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- [Alex] So today we're in India
to explain, and also to take advantage
of the Balassa-Samuelson effect.
We'll also be understanding a little bit more
about purchasing power parity corrections,
and why they're important.
So, let's take a look at this mobile phone store
and ask them about some prices.
Come on!
- [Alex]
- [Shopkeeper]
- [Alex] So, can you show me one of your nice phones?
- [Shopkeeper] Yeah. This is the best one --
the Apple -- the new one, the 7 Plus.
- [Alex] Great, great. Okay, that looks pretty good.
So,
- [Shopkeeper]
- [Alex]
- [Shopkeeper]
- [Alex] 70,000 rupees -- that's about 1,000 dollars --
at least as much, maybe a little bit more
than you'd pay in the United States.
And that makes sense,
because this good is easily tradeable.
Tradeable goods sell for about the same price
everywhere in the world.
Because if it were a lot cheaper here,
people would buy it here,
and sell it in the United States.
Arbitrage means that goods which are easily tradeable --
they sell for about the same price everywhere.
Now the situation, however, is very different
when it comes to services.
Services are hard to trade.
And that means that the price of services,
the price of labor --
it can differ a lot in different places in the world.
In fact, I think I need a haircut!
Let's go!
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- [Alex]
- [Alex] Good. Haircut today. - [Barber] Please come sit down.
- [Alex] Great.
- [Barber]
- [Alex]
Dhanyavaad. [
Well that was a good haircut,
and an excellent head massage.
And it cost me just 50 rupees.
That's less than a dollar in the United States.
Raju is just as good a barber as any in the United States,
but he earns a lot less.
Raju might like to come to the United States
and sell his labor for $10 an hour
instead of the $10 a day or less that he earns here in India.
But labor is immobile.
A host of laws prevent him from moving.
As a result, the price of labor can be very different
across the world,
and that means the price of services
that are immobile --
not just haircuts, but also housecleaning,
taxi services,
massage services --
they're a lot cheaper in poorer countries.
The fact that services are cheaper in poorer countries
is often called the Balassa-Samuelson effect,
after Béla Balassa and Paul Samuelson
pointed out this fact and developed models
to explain it at a deep level.
The fact that services are cheaper in poorer countries
also means that, on average, prices are lower --
the price level is lower.
That means that each dollar has greater purchasing power
in a poorer country.
And so if we want to compare GDP,
or if we want to compare living standards across countries,
we've got to take into account
the differences in purchasing power.
And that leads us to our next video
on purchasing power parity corrections.
Dhanyavaad.
- [Narrator] You're on your way to mastering economics.
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