Households have changed considerably in economic history. Earliest households were totally self-sufficient. They made what they consumed and consumed what they produced to a large extend.
Specialization took place within the household. Are households self-sufficient today? How are they different? With the increase in agricultural productivity, fewer people are needed to produce the food to feed a nation. How have households changed since the s?
Opportunity cost-define. Households are rational utility maximizers. Economists assume that individuals, and thus households, attempt to maximize their utility. Utility is subjective not objective. One household may have different goals than another. Rational : They act in their own best interest in the interest of their own goals- maximizing their utility , would not make choices that would make them worse off. Households as Demanders. Personal income is allocated among three uses:.
Durable goods : designed to last three years or more. Resource suppliers. Households use their limited resources labor, capital, land, and entrepreneurial ability to maximize their own utility. They can use these resources at home, or they can sell these resources in the resource market to earn money to spend in the product market. You can see that a majority of personal income in the US is from labor earnings, rather than from ownership of other resources such as capital or land.
Exhibit 1, page Proprietors : People who work for themselves rather than for employers plumbers, farmers, and doctors. In those cases, the government provides temporary public assistance. Firms : Economic units, formed by profit-seeking entrepreneurs who employ resources to produce goods and services for sale. Firms have evolved as providers of goods and service.
Firms supplied raw materials lumber, wool to households that turned raw materials into finished goods. Promoted more efficient division of labor 2. Allowed for direct supervision of laborers 3. Reduced transportation costs 4. Facilitated use of machines. Kinds of Firms. Sole Proprietorships : A firm with a single owner who has the right to all profits and who bears unlimited liability for the firm's debts.
Partnerships : A firm with multiple owners who share the firm's profits and each of who bears unlimited liability for the firm's debts. Corporations : A legal entity owned by stockholders whose liability is limited to the value of their stock. Household production still exists. Name some forms of household production that still exist.
If a householder's opportunity cost of performing a task is below the market price of the task, then the householder usually performs that task. Opportunity cost : the value of the next best alternative. Consider my decision to mow the lawn or pay someone else to do it.
What is my next best alternative to mowing the lawn? Preparing an extra hour isn't my next best alternative, because I'm well enough prepared, and I won't get any extra salary from over-preparing. What would I do? What about a Dr. His next best alternative is working an extra hour. What would the doctor do? Some Reasons for household production :. No skills or specialized resources are required.
Household production avoids taxes. Household production reduces transaction costs: Transaction costs -the costs of time and information required to carry out market exchange. Household production allows for more control over the final product. Technological Advances Increase Household Productivity. The Government. In the case of market failure, intervention could improve society's overall welfare. The Role of the Government. Establishing and Enforcing the Rules of the Game.
Promoting Competition. Regulating Natural Monopolies. Producing public goods. Public good : A good that, once produced, is available for everyone to consume, regardless of who pays and who doesn't. Externality : A cost or benefit that falls on third parties and is therefore ignored by the two parties to the market transaction.
Income Distribution. As established in Landefeld and McCulla , Landefeld, Fraumeni, and Vojtech , Bridgman and others , and Bridgman , household production is an important consideration when evaluating aggregate production; that is, it provides a useful complement to the gross domestic product GDP estimates published by the Bureau of Economic Analysis BEA.
Accordingly, BEA publishes a satellite account that estimates the value of production by households. This article updates Household Production Satellite Account estimates to include years through , providing estimates of GDP that incorporate the production of nonmarket services. Household production has remained relatively consistent over the years, with a few variations, which are described in this article. One of the most important underlying pieces used in this satellite account is household production hours.
After outlining the methodology of the updates to the estimates of GDP and producing updated tables of GDP, we will further explain the methodology and analyze trends in household production hours. We will examine the trends in such estimates as child care, cooking, housework, and gardening to show increases or decreases in hours of work performed by men and women, both employed and nonemployed.
This section extends the previous analysis of Bridgman , with new data to take us from to , using the same methodology that was previously published. Our estimates begin in —the year the American Time Use Survey data, described later, first became available. From to , we estimate an average annual growth rate of nominal GDP of 3. When household production is included, this average annual growth rate drops to 3.
Overall, the two growth rates continue to track each other closely. Wages of household workers were weak during but strong during , contributing to the difference of movement seen in those years; however, the difference in percent growth shown on the plot is still quite small. The largest impact when including household production in GDP stems from the inclusion of nonmarket services.
Nonmarket services measure the value of time spent on home production tasks. Household production table 1 is the value of these hours worked plus the consumer durables used. To compute household production, we first aggregated household production hours across seven categories: housework, cooking, odd jobs, gardening, shopping, child care, and domestic travel.
The value of nonmarket services is the product of the wage rate of general-purpose domestic workers and the number of hours worked.
This method assumes a market-cost approach to valuing nonmarket household services. For further explanation regarding this and other approaches, see Bridgman In contrast, this satellite account treats such purchases as investment and adds the services of consumer durables to personal consumption expenditures. These services are measured by applying the return on personal interest income and personal dividend income to stocks of consumer durables. At the margin, households should be indifferent between investing in consumer durables and financial assets, in other words, the rate of return must be the same.
Therefore, we set the rate of return on durables equal to that of the household sector's financial assets. Tables 1 and 2 break out the adjustments into categories for the years and Table 1 is separated into two sections, both containing new data for and rates of growth based on this new data. Table 2 contains data on the percentage share of GDP as defined by NIPA or household satellite account measures for various aggregate categories in both years.
The first column contains the percentage growth of aggregate measures in the same year household production is included in GDP. The third and fourth columns simply measure the aggregate share of GDP as defined by NIPA measures and household satellite account measures, respectively. Personal investment is a new category that is created from adding investment in consumer durables from personal consumption expenditures and residential investment.
Residential investment is categorized under gross business investment in the NIPAs. Reclassifying consumer durables as personal investment raises GDP because of the inclusion of a return on consumer investment. Moving residential investment under personal investment simply shifts it into a new category, but it doesn't actually change the measure. These figures are not adjusted for inflation since there is no clear price index to deflate household production.
Including the household sector in GDP slows the growth rate of output. From to , the average annual growth rate of nominal GDP was 6. When household production is included, this growth rate drops to 6.
Household production has declined in significance over time as more women engage in market work. This sector accounted for 37 percent of the satellite account's output in , but that declined to 23 percent in table 2.
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