Saturday, November 14, 2009

U.S. Signals Shift on Asia-Pacific Trade

The Wall Street Journal's editorial "U.S. Signals Shift on Asia-Pacific Trade" (November 14th, 2009) is mistaken and slightly misleading in its dismissal of the Trans-Pacific Strategic Economic Partnership Agreement,

Although touted by free trade advocates, the combined size of the four economies [Singapore, Chile, New Zealand and Brunei] in the pact is smaller than Belgium's economy.

A more apt comparison might be to say that the nominal GDP of the four countries exceeds that of Taiwan, which often finds itself as the United States 10th largest trading power, by approximately 25%. Or that their GDP measured by purchasing power parity (PPP) exceeds that of Belgium by 58%.

GDP can be misleading--production prices can matter much more. If another country, very large, has exactly the same prices and technologies as us, then we are, in most cases, indifferent to trade, as are they. The more different the production prices, the larger the gains to trade. We should note that the ratio of PPP to GDP is a crude measurement of the difference in prices between countries. As the countries in question have relatively high PPP to nominal GDP ratios, they are to be seen as more attractive trade partners than a similarly-sized economy with PPP to nominal GDP ratio close to one.

Furthermore, GDP is not a good measure of gains to trade for a country. To use the classic example, when a secretary trades with a doctor to save him 2 hours of administrative work, she does not save him the $15/hour he pays her--his gain from trade is the $485/hour he now makes doing what his comparative advantage is (doctoring for $500/hour). Her "GDP" may be $30, but her worth in trade was $875.

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