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Pitfalls of Economic Analysis Review the discussion of pitfalls in economic thinking in this chapter. Then identify the fallacy, or mistake in thinking, in each of the following statements:
a. Raising taxes always increases government revenues.
b. Whenever there is a recession, imports decrease. Therefore, to stop a recession, we should increase imports.
c. Raising the tariff on imported steel helps the U.S. steel industry. Therefore, the entire economy is helped.
d. Gold sells for about $1,000 per ounce. Therefore, the U.S. government could sell all the gold in Fort Knox at $1,000 per ounce and reduce the national debt.
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Economic analysis is similar to other observational and analytical sciences. Thus, it is possible to fall victim to pitfalls of faulty economic analysis, or a faulty analysis process.
(a)Stating that raising taxes always increases government revenue is a faulty thought process in economic analysis. Though the two events might be related, it is not always a fact. Government revenue might increase for other reasons. This thought process commits the association-is-causation fallacy. In other words, it is incorrect to assume that one variable, raising taxes, necessarily results in the other variable, increased government revenue.(b)The idea that increasing imports will bring an economy out of a recession is certainly a faulty analytical process. Not only does it commit the association-is-causation fallacy mentioned above, it also ignores secondary, or unintended, consequences. For example, increasing imports will simply send more money abroad and increase government deficits even further. When making any decision, it is important to recognize the full impact that certain policy changes may have on an economy.
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Global Economic Watch Go to the Global Economic Crisis Resource Center. Select Global Issues in Context. In the Basic Search box at the top of the page, enter either the term "microeconomic" or the term "macroeconomic." Choose one of the resources and write a summary in your own words. Especially emphasize how the resource is an example of microeconomics or macroeconomics.
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An article outlines the differing aspects between three countries experiencing low rates of inflation. In short, the United States, Europe, and Japan are experiencing rates of inflation at approximately 1%. However, this stems from different reasons with different implications. For example, deflation may stem from low levels of demand and policies that limit growth, as is occurring in Japan. Europe is attempting to reverse the downward price and wage pressures with stimulating monetary policy, though the effects are short-term and insufficient. These pressures are stemming from previously excessive economic processes. However, the United States seems to be experiencing near-deflation price levels for other reasons. Primarily, technological advancement has decreased production costs and also increased online competition. With this, unemployment is decreasing and personal income is increasing at a rate faster than the inflation rate. Thus, low rates of increasing price levels need not always be an alarm of concern.
This topic is of particular macroeconomic concern because it is influenced by and influences the whole economy. Inflationary pressures result from various different interactions in a country's economy. The result is a higher price level throughout the country, thus increasing the demand for money, overall demand, and many other factors.
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MICRO VERSUS MACRO Some economists believe that to really understand macroeconomics, you must first understand microeconomics. How does microeconomics relate to macroeconomics?
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Microeconomics relates to macroeconomics:
Microeconomics studies the individual behavior of various economic decision makers, whereas macroeconomics studies the economy at an aggregate level.
Microeconomics examines the demand and supply of an individual product, whereas macroeconomics studies it at an aggregate level as it deals with the GDP (gross domestic product) and trade of an economy.
Microeconomics examines the price level of an individual product, whereas macroeconomics deals with rate of inflation, that is an aggregate price level, of all individual products.
Microeconomics deals with the demand and supply of labor of individual industries, whereas macroeconomics deals with the labor market at an aggregate level, which studies the unemployment rate of an economy.
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MARGINAL ANALYSIS The owner of a small pizzeria is deciding whether to increase the radius of delivery area by one mile. What considerations must be taken into account if such a decision is to increase profitability?
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DEFINITION OF ECONOMICS What determines whether or not a resource is scarce? Why is the concept of scarcity important to the definition of economics?
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ROLE OF THEORY What good is economic theory if it can't predict the behavior of a specific individual?
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Global Economic Watch Go to the Global Economic Crisis Resource Center. Select Global Issues in Context. In the Basic Search box at the top of the page, enter the phrase "selfish." On the Results page, scroll down to the Magazines section. Choose the red link to View All. Scroll down to click on the link for the December 8, 2008, article "Going Green for Selfish Reasons." Are the companies described acting out of rational self-interest?
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RESOURCES To which category of resources does each of the following belong?
a. A taxi
b. Computer software
c. One hour of legal counsel
d. A parking lot
e. A forest
f. The Mississippi River
g. An individual introducing a new way to market products on the Internet
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ECONOMIC DECISION MAKERS Which group of economic decision makers plays the leading role in the economic system? Which groups play supporting roles? In what sense are they supporting actors?
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Case Study: A Yen for Vending Machines ? Suppose you had the choice of purchasing identically priced lunches from a vending machine or at a cafeteria. Which would you choose? Why?
Reference Case Study:
A Yen for Vending Machines ? Japan faces a steady drop in the number of working age people. Here are three reasons why: (1) Japan's birthrate has dropped to a record low, (2) Japan allows little immigration, and (3) Japan's population is aging. As a result, unemployment has usually been lower in Japan than in other countries. For example, Japan's unemployment rate in 2010 was only about half that of the United States and Europe. Because labor is relatively scarce in Japan, it is relatively costly. To sell products, Japanese retailers rely more on physical capital, particularly vending machines, which obviously eliminate the need for sales clerks.
Japan has more vending machines per capita than any other country on the planet-twice as many as the United States and nearly 10 times as many as Europe. And vending machines in Japan sell a wider range of products than elsewhere, including beer, sake, whiskey, rice, fresh eggs, beef, vegetables, pizza, entire meals, fried foods, fresh flowers, clothes, toilet paper, fishing supplies including bait, video games, software, ebooks, toys, DVDs, mobile phone recharging, and even X-rated comic books. Japan's vending machines are also more sophisticated. Newer models come with video monitors and touch-pad screens. Wireless chips alert vendors when supplies run low. Some cigarette and liquor machines have artificial vision that reportedly are better at estimating age than are nightclub bouncers. Sanyo makes a giant machine that sells up to 200 different items at three different temperatures. Some cold-drink dispensers automatically raise prices in hot weather. Thousands of machines allow cell phone users to pay by pressing a few buttons on their phones.
