in poorer nations
systemic tendency
prices to be lower
In the opinion piece, Wonking Out: How Super Is Your Superpower? by By Paul Krugman writes about the economic differences in different economy’s.
Paul Krugman has been an Opinion columnist since 2000 and is also a distinguished professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography.
Mr. Krugman writes of the challenges of comparing Yuan and Dollars and the steps necessary to get meaningful numbers to draw useful conclusions.
Mr. Krugman writes:
But there’s another reason to adjust for prices.
If you want to compare either the real sizes of two economies — the total amount of stuff each produces — or their standards of living, you want to know if goods and services are cheaper in one economy than in the other and to take that into account.
This is especially true if you’re comparing a high-income economy like the United States with a middle-income nation like China or, even more so, with a low-income country like India.
That’s because there is a systemic tendency for prices to be lower in poorer nations, because of the Balassa-Samuelson effect (discovered and analyzed simultaneously and independently by Bela Balassa and Paul Samuelson in 1964).
What caught my eye was that last bit.
That’s because there is a systemic tendency for prices to be lower in poorer nations, because of the Balassa-Samuelson effect.
Mr. Krugman notes that Balassa-Samuelson effect was discovered and analyzed simultaneously and independently by Bela Balassa and Paul Samuelson in 1964.
Really?
No one understood this until 1964?
Really?
It is a known effect of economics that there is a systemic tendency for prices to be lower in poorer nations?
If people are poor they have less many and if they have less money, prices are lower.
No one noticed until 1964?
I remember reading the book Up Front by WW2 Cartoonist Bill Maudlin, (Willie and Joe) in which this story was told.
If we find a barbershop where the price equals six cents in American money, we plop down what amounts to fifty cents in tattered European currency. When our change is counted out to us in even more tattered bills—some worth as little as one cent – we tell the barber to keep the change. We’d have paid that price in America, and besides, we hate to have wads of the stuff stick- ing between our fingers every time we reach into our pockets for a cigarette.
After two or three dogfaces have repeated this performance, the barber decides the stories he has heard about all Americans owning oil wells are true, and the price goes up to fifty cents. Along comes a Canadian, whose government allows him about ten dollars per month and banks the rest for his return, and when the barber tries to soak him fifty cents the Canadian tears the shop apart.
I guess that poor barber had a first hand experience of the Balassa-Samuelson effect.
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