Tag Archives: imports

02.22.2013 | Purchasing Power

The Big Mac Index is out again and not much has changed. Norway’s Big Macs are expensive and Chinese Big Macs are cheap.

What do Big Mac prices tell us about purchasing power? Starting with an average U.S. price of $4.37, we can determine whether other currencies are overvalued or undervalued in comparison to the dollar. So, when we see that Norway’s Big Mac is $7.84 and a euro zone Big Mac will cost $4.88, we know the kroner and the euro are overvalued. By contrast, Mexico’s Big Mac is very inexpensive at $2.90 and predictably, at $2.57, yes, a Big Mac reflects China’s undervalued currency.

Next, I wondered whether a low price would be inexpensive domestically and discovered that we can use McWages. In 2011, a US McDonald’s employee buying a Big Mac would have needed 27 minutes of work while a person in China doing the same job needed 85 minutes. You can see, below, that a McDonald’s Indian employee needed close to 200 minutes to buy what he or she was making.

Finally, as economists, we should note that the Big Mac Index takes us to purchasing power parity (PPP). This 2 page St Louis Fed paper, though dated, provides the perfect discussion of PPP and the Big Mac.

Sources and Resources: I definitely recommend going to The Economist to see all Big Mac prices and to use their interactive graphic on current and past purchasing power parity. More academic but fascinating, the Ashenfelter paper on McWage purchasing power is here while a good summary of the paper and the source of my graph is at WSJ.com.

Note: This post has been minimally edited since it appeared.

Posted by: adminEcon
Tags: Big Mac Index, China, exports, imports, McWages, Mexico, Norway, Orley Ashenfelter, overvalued, purchasing power, purchasing power parity, St. Louis Fed, The Economist, undervalued
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03.08.2012 | Giraffes and Levis

French fashion, food, wine and now a French giraffe.

Most French moms buy Sophie for their newborns. Seven inches tall, with brown spots, black eyes and pink cheeks, she is just a rubber toy giraffe that squeaks. In French supermarkets, her price is $12.

In the U.S., Sophie is a $25 giraffe with cachet. Exactly the same as her French sisters, her “Made in France” label, her natural rubber body, and her small-scale production differentiate Sophie from mass produced Chinese baby toy imports like Elmo and Big Bird. In the U.S., because Sophie is special, her sales are soaring.

Sophie reminds me of Levi’s in Communist Russia. Patented in 1873, Levi’s have always been utilitarian. However, in the former Soviet Union approximately 20 years ago, their “made in the U.S.A.” label made them a fashion icon .

The Economic Lesson

Looking at the total value of toy, doll and game imports from January to September, 2011 for 25 countries, France is #19 at $6 million. At the top of the list is China, then Japan and Mexico.

Because numbers from the St.Louis Fed indicate the U.S. imports more from France than we export to France, our trade balance is negative.

An Economic Question: Discussing trade, economists typically mention David Ricardo and the law of comparative advantage. Might French toy manufacturers have a comparative advantage over China?

Posted by: adminEcon
Tags: comparative advantage, David Ricardo, exports, France, imports, international trade, Sophie the Giraffe, toys
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11.14.2011 | European Ties

How to picture the US/European economic partnership?

You could think of Skippy Peanut Butter. Owned by Unilever, a multinational based in the UK and the Netherlands, Skippy’s peanuts are grown primarily in Georgia and Texas, shelled and sorted here, and then made into peanut butter. As a result, a European firm is providing business to US farms, it is building US factories, and it is creating US jobs.

For another side of our economic partnership, you might imagine Texas. During 2009, totaling close to $25 billion, exports from Texas, including petroleum, electronics, crops, and transportation equipment, were primarily sold in the Netherlands, the UK, Belgium, France and Germany. Meanwhile, European foreign affiliates were responsible for 212,000 jobs and invested close to $60 billion in Texas.

Or, we could just think of Bic, Adidas, Ben & Jerry’s Ice Cream, Trader Joe’s, and Sunglass Hut…all European firms.

In this 169 page report from Johns Hopkins, a detailed description of the transatlantic trade tells us that the US and Europe dominate each other’s trade activities. Ranging from California at the top to Hawaii at the bottom, every US state exports to Europe and receives European goods and services.

The Economic Lesson

You can see where this is going. Looking at foreign affiliates, foreign direct investment, jobs, exports, intrafirm trade, shared financial services and R & D, the US and Europe are closely tied. Looking at both directions, what European firms have here and what we have there, we see a massive economic connection. As a result, turmoil in the euro zone means more to us than a continent’s well being. It touches our own economy directly.

An Economic Question: Referring to transatlantic trade, how might euro zone economic woes specifically affect the US GDP?

Posted by: adminEcon
Tags: euro zone, exports, foreign investment, imports, Skippy Peanut Butter, Texas, transatlantic trade
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10.23.2011 | Chinese Imports

Are you paying more for your clothing?

According to NY Times financial journalist Floyd Norris, women’s shirt prices, dresses, sweaters, all that government statisticians consider female “outerwear,” have started to become more expensive. Meanwhile, the women’s “underwear” category reflects a 7.8% annual price spike since 2007.

Explaining the price rise, Mr. Norris suggests that the era of cheap Chinese imports might be coming to an end. And, if it is, the low prices that buoyed our purchasing power during the past 20 years will no longer elevate our standard of living.

The Economic Lesson

Let’s assume that changes in the Chinese economy such as higher wages continue to nudge their export prices upward. And, what if the U.S. Congress successfully pressures the administration to support tariffs on Chinese goods because the yuan is undervalued? Some would say that the inflationary impact is a minus but that tariffs on Chinese goods would lead to additional jobs.

An Economic Question: Do you agree with this 2004 paper from former Federal Reserve Vice Chairman Roger Ferguson that says even with the jobs disruption, cheap imports are much more of an economic benefit than tariffs?

Posted by: adminEcon
Tags: China, free trade, imports, inflation, tariffs
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09.06.2011 | Should We Buy American?

How to diminish unemployment? The NY Times tells us about a Montana general contractor who plans to use only American-made goods for building his homes. Explaining, he said, “I think we could solve this recession if everyone shifted just 5% of their purchases to U.S.-made products.”

Is he right?

Here, Nobel Laureate Milton Friedman (1912-2006) replies to a similar question during a 1977-78 lecture series. Competing against subsidized Japanese steel, US sales sunk, Japan’s market grew and we lost steel industry jobs. Asked about the loss of jobs, Dr. Friedman was not concerned. Yes, steel workers’ jobs would be lost. However, many of the dollars used to buy the steel would find their way back here through purchases of our exports. The result? U.S. job creation. And furthermore, Japanese steel is a bargain for U.S. businesses and consumers.

Why then do people worry about the steel industry? They belong to a visible group. As steel workers they can be identified. By contrast, if exporting industries lost business because of a buy-American policy, they would be invisible. Located in disparate places across the country, exporters and consumers are anonymous and scattered.

The Economic Lesson

Purchasing imports creates more American jobs than people realize. Correspondingly, buying American can retard economic growth and job creation. Expressed by David Ricardo (1772-18230), by trading, at home and abroad, everyone benefits.

An Economic Question: Milton Friedman explained his position by saying that we could place a high tariff on imported bananas and instead grow them in Utah hot houses. Is this a good way to create jobs? Explain.

Posted by: adminEcon
Tags: "Buy American, David Ricardo, exports, imports, invisible, Milton Friedman, steel, unemployment, visible
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