Jordan Weismann has an interesting bit in The Atlantic on the recent decline in gold prices — off about 15% from last-year’s peak — that includes some fascinating perspective on China and the world economy:
[China] deregulated its gold market in 2001, and since then, it has gone from consuming about a third as much gold as the developed west to overtaking it by 2011. Let me repeat that: the Chinese buy more gold than the entire west combined.
The current gold price seems pretty high to me. Back when I was thinking more about the mining industry, (nominal) prices were less than $400 /oz; today’s prices are north of $1500. So, even adjusting for inflation, that is a pretty good ride. But when I looked for a graphic to illustrate the changes, I came across this nice blog post on how it’s hard to find an “objective” series of real gold prices.
Gold markets are interesting for all sorts of reasons that I won’t get into here. Perhaps I will start cobbling together a reading list on the many dimensions of the economics of gold and gold markets.
Slated to be the China’s tallest building upon completion, the 632-meter tall Shanghai Tower conveys stability, if not permanence.
The ground under it, however, is another story.
Spectators were intrigued in mid-February when a giant 8-meter long crack appeared in the asphalt near the tower. The crack was a reminder of Shanghai’s shifting and sinking ground, which scientists say makes the city vulnerable to rising sea levels.
And Shanghai is not alone. China’s Ministry of Land and Resources recently reported that the ground is sinking under more than 50 cities. The culprit is the overuse of groundwater, the ministry’s Geological Environment Department Deputy Director Tao Qingfa told Caixin.
When residents consume too much groundwater, water pressure underground depletes and causes the soil to shift and sink, Tao said. Beijing, Tianjin, Hangzhou and Xi’an are all sinking in certain places as a result, he said.
I saw this over at foreign policy scholar Walter Russell Mead’s blog. He seems to think the crack is a metaphor for fractures in China more generally, as rifts develop between rich and poor, urban and rural, local and national, authority and spontaneity. As Professor Mead puts it, “Sooner or later, something will give.”
Goods and services from China accounted for only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs of Chinese imports. The rest went to U.S. businesses and workers transporting, selling, and marketing goods carrying the “Made in China” label.
So who gets what?
Table 1 shows that, of the 11.5% of U.S. consumer spending that goes for goods and services produced abroad, 7.3% reflects the cost of imports. The remaining 4.2% goes for U.S. transportation, wholesale, and retail activities. Thus, 36% of the price U.S. consumers pay for imported goods actually goes to U.S. companies and workers.
That’s a potentially interesting figure that suggests something we probably all know intuitively — that the firm that makes something isn’t necessarily the same firm that captures the value from its sale.
Last year I poked around for information like this when we were looking at what went into the price of shoes and found Rodrige, Comtois, & Slack’s breakdown in The Geography of Transport Systems.They split up the “cost of a $100 shoe made in China” (click to expand) to the various factors of production, and provide an explanation here.
The analysis suggests that a $100 shoe has about $12 worth of labor and materials in it, almost none of that paid to labor ($0.40). I assume “profit” goes to the corporation (e.g., Nike, Earth Soles) and the “retailer” percentage includes both retailer costs and retailer profits.
Here’s an important point — the difference between Walmart and Footlocker for a given pair of shoes would probably come out of that 50% retailer percentage. Lower rent, lower personnel costs, lower profit per unit. So where does the difference in shoe quality come from? It seems to me it comes out of that $12 in labor and materials.
Do you see what I mean? If a typical $100 pair of shoes has $12 of parts and labor, then how much does a typical $37.50 pair of shoes have in terms of parts and labor? Somewhere between $0 and $12, I suspect. For the sake of argument, let’s say you could cut those by 25% to $9. That suggests Walmart could offer the same quality shoe (that is, a $12 shoe) by bumping the price up by $3 to $40.50…
Why can China produce at such low “costs”? The chart at the right shows the figures for manufacturing generally — 40% of the cost advantage stems from lower labor costs. My intuition was that labor costs were a major portion of the product costs, but that was incorrect. It is, however, a substantial source of the lower costs. So, to illustrate this point, suppose Indonesia could assemble these shoes for $12.50 — $0.50 more. Of the $0.50 Chinese cost advantage, 40% ($0.20) would be due to lower labor costs.
I would guess that the cost advantage is nowhere in the neighborhood of $0.50. If China produces 8 billion pairs of shoes annually (16 billion total shoes), then a penny per unit in labor savings is $80 million into someone’s pocket. An $0.08 labor cost advantage translates into well over a half billion dollars.