Sunday, December 25, 2011

On trade numbers and statistical illusions

The Economist has an interesting debate on whether persistent trade deficits are a bad thing. Hal Varian makes an important point about the fallacy of paying too much importance to headline trade deficit figures.

According to research by Ken Kraemer at UC Irvine, the component parts of the iPad are imported to China from South Korea, Japan, Taiwan, the European Union, the US and other places for final assembly. None of the component parts are made in China: it's only role is assembly. The value added by the final assembly in China is about $10. Nevertheless, each iPad exported from China to the US increases the US trade deficit with China by $275.

The same misleading accounting holds for other products. If China buys steel, aluminum, and machine tools from Australia and uses these parts to build a ship which they then export to the US, the total value of the ship is counted as an export for China.

Laurence Kotlikoff and Scott Sumner argue that the most important metric should be the national savings rate, since it determines not only the sustainability of a trade deficit but also whether the deficit is financing productive investments.

On the same subject of statistical illusions, Paul Krugman posts that Ireland's reported recovery in competitiveness may not be a reflection of the true story.

Ireland is an economy that generates a lot of GDP — but not much GNP — out of capital-intensive, foreign-owned export sectors, such as pharma. And what has happened in the austerity era is that these sectors, which aren’t selling to the domestic market, have held up much better than labor-intensive sectors serving that domestic market. And this causes a spurious increase in labor productivity: if you lay off a construction worker but don’t lay off a pharma worker who basically watches over very expensive machines that produce a lot of output, it looks as if productivity has gone up, but in any individual sector nothing has happened.

In other words, the numerator (GDP) falls by a far smaller number than the denominator (workers) when a less productive domestic worker is displaced.

Update 1 (26/1/2012)

The Economist points to a study about iPad's production supply chain and writes about how trade statistics overstate trade figures

"According to a study by the Personal Computing Industry Centre, each iPad sold in America adds $275, the total production cost, to America’s trade deficit with China, yet the value of the actual work performed in China accounts for only $10. Using these numbers, The Economist estimates that iPads accounted for around $4 billion of America’s reported trade deficit with China in 2011; but if China’s exports were measured on a value-added basis, the deficit was only $150m."

China’s small contribution to total costs suggests that a yuan appreciation would have little impact on its exports. A 20% rise in the yuan would add less than 1% to the import price of an iPad. For imports such as clothing and toys the Chinese value added is much higher. But electrical machinery and equipment, with more complex cross-border supply chains, make up one-quarter of China’s exports to America.

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