[ExI] undercover at Walmart

[Rafal Smigrodzki]

On Tue, Feb 17, 2009 at 6:05 AM, Stathis Papaioannou <stathisp at gmail.com> wrote:
> 2009/2/17 Rafal Smigrodzki <rafal.smigrodzki at gmail.com>:
>
>> ### Calculations using PPP do take this into account. The US
>> manufacturing sector is actually bigger in absolute terms than ever
>> before, the services sector is incredibly large (which is why in
>> relative terms manufacturing is smaller), the farm sector is bigger
>> than ever. Yes, US economic output is more valuable than ever, even
>> though the fraction contributed to it by the manufacturing sector is
>> lower than 50 years ago. So what? All this is accounted for
>> (indirectly) in the PPP GDP figures.
>
> But PPP would go up if the exchange rate went up, since imported goods
> and commodities would be cheaper, even if it didn't go up quite as
> much as the exchange rate because services were cheaper. This would be
> the case even if the exchange rate changed without anything in the
> real economy changing. You could then say that GDP or PPP GDP had
> increased even though the goods and services produced in the country
> stayed the same.

### Obviously, yes. If somebody in California makes a discovery
allowing him to make good cars costing a dollar each, the PPP GDP of
people in Arizona would change (for the better), even if no such cars
were manufactured in Arizona. Same with international improvements or
changes in productivity - our PPP GDP is in part determined by the
trading opportunities available in China, or in Chad. How does that
impact the initial issue we addressed, namely that differences in
labor productivity between the US and China are the principal reasons
for lower incomes in China?

------------------------------------------
>
>>  But the increasing US trade
>>> deficit suggests that a correction is coming.
>>
>> ### Preoccupation with the trade deficit baffles me. Why do you think
>> it matters, and what kind of a "correction" are you talking about?
>
> The extreme case is where a country produces nothing and imports
> everything. Its citizens could work for a few hours a week in service
> industries paying themselves high salaries and have a very high
> standard of living. This would work fine until the rest of the world
> lost faith in the worth of the IOU's they were receiving,
> precipitating a crash in the currency or, if it happened in a more
> orderly way, buying up all the real assets. Either way, the original
> inhabitants or their descendants would have to start doing real work.

### "Real work"? Say, the service work that you mention includes
managing foreigner's money better than possible in their own
countries. The Swiss have been doing that for centuries. They didn't
get rich off making watches. Certainly, if the world reverted to the
stone age, and no longer had any demand for such services, the Swiss
would have to retool to meet the demand for stone tools. I hope you
are not implying that making stone tools (or steel tools) is in some
way more "real" than writing code or managing money?

But back to the deficit. US "deficit" is denominated in US dollars,
meaning that the government can and as we have seen recently, will
print enough of them to satisfy foreign demand. I have no idea why
this should be a problem. The "deficit" is a monetary artefact, not a
feature of differential productivity, therefore it does not affect the
standard of living in the long term (at least not directly).

-------------------------------------

>
>> ### The PPP values do not rely on the yuan.
>
> They do, since you could buy a given basket of goods (including
> imported items) for fewer yuan if the yuan is higher relative to other
> currencies. If the Yuan were allowed to rise, the trade imbalance
> would tend to resolve, since the Chinese would import more and export
> less.

### I don't quite follow your argumentation. If the yuan was to rise
without underlying changes in productivity, then yes, the Chinese
initially would not be able to export as much since the prices of
their goods would go up, and they would be able to import more, until
they would deplete their foreign currency reserves but still they
would not be able to buy a bigger basket of goods with their money, so
their GDP would remain unchanged (unless there were secondary effects
impacting labor productivity). Really, the PPP GDP has almost nothing
directly to do with currency balances, trade balances and whatnot, it
almost solely predicated in the long term (more than 2 - 3 years) on
labor productivity.

Rafal