ANALYTICAL PROBLEMS

1. A reputable study shows that a particular new work­place safety regulation will reduce the growth of real GDP. Is this an argument against implementing the regulation? Explain.

2. Consider a closed economy with a single telephone company, Calls-R-Us. The residents of the country make 2 million phone calls per year and pay $3 per phone call. One day a new phone company, CheapCall, enters the market and charges only $2 per phone call. All of the residents immediately stop using Calls-R-Us and switch to CheapCall. They still make 2 million phone calls per year. The executives of CheapCall are proud of their market share. Moreover, they post billboards stating, “Our country has increased its national saving by $2 million per year by switching to CheapCall." Comment on the accuracy of the statement on the billboards.

3. Economists have tried to measure the GDPs of virtu­ally all the world's nations. This problem asks you to think about some practical issues that arise in that effort.

a. Before the fall of communism, the economies of the Soviet Union and Eastern Europe were cen­trally planned. One aspect of central planning is that most prices are set by the government. A gov­ernment-set price may be too low, in that people want to buy more of the good at the fixed price than there are supplies available; or the price may be too high, so that large stocks of the good sit unsold on store shelves.

What problem does government control of prices create for economists attempting to measure a country's GDP? Suggest a strategy for dealing with this problem.

b. In very poor, agricultural countries, many people grow their own food, make their own clothes, and provide services for one another within a kin or vil­lage group. Official GDP estimates for these countries are often extremely low, perhaps just a few hundred dollars per person per year. Some economists have argued that the official GDP figures underestimate these nations' actual GDPs.

4. We showed in Eq. (2.10) that S = I + CA, where S is national saving, I is investment, and CA is the current account balance. Calculations of national saving and investment depend on the treatment of government investment. In the text, we treated government pur­chases, G, as if they were consumption expenditures. Therefore, Eq. (2.7) states that government saving is S_govt =( T — TR — INT) — G, so that (1) national sav­ing in Eq. (2.8) is S = Y + NFP - C - G, and (2) I in Eq. (2.10) is gross private domestic investment GPDI.

As mentioned in the text, a more detailed treat­ment recognizes that government purchases com­prise consumption expenditures, which we will call GCE, and government investment, which we will call GI, so G = GCE + GI. Now define government saving as (T — TR — INT) — GCE. With this alterna­tive definition of government saving, show that private saving plus government saving = I + CA, where investment (I) is the sum of GPDI and GI.

Table 5.1, titled “Saving and Investment by Sector," in the National Income and Product Accounts (found online at www.bea.gov) uses this more detailed treatment. For the most recent quarter for which all data in Table 5.1 are available, what are the values of gross saving, gross domestic investment (gross pri­vate domestic investment plus gross government investment), and the current account balance (shown in Table 5.1 as “Net lending or net borrowing")? Does the identity hold true? If not, how can the entries for capital account transactions and statistical discrep­ancy in Table 5.1 help?

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