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Session 6 a introducing reich iariw 2014
- 1. 1 Introducing “Inequality in Global Production and Trade: A Proposal for Measurement” by Utz-Peter Reich IARIW 2014, Rotterdam
- 2. The basic message of this paper • The author proposes a marriage of WIOD and ICP; or • The use of PPPs (instead of XRs) in the analysis of international trade. 2
- 3. Contents of the paper (1) • Introduction of the GK method for compiling PPPs. • Scope of GK: Household expenditure. • Normalization of GK: Total real hh expenditure (PPP based) = total nominal hh expenditure (XR based; SDR as numeraire). 3
- 4. Contents of the paper (2) • Application to a bilateral trade example: should terms-of-trade be computed as (푃푋/푃푀)푋푅 or (푃푋/푃푀)푃푃푃 ? • Trade balance based on XRs or PPPs → Different picture; various possible explanations. 4
- 5. 5
- 6. 6 Inequality in Global Production and Trade: A Proposal for Measurement by Utz-Peter Reich Mainz University of Applied Sciences (em.), Germany
- 7. 7 Three questions (and answers) 1. What is equality in international trade? 2. How may it be defined? 3. Is its observation statistically feasable? Ad 1: An equilibrium between advantageous and disadvantageous terms of trade. Ad 2: Equality of internal and external purchasing power of a national currency. Ad 3: Yes, by means of ICP and WIOD.
- 8. 8 Terms of trade A country’s terms of international trade are defined as follows: p ex p im t.o.t. e where pex and pim denote the price indexes of exports and imports, respectively, and e is the rate at which foreign currency is exchanged against its domestic counterpart. Terms of trade, therefore, are governed by two kinds of variables, prices at product markets, and rates of foreign exchange at financial markets. We are interested in the latter.
- 9. 9 Geary-Khamis system of purchasing power parities q x i m j j j j i j i i , 1,..., i j i i i j j i x q , j 1,..., n. q x / ppp , i 1,..., m; j 1,..., n. j j j i i i j x x 5,589 billion SDR i j j i i j j i
- 10. 10 Private Consumption Expenditure 2005 xij (million SDR) GER JAP UK USA Food, nonalc. beverages 118 248 84 375 Alcoholic bev., tobacco 37 51 36 110 Clothing and footwear 55 62 55 213 Housing, water, electicity 260 436 192 1045 Furnishing, equipment 71 75 56 280 Health 47 70 15 1050 Transport 152 201 139 625 Communications 31 46 23 122 Recreation and culture 101 191 114 530 Education 9 41 13 111 Restaurants, hotels 58 114 100 346 Miscellaneous 137 257 139 782 Sum 1078 1792 965 5589 j 0,8968 0,8244 0,8577 1,1008
- 11. 11 Classical model of trade E D cloth A F corn England Poland B C
- 12. 12 PPP in the classical model 1 = 1.262 [ounces of silver / kg corn] 2 = 0.993 [ounces of silver / m cloth] 1 = 0.936 [ounces of silver / shilling] 2 = 1.120 [ounces of silver / zloty] The parity exchange rate between shilling and sloty is thus given by 1/ 2 = 0.836 [zloty / shilling]. kg m p ex . . .( ) 0.836 / p t o t at parity im
- 13. 13 Trade balances 1995 in nominal and in real terms (billion $) Valued at: DEU FRA JAP USA BRA CHN IND RUS Market ex-change rates -19.4 -19.1 40.1 -75.7 -2.7 71.3 -2.0 7.5 Purchasing power parities -72.1 -40.7 -128.7 -152.7 14.0 320.6 24.2 35.0 Balance -52.7 -21.6 -168.8 -77.0 16.7 249.3 26.2 27.5
- 14. 14 Two theories of global trade inequality • Balassa-Samuelson: Low wage rate is due to low productivity in export industries, compared to world standard. • Prebish-Singer: Low wage rate is due to low payment (at equal- to - world productivity) in export industries. • Result in both cases: Non-tradable products are paid below productivity (measured at PPPs).