Most economists think of New York City as a "small open economy". This means that the City is analogous to a price taking competitive firm in many of its output markets since producers in the City are an extremely small part of the supply side of the global market. The demand curve in these markets is almost perfectly elastic. Those sectors that are exposed to global competition usually referred to as the "tradeables" sector, while sectors that are not as vulnerable to external competition are referred to as "non-tradeables".

Suppose that the City is in another budget crisis. A leading Wall Street economist urges that Mayor and City Council to increase sales taxes in order to cover the budget shortfall. A leading Barnard college economics professor suggests that the City be allowed to reinstate the commuter tax as a way to force suburbanites to pay for services that they use.

a. The Wall Street analyst claims that imposition of the commuter tax must ultimately raise the level of wages and costs of production in New York, while a rise in sales taxes will have little effect on production costs. The Barnard economist claims that higher sales taxes will also raise production costs in New York by increasing the cost of goods and services to workers. Explain why both claims are correct.

b. The Wall Street analyst says that the elimination of minimum wage regulations in New York will lead to a substantial rise in the number of jobs and the reduction of unemployment in the City. The Barnard professor argues that the elimination of minimum wage regulations will only lead to a greater burden for income support and anti-poverty services on the City, which will ultimately show up in higher tax rates and therefore lower long term levels of employment and wages. Why are both of these arguments right (they are).

c. Both analysts claim that New York City's real problem in the world economy is that its labor force is not as productive as it could be, thereby making it hard for City government to provide a decent array of services to citizens at a bearable cost. Explain how rise in the productivity of labor among regions outside of New York must lead to lower level of output, wages and employment in New York. Further explain why an increase in worker productivity is the only way that the City can afford decent social services in the long run.

d. The Wall Street analysts claims that the only way for New York to improve its long term economic future is to encourage the settlement of highly skilled and highly educated people into the City, while discouraging low skill immigrants who make demands on the City budget. The Barnard professor claims that the City should focus its spending on creating high quality schools in order to boost productivity, making drastic cuts in most other areas of City government, if necessary, in order to promote the long term economic future of the community. Who's right, who's wrong and why?