Question

The Consumption Conversion Factor ( CCF ) is best used to calculate the shadow price of labor wages Briefly explain why !

Answer 1

SHADOW PRICE

It is a method of assigning values to commodities that cannot be converted into quantifiable terms. This type of price is ascertained so that cost-benefit analysis can be conducted. Examples of this price may be public places constructed/maintained for the well-being of all the persons in a community- by doing so constructers are able to understand the benefit received with regard to cost.

CONVERSION FACTOR

A conversion factor is a number/value that is either multiplied/ divided to a given numerical value in order to convert it into another numerical value. It is mainly done to evaluate, that is, when 2 commodities are in same units evaluation is fair and precise.

CONSUMPTION

It is usually known as the destruction of utility. To consume something is to use up something or more specifically a resource.

FACTS TO THE CASE

• Labour is one of the four major factors of production and it is very difficult to quantify it, since it is done by human resources.
• But there is a need that all the factors of production needs to get some return, the labour needs to be paid, they have to get remuneration in some form, either in cash/kind or in the form of wages/salaries.
• There needs to be a factor that can create a uniformity among the remuneration given and work done.
• Consumption is a very important aspect, there is always a constumption happening even when there is zero production (also knwon as autonomous consumption).
• Consumption function is determined by adding the result of [ marginal propensity to consume * disposable income] to autonomous consumption.
• Using this consumption as a conversion factor to determine the costs of labour or the remuneration that is to be given to them is an ideal way, since it motivates them.
• The remuneration under this method is work-based incentive and not a fixed one, hence they are motivated to work more to earn more.
• This method ensures that each worker are able to earn atleast the minimum wages that is able to meet their minimum/basic consumption needs.
• The very basic purpose of employment is to meet the consumption requirements of an individual and his family members or the people dependent upon him, this method is very effective in the way that, scarcity can go down and there will be better distribution of resources and lesser accumulation of wealth in few hands.
• The end goal of using such a method is to ensure welfare for all and growth for the economy, as the real growth (Real GDP) is measured on consumption basis.