This is not a grand existential question; I am referring to the size of its economy. According to most news reports, China's GDP is approaching $2 trillion, rivaling Germany for the #3 ranking in the world, behind the United States and Japan. In fact, this figure grossly understates the size of China's economy. It is already far larger than Japan's economy and is likely to surpass the size of the U.S. economy in less than a decade. The error is simple. The standard number reported for China's GDP is based on a "currency conversion" measure of GDP. This method takes China's GDP, calculated in its own currency, and then converts this number into dollars, using the official exchange rate. However, China's currency is hugely under-valued, so this method provides a very poor measure of the value of goods and services produced in China each year. The method preferred by economists for most comparative purposes is a "purchasing power parity" measure. This measure adds up GDP by using the...

A New York Times story on Iceland provides a good opportunity to discuss the asymmetry in reporting on government budget deficits and national current account deficits. While news of the budget deficit routinely appears prominently on the front pages (in addition to occupying considerable space on editorial and op-ed pages) discussion of the current account deficit is generally relegated to the inner pages of the business section. Since the long-term impact of the two on the economy is comparable, there is little justification for the difference in treatment. This is another Econ 101 story. A budget deficit is supposed to be bad because it pulls money away from other more productive purposes. Specifically it is supposed to raise interest rates and thereby crowd out private investment. (The deficit hawks have a hard time telling this story at present, with real interest rates in the U.S. at near post-war lows.) The result is slower growth and a poorer country in the long-term. There is...

I want to follow up quickly to a couple of notes on my posting where I referred to the "Die at the Border" policy. I was not arguing for open borders. I don't think that anyone who has given the issue serious thought advocates open borders, since a literal open border policy would almost certainly imply an inflow of hundreds of millions of people in the next couple of decades. My point is that we don't have open borders; instead we have very serious limitations on immigration. Immigration is restricted both by the danger of the border crossing and the prospect of deportation due to a random encounter with law enforcement (e.g. a traffic ticket). These threats ensure that most immigrants will not be well-educated, since well-educated people in the developing world will not take these risks to work in the United States. This means that less-skilled workers in the United States have to worry about competition from undocumented workers, while the people who design and debate immigration...

One of the great absurdities in the debate over immigration policy is the frequently repeated claim that the U.S. economy is generating more "low wage" jobs than can be filled by the domestic workforce. This line has been endlessly repeated in news stories on the issue. Quick trip back to econ 101: recall the concepts "supply" and "demand." What makes a job a "low wage" job? In econ 101 world, a job will be a "low wage" job if the supply is high relative to the demand. When there is insufficient supply, then the wage rises. My students didn't pass the course if they couldn't get this one right. Econ 101 tells us that there is not a shortage of workers for low wage jobs; it tells us that there are employers who want to keep the wages for these jobs from rising. Immigration has been one of the tools that have been used to depress wages for less-skilled workers over the last quarter century. Many of the "low-wage" jobs that cannot be filled today, such as jobs in construction and meat-...