Tuesday, April 29, 2008

Yeah China

So this is a really interesting piece of economic research (no, seriously). Broda and Romalis, in a paper you can find here, look at inflation in the price of goods for different income groups. What they find is that the inflation rate for the goods that rich people buy (which tends to includes expensive services like financial planning and legal advice) is much higher than the inflation rate for goods that poor people buy (which tend to include much of the inventory of Wal-mart).

The reason for this, they point out, is that services are not generally tradable (you can't replace American tax advice with Pakistani tax advice) while the inventory of Wal-mart is highly tradable. This has two big implications:
1) Inequality in purchasing power between rich and poor people is not nearly as large as inequality in income. So while we might decry the increasing wage gaps observed in the U.S., you can sleep better knowing that rich people pay higher prices than you do.
2) Trade with places like China is absolutely a positive, even for the poorest people. They benefit immensely from cheap Wal-mart stuff, and this probably far outweighs the (as-yet-unestablished-by-decent-empirical-work) lower wages that trade might induce for poorer people.

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