The schoolboy error that will not die

In a special report on managing information, the Economist writes that Wal-Mart’s “revenue last year, around $400 billion, is more than the GDP of many entire countries.”

This is an apples-to-oranges comparison that means nothing. GDP measures value-added. Revenue measures gross value. Please never print such a comparison again.

Martin Wolf tackled this in a FT column in 2002. Jagdish Bhagwati took it on in In Defense of Globalization in 2004. And Paul De Grauwe and Filip Camerman even devoted 15 pages to measuring the size of companies correctly. Yet this “elementary howler” keeps rearing its head, time after time.

Addendum (22 March): My very brief letter to the Economist on this point appeared online.

Ravallion on Pinkovskiy and Sala-i-Martin

Martin Ravallion is open to the idea that African poverty has been improving to the last 15 years, but he is cautious regarding the quality of our data and methods:

Maxim Pinkovskiy and Xavier Sala-i-Martin (PSiM herafter) have confidently claimed that “The conventional wisdom that Africa is not reducing poverty is wrong” and that “African poverty is falling and is falling rapidly.” This sounds like good news. But is it right?

We must first be clear about what we mean when we say “poverty is falling”. What many people mean is falling numbers of poor. However, PSiM refer solely to the poverty rate—the percentage of people who are poor. (There is no mention of this important distinction in their paper.)…

Here we agree: aggregate poverty rates have fallen in Sub-Saharan Africa (SSA) since the mid-1990s.  Shahoua Chen and I came to exactly the same conclusion in our research, for the World Bank’s global poverty monitoring effort, although our methods differ considerably and (no surprise) I prefer our methods.

However, Chen and I also point out that the decline in the aggregate poverty rate has not been sufficient to reduce the number of poor, given population growth…

Two points to note here: (i) Chen and I show that the poverty decline in SSA tends to be larger for lower poverty lines (in the region $1-$2.50 a day) and (ii) PSiM’s method attributes the entire difference between GDP and household consumption to the current consumption of households, and they assume that its distribution is the same as in the surveys. These assumptions are very unlikely to hold, and they give an overly optimistic picture.

In effect, PSiM are using a lower poverty line than us…

PSiM do not tell readers just how few survey data points they have actually used after 1995. Indeed, readers of their paper may be surprised to hear that there is any uncertainty about the trend decline since the mid-1990s; their main graph has 30 annual data points since 1995. But these are not real data points in any obvious sense; rather they are synthetic (model-based) extrapolations based on national accounts and growth forecasts.

We have national household surveys for all but 10 of the 48 countries in SSA since 1995. However, for only 18 countries do we have more than one survey since 1995; for 30 countries, there are is at most one survey since 1995.

As we warn explicitly in our paper, this is not yet sufficient survey data to be confident about the (promising) downward trend for Africa’s aggregate poverty rate that PSiM have announced with such confidence.

Hopefully we will see a confirmation of the emerging downward trend for Africa in the years ahead, as more (genuine) data emerge.

HT: Larry W-S.

Addendum: Blattman beat me to it and has more thoughts.

Variable-rate tariffs

The Andean Community’s variable-rate tariffs seem novel: “The Andean Community’s Price Band System (APBS), introduced in 1995, had the announced goal of reducing domestic price instability by buffering fluctuations in international prices through use of a variable import tariff.”

Why Americans should check Amazon.ca

Years ago, I posted a table documenting violations of the law of one price across Amazon.com and Amazon.co.uk, noting that there were opportunities for “DIY international arbitrage“. Now Jean Boivin, Robert Clark, and Nicolas Vincent are demonstrating the same point, after collecting a lot more data and noting that it’s best to compare Amazon.com to Amazon.ca:

What are the features that make the online book market and our data set appropriate for this type of study?

  • First, each product is identical across retailers, which makes our analysis immune to issues of quality, packaging, and size differences which are present in the data used in earlier studies.
  • Second, price comparisons can be readily done online and so shopping or search costs should be orders of magnitude lower than for non-online items.
  • Third, according to the NAFTA agreement, books are not subject to trade restrictions or tariffs and there are no constraints on buying books from foreign websites between these two countries.
  • Fourth, the nature of the industry is such that the physical concept of distance is irrelevant; the consumer does not have to travel to purchase the good and rather must incur shipping costs, which we observe.
  • Fifth, Canada and the US are among the most economically integrated countries in the world, with similar tastes and economic environments.
  • Finally, for some websites, we have proxies for (relative) sales, which make it possible to study the reaction of quantities to movements in international relative prices.

…

Based on the shipping costs for a four-book bundle, up to 40% of the 213 best-seller books in our sample are cheaper in Canada from a US perspective. The size of the deviations from the law of one price can also be significant, reaching up to 60% in some cases… If markets are not fully segmented, then the fact that books in Canada become cheaper following an appreciation of the US dollar should be reflected in higher sales for Canadian retailers. Using sales rankings as proxies for quantities, we find no evidence supporting such behaviour.

Export-led Growth 2.0

Otaviano Canuto, Mona Haddad, and Gordon Hanson in the World Bank’s Economic Premise write:

How dependent are developing countries’ exports on de- mand in developed countries? This note shows that much of the recent growth in developing countries’ exports was driven by demand in other developing countries. This means that developing countries may continue to rely on South- South trade to recover from the crisis. In fact, countries like China are leading the recovery through strong import demand. Over the medium term, the development of an “export-led growth v2.0,” in which South-South trade plays a more important role, will be essential. Policy makers can support this process by continuing to liberalize South-South trade, focusing in particular on nontariff measures.

WTO essay contest

The 2010 WTO essay contest for young economists, with a prize of 5000 CHF (~$4640), is now open. Submissions are due June 15 and will be judged by Jagdish Bhagwati, Robert Staiger, Alberto Trejos, Patrick Low, and Hakim Ben Hammouda. Ralph Ossa was last year’s winner.

What is Obama’s trade strategy?

Describing the USTR’s willingness to write a trans-Pacific PTA from scratch, Simon Lester says “I feel like we are getting close to seeing what the Obama trade folks have in mind for this one part of trade policy.”

When will find out what the Obama administration plans for any part of trade policy? I’ve stopped tracking day-to-day trade politics, so maybe I missed it, but I haven’t seen anything from the Obama folks about their plan for global economic engagement. Competitive liberalization may have been a bad idea, but at least the Bush administration made their strategy clear.

This week in NBER working papers

Paul Romer: “Economists devote too much attention to international flows of goods and services and not enough to international flows of ideas.”

Elhanan Helpman: A literature review of “labor market frictions as a source of comparative advantage, with implications for unemployment and inequality.”

William Kerr & William Lincoln: “Higher H-1B admissions increase immigrant science and engineering (SE) employment and patenting by inventors with Indian and Chinese names in cities and firms dependent upon the program relative to their peers… We are able to rule out displacement effects, and small crowding-in effects may exist.”