GDP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 14

[TCO]

Originally posted by el freako


Well in that case I think you should applaud the Euro area's amazing growth rate of over 15% over the last year - so what if 14.5% of that was due to the appreciation of the euro, after all we should all use currency exchange rates.

With European growth six times faster than the US level when will americans ditch their sluggish economic practices and adopt our 'continental' model with high social protection, government spending and taxation.



The above is to show how absurd your stance is TCO.

Why use a mathematical expression when you can use a market reality. The Euro production was worth more at that time.

[TCO]

And freko, you really are way too obsessed with the **** size issues here. Try thinking about the economics instead. It's not about "feeling great" or that kind of crap.

[TCO]

Originally posted by el freako


Purchasing Power Parities are an attempt to compare price levels across economies - basically you take a 'basket' of goods and services in one country, see how much it costs and then see how much the same 'basket' costs in another - you then use the resulting rate for converting the size of the economies.

This is better than exchange rates because it covers many prices that are not affected by exchange rates because they are not traded internationally - things like haircuts or take-away foods for example.
Exchange rates are also inaccurate because the vast majority of the trades that result in them have noting to do with GDP (or value-added) but relate to capital flows.

Ice is worth less in the arctic. Use market prices. You are right that there is a lot of volatility, though...

[TCO]

I mean less. Frigging server won't let me edit.

[TCO]

el freako, it is also silly to look at a single year datum to make a decision. Like looking at a company heading down the tubes and getting excited about the month where there stock has an uptick. Surely you can think of more astute ways to look at social policy costs?

[el freako]

You havn't addressed the fact that you are measuring one thing (value added or GDP) using prices obtained in trading something that does not relate to it (investment flows are not part of value added).

It's a bit like claiming that you can compare the value of production of maize and beef by multiplying the metric tonnes produced by the price of natural gas futures.

[TCO]

If you want to compare year to year production within a country, you need to adjust for inflation, granted.

If you want to compare production levels from country to country in a given year you can use the market value. Products have a market value. Currency has a market value. No? By analogy, you can also compare growth rates from country to country without adjusting for inflation (since the currencies are traded.) You can't say what the absolute growth rate is but you can make a comparison. Yeah, you will have some "interesting" numbers. But heck ice is worth less in the arctic. And ice can have volatile worth. It's worth a lot in VA right now with the power loss...

[TCO]

Think about it in terms of arbitrage.

[el freako]

You're still not getting it are you?

GDP, which you want to compare between economies, relates to the value added in that economy.

Exchange rates are mainly determined by capital flows (they usually make up 90% or more of currency trades), only the remaining tenth is related to international trade (and therefore international prices).
However international trade only accounts for 10% to 15% of the GDP of the major currencies economies.

So you are saying the 'market price' (actually there is no market price as no-one trades GDP) for comparing value added across economies should be one that only really applies to 15% of the thing you are comparing, and the price is determined in a market where 90% of the transactions are to do with something else entirely.

Surely you can see how absurd this is?

[TCO]

Originally posted by el freako
You're still not getting it are you?

GDP, which you want to compare between economies, relates to the value added in that economy.

Exchange rates are mainly determined by capital flows (they usually make up 90% or more of currency trades), only the remaining tenth is related to international trade (and therefore international prices).
However international trade only accounts for 10% to 15% of the GDP of the major currencies economies.

So you are saying the 'market price' (actually there is no market price as no-one trades GDP) for comparing value added across economies should be one that only really applies to 15% of the thing you are comparing, and the price is determined in a market where 90% of the transactions are to do with something else entirely.

Surely you can see how absurd this is?

You are not seeing the arbitrage point. Currencies are freely traded. So are products. Ice is worth less in the arctic.Check out a fungible product (e.g. gold). It is worth the same everywhere. There are no arbitrage opportunities in gold. If land or cars or services cost more in one country, then they are worth more. The currencies are freely traded.

[TCO]

Originally posted by el freako
You're still not getting it are you?

GDP, which you want to compare between economies, relates to the value added in that economy.

So you are saying the 'market price' (actually there is no market price as no-one trades GDP) for comparing value added across economies should be one that only really applies to 15% of the thing you are comparing, and the price is determined in a market where 90% of the transactions are to do with something else entirely.

Surely you can see how absurd this is?

99.9% of currency transactions have nothing to do with gold. Yet there are not arbitrage opportunities. Why? Obviously percent of transactions is not the key--elimination of arbitrage is the key. If ice costs less in the arctic, it is worth less in the arctic. By implication, the same is true for widgets in France.

[el freako]

Some products are freely traded across economies. but most services are not.

And as services make up 60% to 70% of GDP then your argument (which seems to equate to 'markets are perfect everywhere') doesn't hold much water.

How can you account for the persistant (5 to 10 years or more) under or over valuation of some countries currencies then?
If the market is moved by differing prices in goods or services then these should equalize in the long run - or at least move around an equilibrium price, but they don't because the market is not moved (or at least not very much) by trade in goods and services but by investment flows.

You are still using the prices of apples to compare oranges.


Gold is easily tradable across frontiers.
Rent, medical costs, education, haircuts etc are not.
That's where your argument falls down - if they where traded then exchange rates would be an ok way to compare economies.

[TCO]

If the service is freely traded, the price is still indicative of value. That is because people can buy less of the service and buy gold or oil or what-have you instead. I don't have to connect the individuals. That is how a price mechanism works.

If there are less prostitutes in the US, than in your country and a **** costs more here, than it is worth more.

[el freako]

Now you're using a circular argument.

How can identical products or services be priced differently in different countries (when converted into a common currency using exchange rates)?

You seem to be saying that because a currency is overvalued, relative to others, then the people there are happly to put up with higher prices than others abroad.

Conversely countries with undervalued exchange rates must be full of bargain-hunters.

It would be nice to live in such a perfect world where prices equalized globally - but this has not been observed to happen in the real world.

The goods/services which show the least deviation from a common value are those most easily traded across frontiers, whereas those that don't are those that are difficult to trade - surely this implies that a perfect market does not exist, that's because no market is perfect.

Even your example of gold trading is not a perfect market, arbitrage opportunities exist - otherwise there would be few speculative traders in the market, which is not the case.

[TCO]

Well at least you've ditched the "what percent of transactions" argument. I was going to drive a further stake in it with examples of three commodities with A and C having no common purchasers/sellers but the groups connected in purchasing/selling B.

Do you really think that ice in the Arctic is the same as ice in the Sahara? That the location of the ice is irrelevant to valuing it? Well you can assign your arbitrary equal value, but I'll go with the market that sees a difference in the two. The market somehow seems a lot closer to reality than "what el freako thinks".