Tuesday, November 15, 2011

Grade your knowledge of political economics (ANSWERS)

Grade your knowledge of political economics. Regardless of your political identity, you either have a good or a bad understanding of economics. Here are a few simple questions that have complex answers.

TRUE/FALSE: Mandatory licensing of professional services increases the prices of those services.
TRUE - This of course ignores the price to you when an unlicensed and incompetent lawyer drafts your contract, closes your transaction or defends your court case. Or the price to you when an unlicensed and incompetent doctor operates on your brain or performs your plastic surgery. Thus the assumption is that removing licensing will introduce more competition and lower prices. But monetary costs are not the only relevant costs if you actually want competent professional services.

TRUE/FALSE: Overall, our standard of living is higher today than it was 30 years ago.
FALSE - Standard of living is inevitably linked to the cost of living. When we try and see whether we’re better off than we were 30 or 100 years ago, we immediately have a problem. Our incomes are higher which suggest a higher standard of living. But we know that the general level of prices has risen over time, what is called inflation. So you can’t look at the growth of income alone to measure the growth in material well-being. You have to take account of the increase in prices to accurately measure how much more stuff we can have now compared to before. In practice, measuring the change in prices is quite difficult. Some of the difficulty is because the mix of goods and services—the "basket" of goods and services as it is sometimes called—isn’t really the same as it was a year ago or ten years ago. One reason is that people will tend to substitute toward goods that have become relatively cheaper and move away from goods that have gotten relatively expensive. Surely, the average American is many times more comfortable materially than in 1900 and even perhaps compared to 1970, but the measurement of income does not prove it so.

TRUE/FALSE: Rent control leads to housing shortages.
TRUE - Rent control, like all other government-mandated price controls is a law placing a maximum price, or a “rent ceiling,” on what landlords may charge tenants. If it is to have any effect, the rent level must be set at a rate below that which would otherwise have prevailed. In a competitive market and absent controls on prices, if the amount of a commodity or service demanded is larger than the amount supplied, prices rise to eliminate the shortage (by both bringing forth new supply and by reducing the amount demanded). But controls prevent rents from attaining market-clearing levels and shortages result.

TRUE/FALSE: A company with the largest market share is a monopoly.
FALSE - It is usually assumed that the company with the largest market share could be a monopoly, however there are companies that control the price of a specific item due to their longevity and stature in the market, re: Heinz and catsup, or Coke and cola.

TRUE/FALSE: Third World workers working for American companies overseas are being exploited.
FALSE - All employers, by some definition, exploit their employees to get tasks done. Likewise, employees exploit opportunities for employment and advancement provided by their employers. But even if we assign a negative connotation to "exploit," that still doesn't get us anywhere. It's a defensible belief to say that Third World workers are exploited compared to the treatment that would be required of employers elsewhere. It all depends on context. One might also reasonably argue that US minimum wage employees are exploiting their employers by accepting an unfair wage.

TRUE/FALSE: Free trade leads to unemployment.
FALSE - Free trade leads to change and that change leads to overall higher employment. But Free Trade also brings about pain and turmoil. A country’s wage and unemployment levels depend fundamentally on the productivity of its labor force, not on its trade policy. As long as American workers remain more skilled and better educated, work with more capital, and use superior technology, they will continue to earn higher wages than their overseas counterparts. If and when these advantages end, the wage gap will disappear. Trade is a mere detail that helps ensure that American labor is employed.

TRUE/FALSE: Minimum-wage laws raise unemployment.
TRUE - It's called the "spill over" effect. Especially small firms are in equilibrium at a certain wage price. When the government comes in and artificially raises that equilibrium via a higher minimum wage, it changes the labor demand curve for firms and they have to fire some workers because they can't afford to keep them. It mostly affects mom and pop shops.

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