Don’t go to Shanghai for your Big Mac

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Richard Florida says “While it’s commonly thought that globalization has put the world’s global cities on an increasingly level playing field, substantial differences in prices persist”:

What should leap to mind? Trade costs.

The biggest price gap (a ratio of 100) is for a good that is completely non-tradable and varies greatly in quality (bus fare is 7 cents in Mumbai and $7 in Oslo). A good of relatively uniform quality that is perishable varies quite a bit (Big Mac, from $2 in Shanhai to $6 in Oslo). A durable good with a high value-to-weight ratio, the iPad 2, exhibits less variation, a ratio of under two ($1058 in Buenos Aires and $548 in Bangkok). So it looks like trade costs are a pretty good explanation for nominal price differences.

That iPad gap may not be as large as it seems. You’ll want to adjust for taxes. The VAT is 21% in Argentina and 7% in Thailand.

How can there still be a ~$350 price difference when one can probably mail an iPad to most countries for less than a hundred bucks? Shouldn’t arbitrage drive price differences for identical products down to the shipping cost? Not so fast. It turns out it’s quite difficult to arbitrage iPads. Apple tracks its customers and doesn’t allow bulk purchases.

Why is gasoline, a very homogeneous and fungible commodity, $2 in Amsterdam but only 42 cents in Dubai? Taxes in the former and subsidies in the latter.

In short, these data are a lesson about trade costs. You’ll notice that Richard Florida didn’t title his post “why you should buy a bus ticket in Mumbai instead of Oslo”!

(Relatedly, price comparisons of personal services, as opposed to goods, suggest a lesson about global labor mobility. A one-hour Thai massage costs $6 in Bangkok and about $100 in New York City!)

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2 Responses to “Don’t go to Shanghai for your Big Mac”

  1. Pierre-Louis Says:

    Hi JD
    I don’t know what you mean exactly by trade costs but I would add two things that explain the price differences. The first one is import tariffs (which explain, on top of VAT, why electronics are cheaper in Switzerland than in the EU, for example. The second is that, as you say, parallel imports are forbidden (you can’t buy ipads in one country and sell them on eBay in another). Hence, firms like Apple price to market. Hence GDP per capita or purchasing power is also a determinant of high prices.

  2. Some Notes in Passing | Magic Blue Smoke Says:

    […] My friend Jonathan, over at his excellent Trade Diversion blog, has a fantastic post on globalization and local prices. It is title, appropriately, Don’t go to Shanghai for your Big Mac […]

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