Phantom GDP and Comparative Advantage

Wow! The data measurement is so complicated. However, the fundamental effect is simple.

When we shift from the domestic flimflams that cost $10 to the imported flimflams for $5 we are able to direct those domestic flimflam workers to other productive employment. The new output from that employment is the real gain for the economy.

For the same $10 we now get the flimflams, plus the new output. On a price-adjusted basis we have gained $5.

Nope.

Let's distinguish between production and consumption. The economy's production may or may not go up, depending on how productive the workers are in their new jobs. Let's assume that they are at least as productive.

Consumption goes up, right? Because now we are producing as much at home, and importing the flimflams (and paying for them by borrowing the money from the Libyans).

But because the change in the price of imported flimflams is mismeasured, the statistics end up showing a bigger gain in domestic production than really happpened.

I don't fully understand - if the Flimflamds have halved in price, but the BLS doesn't show that, then isn't it underestimating the gain from trade? It's not that the Flimflam has actually got only half as good.

Ok, I've read the other articles. The impact is not on one's standard of living, but the size of real imports in that standard of living.

Yes. If you imagine that an increase in your standard of living can come from either cheaper imports or from higher domestic productivity, the second one measures real growth of our productive capabilities. If the impact of imports is being underestimated, then the growth of our output and productivity is being overestimated.

Dear Dr.Mandel,

Your article on in BW's June 18th issue titled "The Real Cost of Off-shoring"is very enlightening. I believe this really could be the small beginning of a change in how we define our economic value to the world. We are nolonger a manufacturing or farming economy but, a intellectual, education development, R&D, services economy.

Also, I am an adjunct faculty member atITU and I teach mostly students who are from India. Could you tell me where i can find a comparison of the India economic structure and the United States?

Also, I want to do a paper on how these students see the U.S. compared to India.

Thank you
Greg Hobbsb

Our measures of productivity are overestimated. And they do not measure worker efficiency - they measure efficiency of the aggregate economy. But this does not mean that we have not gained from the trade. What matters is that we have more goods for the same price. We have gained from the trade.

Which side of the border the workers reside is of less importance than the gain for all parties from the trade. This is just a continuation of the trading evolution that predates history.

Long ago New York city was a manufacturing center. But the manufacturing moved to places of cheaper labor - Connecticut, the midwest, then the south etc... Long after losing the manufacturing economy, New york city has higher incomes than the places to which the manufacturing moved. I see no sky falling here.

The GDP mismeasurement is not so exciting to me - everything is mismeasured. We are surrounded by imperfect and incomplete data. In business and investing we must constantly make do with incomplete and imperfect data.

Phantom GDP based on the idea of mismeasurement of imports - maybe so. What else is missing in the data? The measurement of the trade deficit is also suspect and perhaps the greater phantom - the real place of mismeasurement, and a bigger story. Much like the savings rate, its measure is far from complete or accurate.

To the extent that the trade deficit is real and paid for by debt, we are getting their real goods in exchange for IOUs denominated in our fiat currency. I would not want to be on the other side of that deal.

Dear Dr. Mandel,

Until you post the exact methodology of how you constructed your numbers, I won't believe a thing. This should include your assumptions about what the “right” chained price indices should be.

A couple of things should raise suspicion:
"66 Billion (2006 dollars)"
The 2006 real GDP in 2006 dollars is not mismeasured. By definition it's equal to the 2006 nominal GDP. The errors occur only if we calculate 2006 GDP in dollars of a prior year.

The other thing that sounds fishy is "cumulative overestimate of real GDP growth since 2003."
Does that mean that 2006 GDP measured in 2003 dollars is $66b overstated? In that case the mismeasurement is only 0.16 percent per year, because it is spread over 3 years!

Or does it mean that 2004, 2005, 2006 GDP numbers are overstated by 11, 22, 33 billion dollars, respectively? Then the impact on real GDP growth is even smaller: affecting the growth rate by only 0.08 percent per year, not 0.5.

