Clearing Up the Confusion Over “Made in China” 1

Speaking of Paul Krugman as I did in my previous post, Romney Isn’t Concerned, I find this other post, Clearing Up the Confusion Over “Made in China”, by Paul Krugman.

On his blog, “The Big Picture,” the author and commentator Barry Ritholtz sends us to a Federal Reserve Bank of San Francisco paper from last summer that makes a point about which many people seem confused: Despite globalization and all that, the bulk of a consumer dollar spent in America falls on American-produced goods and services. According to the paper, titled The U.S. Content of “Made in China,”

“Goods and services from China accounted for only 2.7 percent 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.”

It is amazing how China can accumulate hundreds of billions of dollars in U.S. treasury debt by running up a massive trade surplus by selling us 0.6% of our GDP with goods coming solely from China. (If I understand the report, only 11% of the content of the products marked “Made in China” originated in China.)

My engineering training has always told me that after you make a complex calculation, you need to check against other obvious data to make sure there isn’t a mistake in your calculations. When you do find a discrepancy, you need to understand where it comes from. It could be an error in your calculations or it could be an error in the comparison data.

In no case can you just walk away without explaining where the error comes from. Especially when the calculation gives very surprising results, you need to know in great detail how it came to be that the results are correct and yet disagree with all the data that went before.

I take this report with a large bag of U.S. made Morton Salt (if indeed that is where it comes from) before I buy into this analysis.

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One thought on “Clearing Up the Confusion Over “Made in China”

  • SteveG Post author

    Let me add the apocryphal story I heard at MIT.

    A grad student in astrophysics was going through his PhD thesis defense. The thesis was on a new, startling theory of the creation of the universe. The professors on the committee were very impressed.

    Still, one professor asked the student, “So what is the size of the universe that your new theory predicts?”

    In typical MIT fashion, the student said, “Calculations are just simple arithmetic, not worth bothering with.”

    The Professor said, “Humor me and make the calculation.”

    The student worked with his slide rule for a few minutes (this is an old story) and then turned to the Professor sheepishly replying, “Would you believe 2.5 centimeters?”

    Do you think he got his PhD?

    As an undergrad, the moral of the story was “always do the calculations to check for errors in the theory.”