As noted earlier, it is common practice in the United States to shake down vending machines that malfunction. Such abuse increases the probability the machines will fail again, leading to a cycle of abuse. Vending machines in Japan are less abused, in part because they are more sophisticated and more reliable and in part because the Japanese generally have greater respect for private property and, consequently, a lower crime rate (e.g., Japan's theft rate is about half the U.S. rate).
Forty percent of all soft-drink sales in Japan are through vending machines, compared to only 12 percent of U.S. sales. Japanese sales per machine are double the U.S. rate. Research shows that most Japanese consumers prefer an anonymous machine to a salesperson. Despite the abundance of vending machines in Japan, more growth is forecast, spurred on by a shrinking labor pool, technological innovations, and wide acceptance of machines there.
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GOODS AND SERVICES Explain why each of the following would not be considered "free" for the economy as a whole:
a. Food vouchers
b. U.S. aid to developing countries
c. Corporate charitable contributions
d. Noncable television programs
e. Public high school education
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Case Study: College Major and Career Earnings
Because some college majors pay nearly twice as much as others, why would students pursuing their rational self-interest choose a lower paying major?
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NORMATIVE VERSUS POSITIVE Analysis Determine whether each of the following statements is normative or positive:
a. The U.S. unemployment rate was below 9 percent in 2012.
b. The inflation rate in the United States is too high.
c. The U.S. government should increase the minimum wage.
d. U.S. trade restrictions cost consumers $100 billion annually.
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Understanding Graphs Look at Exhibit 5 and answer the following question:
a. In what year (approximately) was the unemployment rate the highest? In what year was it the lowest?
b. In what decade, on average, was the unemployment rate highest? In what decade was it lowest?
c. Between 1950 and 1980, did the unemployment rate generally increase, decrease, or remain about the same?
Reference Exhibit 5:
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RATIONAL SELF-INTEREST Discuss the impact of rational self-interest on each of the following decisions:
a. Whether to attend college full time or enter the workforce full time
b. Whether to buy a new textbook or a used one
c. Whether to attend a local college or an out-of-town college
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Case Study: A Yen for Vending Machines ? Do vending machines conserve on any resources other than labor? Does your answer offer any additional insight into the widespread use of vending machines in Japan?
Reference Case Study:
A Yen for Vending Machines ? Japan faces a steady drop in the number of working age people. Here are three reasons why: (1) Japan's birthrate has dropped to a record low, (2) Japan allows little immigration, and (3) Japan's population is aging. As a result, unemployment has usually been lower in Japan than in other countries. For example, Japan's unemployment rate in 2010 was only about half that of the United States and Europe. Because labor is relatively scarce in Japan, it is relatively costly. To sell products, Japanese retailers rely more on physical capital, particularly vending machines, which obviously eliminate the need for sales clerks.
Japan has more vending machines per capita than any other country on the planet-twice as many as the United States and nearly 10 times as many as Europe. And vending machines in Japan sell a wider range of products than elsewhere, including beer, sake, whiskey, rice, fresh eggs, beef, vegetables, pizza, entire meals, fried foods, fresh flowers, clothes, toilet paper, fishing supplies including bait, video games, software, ebooks, toys, DVDs, mobile phone recharging, and even X-rated comic books. Japan's vending machines are also more sophisticated. Newer models come with video monitors and touch-pad screens. Wireless chips alert vendors when supplies run low. Some cigarette and liquor machines have artificial vision that reportedly are better at estimating age than are nightclub bouncers. Sanyo makes a giant machine that sells up to 200 different items at three different temperatures. Some cold-drink dispensers automatically raise prices in hot weather. Thousands of machines allow cell phone users to pay by pressing a few buttons on their phones.
As noted earlier, it is common practice in the United States to shake down vending machines that malfunction. Such abuse increases the probability the machines will fail again, leading to a cycle of abuse. Vending machines in Japan are less abused, in part because they are more sophisticated and more reliable and in part because the Japanese generally have greater respect for private property and, consequently, a lower crime rate (e.g., Japan's theft rate is about half the U.S. rate).
Forty percent of all soft-drink sales in Japan are through vending machines, compared to only 12 percent of U.S. sales. Japanese sales per machine are double the U.S. rate. Research shows that most Japanese consumers prefer an anonymous machine to a salesperson. Despite the abundance of vending machines in Japan, more growth is forecast, spurred on by a shrinking labor pool, technological innovations, and wide acceptance of machines there.
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MICRO VERSUS MACRO Determine whether each of the following is primarily a microeconomic or a macroeconomic issue:
a. What price to charge for an automobile
b. Measuring the impact of tax policies on consumer spending in the economy
c. Your family's decisions about what to buy
d. A worker's decision regarding how much to work each week
e. Designing a government policy to increase total employment
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ASSOCIATION VERSUS CAUSATION Suppose I observe that communities with lots of doctors tend to have relatively high rates of illness. I conclude that doctors cause illness. What's wrong with this reasoning?
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RATIONAL SELF-INTEREST If behavior is governed by rational self-interest, why do people make charitable contributions of time and money?
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TIME AND INFORMATION It is often costly to obtain the information necessary to make good decisions. Yet your own interests can be best served by rationally weighing all options available to you. This requires informed decision making. Does this mean that making uninformed decisions is irrational? How do you determine how much information is the right amount?
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