in the Tour de France - in
b. The used toboggan you bought on eBay - out
c. The Whopper you bought for lunch - in
d. The massage you bought your dad for Father’s Day - in
e. The Money painting you bought your mother for Mother’s Day - in
f. The coffee beans that Starbucks roasted in December but didn’t sell until the following year -out
5. How could leisure time be included in a measure of social welfare? Can you think of measureable values that coincide with leisure?
When people have leisure time, they tend to use the computer and/or watch television. This can be measured by counting the amount of television viewers at certain times. For example, if the average hour work week decreases, on average people might be home at 5 pm instead of 7 pm. Thus, if the amount of television viewers increases at 5 pm dramatically, it can be a sign of social welfare. This is not an accurate measurement, but can provide an idea of account leisure in measurable values.