User talk:Cluth/International economics

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I was going to post this in a relevant discussion page somewhere, but I decided it needed further refining before posting it. It's here--a work in progress--until I figure out exactly what I'm trying to say. I'm somewhat loosely referencing some of the following articles: Big Mac index, Purchasing power parity, Standard of living, List of countries by GDP (PPP) per capita, and Price level, among others. Perhaps I can eventually write an article along the lines of "International Economics for Dummies..."

I work in the tourism industry in a place that gets a lot of international tourists. A $125-per[-summer]-night motel (yes, motel, not hotel) room is high but not excessive to a middle-class American, but that price must be obscene to someone from Romania, the Sudan, or China.

When the media reports of laborers in Thailand making $1 per day, most people's immediate reaction is, "Oh my gosh, how can anyone live on that?" But you have to keep in mind, too, that things cost a lot less in Thailand than here--$1 goes MUCH further. I've heard reports of 4-star-hotels going for $20 per night, and lavish six-course dinners costing $10. (OK, my memory might be exaggerating, but you get the picture.) So, a $1-per-day income in a country like that, while still far below the average relative income of someone in the U.S., is not quite as low as it sounds at first.

I'm not an economist, but I'm intrigued about how all of this relates. In my completely ignorant and uneducated view, I see two factors:

1. Income 2. Cost of living

So, here's how I see this all interacting from my view.

IN THE U.S. 1. Income: Within my country's borders (the U.S.), my income qualifies me for lower-middle-class status

2. Cost of living: I like to call myself a poor, starving college student, but I'm lucky enough to have low living expenses and a decent job. I can afford the food I need, a well-running car (not anything fancy, mind you), and a laptop computer. I can also afford to take a few much-needed trips each year.

TRAVELING TO SOUTHEASTERN ASIA 1. Income: Let's assume I keep my American job and take a two-month trip to Thailand.

2. Cost of living: That same income will go MUCH farther. I'd probably be able to afford a nice seaside condo and perhaps a housekeeping service. I might even be able to make payments on an imported luxury car--a Mercedes, perhaps.

MOVING TO SOUTHEASTERN ASIA 1. Income: Let's assume I take a job in Bangkok that is similar to my current job. My income is cut 90%.

2. Cost of living: My new income in Thailand qualifies me for lower-middle-class status. I have to share a flat with a couple of friends, rely on public transportation, and can't afford many imported-from-America items.

LIVING IN SOUTHEASTERN ASIA AND TRAVELING TO THE U.S. 1. Income: My small income per year is well below the U.S. poverty line.

2. Cost of living (traveling): I can barely afford the bus ride from the airport to my old house--it's half a day's Thai wages for me. A Taco Bell burrito costs as much to me as a four-star restaurant back in Thailand.

There's a third factor, too--the exchange rate. Currencies rise and fall against each other--one day, the Euro is strong and the dollar is weak, and travelers to Europe see a higher cost whereas travelers to the U.S. feel slightly richer in comparison. Goods imported from Europe are more expensive (a Mercedes might cost $2,000 more).

So what my actual QUESTION is, then, is can someone devise a simple-to-understand way to put all of this data together? Purchasing power parity and GDP lists are useful, but I want to know how it applies to my daily life and to the daily lives of people in other countries.

The Economist's Big Max Index is a very useful tool for this, but it doesn't quite go far enough. Let me pose some hypotheticals followed by some questions: 1. In order to pay for a Big Mac in the U.S., I need to work at my job for about 15 minutes. Or, put another way, I can buy 4 Big Macs per hour. 2. In order to pay for a Big Mac in Argentina, I only need to work about 8 minutes. I can afford almost twice as many Big Macs there as I can here, or 8 per hour. Therefore, can I conclude that my standard of living is twice as good as his? 3. How long does an Argentinean need to work to pay for a Big Mac? Let's assume an Argentinean in a similar place in life as me makes half as much as I do. Therefore, he needs to work about 15 minutes to pay for a Big Mac--the same 4 per hour as I can buy. Are our standards of living comparable? 4. The Argentinean comes to the U.S. He can only afford 2 Big Macs per hour. Is he poor?

I think what the real thing I'm looking for is: what percentage of the average person's income is spent for a given standard of living? Yes, the Big Mac in Switzerland costs more, but do Swiss people make more? Probably not: I had a nurse friend in Germany who made about $1500 (USD) per month. Yet the cost of living in Germany is far higher than it is in the U.S.--gas is (or was, anyway) four times as much there as here, and even eating out was relatively expensive (the average meal bill as seen on our U.S. credit card statement was more for a party of four than it was at a similar restaurant back home). How could she survive? She was the housekeeper for a Catholic priest and paid no rent.

I edited it a bit and sent it in as a letter to the Economist. It captures what I'm trying to say a bit better than the above post.

I think the next time you publish a Big Mac Index, there should be one more column: "Relative Price For Big Mac For Local Resident (Adjusted By PPP)." This would give us an idea as to how much of a person's income in a given country a Big Mac costs. Sure, a Big Mac might only cost half as much in Argentina as it does in the U.S., but if the average Argentinean earns half as much per year as the average American, his effective Big Mac purchasing power is the same. But if an Argentinean only earns a quarter as much as an American, his purchasing power is half--thereby making the relative price of a Big Mac (to an Argentinean) around $6.

I'm not an economist, so this simple calculation would help me evaluate the true standard of living in other countries. So if I hear of laborers in China earning $1 per day, but I find the average rent is 1% of what it is in the U.S., I'll know that their standard of living is roughly equal to mine. But if I find that the average rent in China is more like 10% of what it is here, then I'll know that rent takes 10 times as much of a Chinese worker's paycheck than it does of mine.

But I'm still confused on why that would be. If the price of goods relative to income were pretty much the same in each country, why would the entire scale be shifted between countries, such that a middle-class Thai person can barely afford a modest dinner out while traveling in the U.S., and a middle-class American can treat themselves to ultimate splendor in Thailand for pennies on the dollar?

Maybe I should just go sign up for an intro course in economics at my local junior college.

Chris Luth

Anchorage, Alaska USA

Perhaps I can make an analogy to frequent flyer mileage-earning credit cards. The Alaska Airlines card issued by Bank of America lets you earn one Mileage Plan mile per dollar spent. Diners' Club nets you a whopping TWO miles per dollar spent. But when you transfer your Diners' Club points to your Alaska Airlines Mileage Plan account, they transfer at the rate of two to one. Therefore, while it is twice as easy to earn DC points, in the end, both cards get you the same miles. (Still a work in progress...)

cluth 08:13, 19 October 2005 (UTC)

Let me rephrase this in a simpler method:

I may be rich to someone in China. A Chinese person may be poor to me here in the U.S. But within our semi-closed economies, am I any richer than he is? Does his $1-per-day buy the same standard of living as my $100 per day?

cluth 06:31, 10 November 2005 (UTC)