New Metropoles

Dennis R Redmond dredmond at SPAMOREGON.UOREGON.EDU
Wed Nov 3 14:49:44 MST 1999

On Tue, 2 Nov 1999, Jose G. Perez wrote:

> economies. So in this case, we might decide that to make the comparison
> valid, we should use the average price of bread in the two countries. This
> would be 55 cents or centimes/lb, which would give equal GDPs for the two
> economies of 550 dollars/francs.

But you're assuming that bread is identical across national borders, when
it clearly isn't (as anyone who's ever experienced the joy of a European
bakery will attest). Are vacuum cleaners essentially the same in the US
and the EU? How about transistors? Power plants? What about differences in
quality levels and customer service?

Also, exchange rates aren't unimportant over time. They bounce
around, but ultimately they do follow long-term productivity trends. The
dollar was way, way overvalued from 1980-85, but it took five years for
economic reality to set in.

> price levels tend to be higher in Europe and Japan than in the United
> States, so using exchange-rate-based GDP numbers is going to give you an
> inflated figure for those countries.

What's the material evidence for this? If prices are higher, might this
have something to do with long-term purchasing habits in Japan and the EU,
where a car is expected to last for years and years, and where
conspicuously wasteful consumption is not yet the cultural norm? I'd also
note that ground-rent is considerably higher in Japan and Central Europe
than in the US, due to the obvious reason that there's less space to put
millions and millions of people.

> They would lead you to think that Japan produced a third more per person
> than the United States, when in reality, close to the opposite of that is
> the case.

Japan does invest more as a percent of its GDP in its economy -- around
28%, I think, compared to 18% in the US and 21% in the EU.

-- Dennis

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