In the 1990's and beyond, the search for an optimum framework for studies in international economics is in order. The dynamics of two sets of economic events, one in Europe, (the emergence of a single economic region, the European Community [EC] and the other in Asia (Japan's economic achievement plus the industrialization and economic growth of certain Asia-Pacific economies) suggests that a new multipolar world economy is emerging. In this global context the EC paradigm of economic regionalization, providing a macroeconomic core for microeconomic optimization, warrants attention.
The crumbling of the Berlin Wall in Germany in 1989, the dismantling of Communist Party control of Central and Eastern European governments in 1990, and the dissolution of the Soviet Union in 1991 have created the opportunity for substantive reductions in military expenditures in the United States and Europe. This paper addresses conceptually and empirically some of the issues surrounding the potential structural impacts of disarmament upon an open economy's allocation of capital and labor between tradable and nontradable goods, upon the relative price of tradables and nontradables, and upon the nation's price level relative to a world average. Theoretically, the effects of military spending reductions on these variables is ambiguous: the effects depend upon the relative factor intensities in production of civilian versus military goods and those of civilian tradable versus nontradable goods, as well as upon the relative importance in utility of civilian tradable versus nontradable goods. Empirically, the model suggests that the effects of disarmament on the relative demand for and relative supply of nontradables to tradables are economically and statistically significant. However, because military spending reductions will tend to increase the relative supply only slightly more than the relative demand, their relative price (i.e., the real exchange rate) is predicted to decline by only a small amount. Consequently, lower military expenditures are predicted to result in a small real depreciation of a country's currency and, thus, only a minor fall in the national price level relative to the world average.
Our concern in this paper is with the measurement of economic growth, or more precisely, the mismeasurement of growth that may occur from ignoring household production. As an economy develops, production shifts from households to markets.' Traditional measures of economic growth which ignore most household production may therefore be biased upward. The existence of household production also complicates international comparisons of real GNP as there are significant differences in the relative size of the household sector across developed and developing economies. There is an extensive empirical literature on the size of the household sector. Most estimates place the value of household production in the United States for recent years at 30-40 percent of GNP.2 Previous studies have found that the relative size of the household sector has remained fairly constant over time, implying that measured growth rates provide a reasonable proxy for overall growth rates. Existing estimates of household production, however, have little theoretical grounding. For the most part, they also ignore the use of capital in the household sector. In addition, most estimates relate to a single point in time.3 Finally, existing studies relate to time periods after which the large movements out of the household and into the market may have taken place. In this paper, we provide new estimates of the value added in household production for selected years from 1930 to 1985. We find that the relative size of the household sector in recent times is smaller than is commonly estimated. We also find, contrary to the results of others, that the relative size of the household sector has fallen continuously since 1930. We conclude that real per capita output has grown from 1930 to 1985 at a rate that is significantly below the rate implied by conventional measures of output. We develop in the next section a formal model of household production which we hope will help us to clear up such issues as the appropriate value to impute to household labor, how to treat time spent transacting, and how to deflate household production in order to obtain real output. The model is not a general-equilibrium model. Its role is not to derive implications for growth, but rather to guide us in our accounting exercise.