I have read for four years now about how beneficial it is for the U.S. economy to offshore our high-paying software development jobs to India and how this "frees up" former software developers like me to be more productive. How can this be? I am a productive, hard-working software developer who now teaches public high school students. I supplement my income waiting tables. I don't make anywhere near the money I used to make, my work life is miserable, I am unfulfilled, my education and skills are wasted, and I don't have the good lifestyle I used to have. In fact, now I worry that I won't be able to retire. So, who has benefitted from this? Not me, because I lost income and productivity by working in jobs I am ill suited for. I don't think my students have a good teacher, because I'm really a software developer, not a math teacher, and I certainly don't like teaching. I don't think my customers at the restaurant really have benefitted from my waiting on them, because my skills are not used at all there. So how did my job loss free me up to be more productive? Please don't push this question aside by saying that other people benefitted. I want to know how the displaced worker benefits from this. How are we now more productive?

Let me try to answer your question, Underemployed. When we talk about productivity, we are talking about aggregate productivity, so yes, we're only saying that it benefits society as a whole, not any individual person. We now have to pay the Indian programmers less than we would have had to pay you, so it is a better deal for US. Now it's up to you to find another way to make a living. It's possible that you were never a good programmer and that you're not good enough or cheap enough now to be employed as a programmer. It could be that you just haven't tried to pick up new skills that employers demand or that you don't want to move to a new location. It's also possible that you're just finding it difficult because of the highly inefficient labor market, where companies just hire based on checklists of 5 years java experience, 3 years C++ experience or whatever. We don't know the details of your particular situation so we can't say for sure. The point is that you're probably a reasonably smart guy who can learn some new programming skills and work in a field that is currently in high demand, whether it's ruby on rails programming or web design. The loss of your former job gave you a chance to do something else that is now in high demand. If you choose not to do your part and backslide into teaching or waiting tables, that's your choice, the government and people of the United States do not owe you a job similar to the one you had.

Dear Dr. Mandel,

If the US economy is lucky, you will soon be replaced with a more efficient writer; some puckish PhD from Shanghai who can deliver the same witty content for a fraction of the cost.

We, the readers, will benefit when the decreased cost of content is passed onto us in the form of cheaper Business Week subscriptions. You'll get a chance to do something else in high demand. Everybody wins.

I expect when adjunct professors have reduced the ranks and paychecks of tenured economists at US universities, we'll begin to see a revision of the current free trade dogma.

After all, when a programmer loses his job to cheap foreign competition, it's the market at work. When an economist loses his job to cheap foreign competition, it's a market in crisis.

Well let me say that my agreement is with the latter, that outsourcing is good as long it does not impact me! I dare say that my education level perhaps is not on the same level as the Professor/Economist but that actually may be an advantage because perhaps he is diluded by his intellectuall prowess. The problem we have is partly if not most to economic gurus that are great on mathematical formulas and theories but short on common sense and so reality vanishes. Yes theoretically if input is A we should get output B, unfortunatly reality and theory exist on two different levels. It is most unfortunate that humans are equated to machinery; value=output/cost-residual value =0. Excuse me if math formula is incorrect but the jist is that human value is on par with a piece of machinery, to discard. First of all the comparison is like apple to orange: given choice if everything being equal as say two apples other than price wich do you choose? The most obvious answer is obvious, the cheaper of the two. Now you can purchase more apples but you can't eat them all so the uneaten apple is thrown out not ot be eaten by any one. That is the problem that is faced humans not their intrisic value but their product value.A commodity replaced by a cheaper one until there are no cheaper ones left.
The problem that arises and surely economists know this that it easier to push theories nad equations than confront the really issues, then it is all just BS. Until common sense is injecteded into the equation situations will alwas be eschued to favor the haves rather to the benefit of the majority, wether it be nationally or globally.Until we we start caring about what is good for the majority rather than the very few, things will always be unbalanced.