Question

In Spectacula, sanitation engineers are being replaced with garbage robots, which have fewer negative effects and many more significant benefits. However, the labor cost efficiency of garbage robots has driven down the price of collecting garbage so significantly that sanitation engineers can no longer compete. After six months, everybody has switched to the cheaper and better garbage robots.

Assume that Spectacula consumes the same quantity of collecting garbage now as they did six months ago. Please select the choice that best describes the short‑run effects of this industrial change on Spectacula's GDP and its standard of living.
a. GDP and standard of living both increase.
b. There is not enough information to answer the question.
c. GDP decreases and standard of living increases.
d. GDP increases and standard of living decreases.
e. GDP and standard of living both decrease.

Answer 1

c. GDP decreases and standard of living increases.

Step-by-step explanation:

GDP is a measure of how much an economy produces. As we see here, this is a very rough measure of societal well‑being. To calculate GDP, we essentially take the price of everything sold in the economy and multiply it by the quantity sold. Then, we add everything up into a single GDP figure.

In this example, sanitation engineers are being replaced by garbage robots, a lower‑cost and improved version of the same thing. Since GDP is reliant on price and garbage robots are less expensive, GDP will necessarily decrease.

The citizens of Spectacula, however, can now enjoy the improvements of the better product. Furthermore, the lower cost of the product means they can spend the savings on other things they enjoy, like yoga balls or hunting rifles. This change represents an increase in standard of living.

This example should serve as a good reminder that GDP only approximates the standard of living, the thing economists really care about, and an approximation is only useful if its limitations are understood.