Sunday, August 10, 2014

An Obvious Point that Isn’t Repeated Enough

Economists talk about traded and non-traded goods. By this they mean traded across borders.

So cars are traded, and haircuts are not. Typically, goods are very easy to trade, and services are harder to trade.

Now, add a second thought: trade (at least the voluntary kind) is beneficial to both parties. In particular, for the argument I’m making, trade benefits buyers by reducing prices.

Now the third thought. Who spends a greater portion of their income on traded goods? The answer is probably the poor.

That might not be immediately obvious. But, if you think about it, there’s a lot more inequality in spending on goods and services than there is in spending on goods alone. The reason is that for many goods, your utility diminishes very quickly. For example, there’s only so many Chilean grapes you can eat. But, services on the other hand, include things like personal shoppers, concierge services, legal and accounting services, and live entertainment. As people get richer, the consumption of all of those continues to rise long after our consumption of goods plateaus.

Which brings me to a quick quote posted at Marginal Revolution. As an economist, it made immediate sense to me, but to my readers … I felt the explanation might be necessary:

…trade typically favors the poor, who concentrate spending in more traded sectors.

This is from an NBER working paper by Pablo D. Fajgelbaum and Amit K. Khandelwal.

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