MAINTAINING LOW PRICE INDEX ((Subscribe to the Blog piece on link below and join the discussion.Thanks buzz.blogger/) Appalled that Manhattan nannies(mboch/es) be worth $200,000 a year. One answer is maybe theyre more talented than your typical babysitter. The highest-paid nannies can cook four-course macrobiotic meals and know their way around a Zamboni (those are actual examples of nanny skills). But the number-one reason why nannies in Manhattan can get paid $200,000 is very simple. Rich families can afford it. And in the market for locally-delivered services, like caring for a child, prices rise as high as the clientele can afford to pay. Six-figure nannies dont rule the world, but they help explain the world of prices. On a global scale, the price of locally-delivered services, such as nannies and barbers, fluctuate wildly from country to country. A simple haircut in Uzbekistan is much, much cheaper than a simple haircut in Beverly Hills. But lots of goods can be bought and enjoyed thousands of miles away from where theyre made, like automobiles and paintings. If youre in the market for an original Picasso or a lamborghini, it wont matter whether you buy the painting in China or in the United States. It will cost the same price anywhere, because the painting can be consumed anywhere. So, some prices vary wildly from country to country, and some prices dont. Whats the difference? My conclusion; THE Mboch EFFECT If the answer is obvious to you, then you just might be smarter than some of the 20th centurys most brilliant economists, who spent decades building a framework for finding out why some prices between countries (and even between cities in the same country) differ so dramatically. The most elegant of these theories is known, less elegantly, as the Balassa-Samuelson Effect, after two economists Béla Balassa and Paul Samuelson. The Balassa-Samuelson Effect is a mouthful. Lets call it the Mboch Effect. In a nutshell, the Mboch Effect says that the price of some goods -- e.g.: Picasso paintings, barrels of oil, bricks of gold, and company stock -- shouldnt vary much by location, because it would create opportunities for arbitrage. If you bought a gold brick for $10 in Peru or Capetown and sold it for $100 in the United States, Peru sellers would raise their price toward $100. But most services arent like gold bars. Theyre delivered locally and consumed locally. Youre not hiring a Manhattan nanny to look after your kids, and youre not flying to Dubai for a haircut. From the dry-cleaner, to the restaurant, to the hairdresser, most of the jobs in a service economy have a local clientele. In cities where incomes are high, average price levels for these services are typically high. Where incomes are low, average price levels are low. But how do incomes go from low to high? Balassa and Samuelson said it must come down to workers productivity, especially in the sectors that can trade their goods and services abroad. If a country gets better at making cars it can sell to foreigners for money, it gets richer. As income and investment flows into a country, incomes rise and prices rise across the board -- even for the haircuts and the nannies. WHY IS INDIA SO CHEAP? ... AND WHY IS ZURICH SO EXPENSIVE? I remember an old classmate emailed from Mumbai to brag about the cheap food. Ordering a full lunch of a rice,beef stew, naan(whatever that is) and three curries for, oh, about $1 is pretty great. It sure is, Mamu. But if he had visited ten years ago, it might have been closer to 50 cents. As India has become more productive over the last few decades, wages in the tradable sector (IT) rose, pulling up wages in the nontradable sector (waiters), and the currency has appreciated. There is a still a major price difference between say Nairobi, D.C. and Delhi. One dollar will pay for much less stuff in America than its equivalent in rupees will buy in India. But as Indian exports continue to grow, one should expect Mamus lunch to get more and more expensive. There is much more to price levels than the Nanny Effect. Much, much, much more. Restrictive urban policy raises the price of rent in similarly productive cities. Energy policies and levies raise or lower the price of gas. Tariffs raise the price of imports. On a nation-by-nation basis, taxes restrain demand and subsidies increase supply on an idiosyncratic basis. But perhaps the easiest way to mess with Balassa and Samuelson is for a government to manipulate foreign exchange rates. China, for example, is famous for pegging its currency to the U.S. dollar to make its exports more competitive. As a result, services in China are probably cheaper than they would be if the government werent actively trying to depreciate the currency. If youre happily wondering Why is China so cheap? you should thank Beijing. The B-S Effect [er, Nanny Effect!] explains why on average, prices vary across countries, but in the short to medium run, the exchange rate will also determine how cheap or expensive different countries are, economist and teacher Mumo Nzau told me. -shrek.5.11.13
Posted on: Thu, 07 Nov 2013 16:27:08 +0000
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