Thursday, September 01, 2005

Macro-Economics for Dummies

Not my own - had got it in one of the mails sometime back (have also edited it a bit):

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....suppose you, as a successful capitalist... hire 100 guys to make 100 widgets, and sell the widgets for $1 apiece, and thus GDP is $100.

So far, so good. Then a few days pass, and...

we find that you raised the price to $2, and you also figured out a way to make widgets with only 50 employees! The hike in price, unfortunately, reduces widget sales by 25%.

But GDP jumps to $150!

But because you fired half the employees, labor costs plummeted, and the next thing you know someone jumps on an airplane and flies down to visit your factory and give you an award as Proud Poobah of Productivity, which you deserve because productivity has soared.

In the old days, it took 100 guys to make 100 widgets. Now it takes only fifty guys to make seventy-five widgets, and you doubled the price to more than make up for it.

You're a genius!

But unemployment is up by 50%, total sales volume is down, and inflation has soared to 100%.

3 comments:

raghu said...

The 50 guys now are not competent enough for many other jobs that they could have taken up. Exactly whats happening to our govt employees who have work exp but no skills

Arvind Rana said...

the other side of the story.

....suppose you, as a successful socialist... you see that in your country, there is a capitalist, who has hired 100 guys to make 100 widgets, and sell the widgets for $1 apiece.

and thus GDP is $100.


So far, so good. Then a few days pass, and...


the capitalist realises that the demand for his widget is high ( his widgets are liked by people) hence he increases the price to $2 ( to truly reflect the worth of his product)

also the fabricating machine that the capitalist was designing for last 5 years has finally been realised, and there by he has succeded in making the same no of widgets with 50 employees.

The hike in price, promotes other players to start making widgets, thereby increasing competition and efficiency in the widget market. They recruit the people with previous experience in widget making.

*here it is not importatnt that the salaries of these people should increase.....what is important is that there is economic justice.....which says: salary equivalent to the effort( manual or intellectual)

the socialist ruler on watching this, thinks " if everything becomes market driven ...how will i rule?"

So he brings out a Bill called " BILL OF INEFFICIENT PRODUCTION" mandating all the corporates to stop any operational improvements, penalising anyone who does......in the name of the social good.

the capitalist is thereby forced to sell his fabricating machine- 5 yrs effort as junk , recruit back the employees, and continue the ineffecient operation, and produce less than he is capable of.



moral of story:


In the old days, it took 100 guys to make 100 widgets.

So we shall continue to do that till eternity


and so the capitalist is not a genius ....but the socialist ruler is....who himself incapable of production.....but also makes sure that nobody else can be.



also a deep lesson for students of economics:

The effort of mind is not a factor of production.

Me said...

I agree with Raghu there...nice post...keep it up...