May 8, 2014

Rare microeconomic claim of the day

. . . apparently, only 11 percent of GDP is produced under conditions of rising marginal cost." (102)
From a Steve Keen's review of Alan Blinder´s Asking about Prices: A New Approach to Understanding Price Stickiness.
He and his team of economics PhD students conducted face to face interviews with Presidents, CEOs and senior managers of 200 firms. The firms surveyed represented 7.1% of the USA's GDP, so what was found was statistically robust: what these firms reported was representative of US industry as a whole. As Blinder put it, "we interviewed an astounding 10 to 15 per cent of the target population-a large fraction by any standard." (68)
The research was used to explain the macroeconomic phenomenon that interests Blinder of "sticky prices". Economic theory implies that price adjustments should dominate market responses, but prices are notoriously inflexible, at least in the downward direction. Blinder's macroeconomics presumes this, but he wanted to know the microeconomics of why. His survey was designed to test 18 different theories as to why this might be so, and the results did let him distinguish between them. But the key surprise for Blinder and his team was the extent to which economic reality did not look at all like the models that economists assume are true.

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