[ExI] undercover at Walmart

[Rafal Smigrodzki]

On Sun, Feb 22, 2009 at 6:04 AM, Stathis Papaioannou <stathisp at gmail.com> wrote:
>
> Of course there is value in such industries as finance and retail, but
> the problem is that the nominal value of these industries has been
> increasing relative to manufacturing and primary production.This is
> allowed to happen because the Chinese agree with the valuation, and
> expect that at some future date they will get something valuable for
> their dollars.

### OK, so tell me how this Chinese irrationality inflated the value
of the Swiss PPP GDP (42,4k international dollars per capita in 2008).
Are you telling me the Chinese are responsible for the Swiss wealth?
That the Chinese are wrong, and the Swiss are not really doing real
work, and one day the Chinese will just wake up and decide that the
Swiss are just slackers who don't do anything useful? That the Swiss
are not really 10 times or so more productive in their labor than the
Chinese?

Once you explain the Swiss conundrum you can go on and explain how
Chinese irrationality increased US PPP GDP as well. And one more
thing, stop reading Krugman, he is no longer an economist, he is a
columnist.

---------------------------
 But if this perception changes, there will be a
> revaluation and more dollars will have to be paid for a Chinese TV.
> The point is that there is no objective way of determining the value
> of different industries in different countries.

### Yes, there are many ways of determining the value of different
industries in different countries, just as you can compare the value
of a car plant in Alabama and a dairy farm in North Dakota. Valuation
can made by stock exchange, by revenue, by added value, ask an
international investor for more details.

-------------------------
In theory a nation of
> complete slackers could have a high per capita PPP GDP and hence a
> high implied productivity, as long as the exporters are happy to take
> the money they print.

### In whose theory? Most people, including the Chinese, are not
sufficiently stupid to take worthless paper from slackers, therefore
in theory and in practice if somebody takes somebody else's money it's
because both have something useful for each other to trade.

-------------------------
>
>>>> ### 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.
>
> If the Yuan rose in value then the immediate effect would be an
> increase in GDP denominated in dollars, and an increase in PPP GDP,
> since local products and services would cost the same but imported
> products would be cheaper.

### Yeah, that's exactly what I wrote above.

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

 In the long run it is more complicated, due
> to the negative effects on GPD as export industries falter and
> unemployment increases, which is why the Chinese government wants a
> weak Yuan. Eventually, however, the economy would switch productive
> capacity from exports to domestic consumption.

### In the absence of trade barriers the mix of export and domestic
industries is dictated by Ricardo's law, and the exchange rate tends
to follow the supply of the respective currency and the differential
labor productivity. If you control the economy you can mildly suppress
domestic consumption, make exports cheaper and imports more expensive
while building foreign currency reserves but you of course need more
than just control of the money press - you need to control trade by
tariffs and quotas, you need to control the banking system to steer
resources towards exports, you need differential taxation to punish
local spending, etc.

-----------------------
The result would be,
> without any change in productivity, that the standard of living in
> China increases because they are not giving as much stuff away to
> America for overvalued dollars.

### But in this scenario there *would* be a change in productivity! If
the Chinese stop doing useless stuff (making TVs that get given away
for nothing in return) and start doing something useful for them
(cooking nicer food) this would be change in labor productivity
measured in PPP.

BTW, do you know that in terms of manufacturing, the US manufacturing
sector is 2.5 times larger in absolute terms than the Chinese
manufacturing sector? That the US farm sector is the largest in the
world in terms of production? That China is responsible for only 13.8%
of US imports which equals 196 billion dollars which equals 1.2% of
the US PPP GDP? Therefore even if they were literally delivering their
goods here for free, it could explain only at most about 1.2% (!!!) of
US GDP - but of course the Chinese actually are getting something in
return for the 196 billion dollar worth of stuff they trade with the
US, so the artificial suppression of yuan exchange rate has an
infinitesimal impact on US real incomes, and only a minor one on
Chinese incomes.

Really, if you run the numbers, many common beliefs just don't make
sense. Krugman is insane (obviously he is much too smart to simply
stumble into a silliness that even I can debunk with Wiki numbers)

To return to the start of our conversation, I firmly stand by the
orthodox economic opinion that the primary long term determinant of
real income in all countries is labor productivity (modified to some
extent by the availability of natural resources in some cases). Find
me well-established handbooks of economics stating it's wrong and we
can discuss it some more.

Rafal