Wednesday, 17 March 2010

On the Impossibility of the Protectionist Calculation

I was interested in this story in the Press today.
A Christchurch student is forgoing bananas, chewing gum and impulse purchases in an attempt to buy only New Zealand-made products for a year.

Canterbury University student Sarah Marquet, who started her experiment on Waitangi Day, said she wanted to see if it was possible to live normally while buying only local products.

Let's leave aside the question whether there is any social gain from benefiting local import substituters at the expense of local exporters; and ask what does it mean to buy only local products. Defined broadly, the obejctive is impossible. Even if you buy a locally grown onion, petrol refined from imported oil has almost certainly been used to transport it to the place of purchase.

But if the definition of local product is defined more narrowly to exlcude the origin of intermediate goods, then anything purchased in New Zealand is New Zealand made. After all, when you buy foreign-made chewing gum in a New Zealand supermarket, what you are buying is actually a final product that bundles chewing gum with retail services. The actual chewing gum is an intermediate good in this production chain. The same is true of petrol purchased at a petrol station.

So let's take an intermediate position between these two extremes and say that our objective is not to buy only New Zealand made products, but is to maximise the total New Zealand value added in the goods we purchase. And for this exercise, let's pretend for now that international trade is not effectively a production process that converts locally made intermediate good called exports into other locally made goods called imports.

To do this calculation, we need to know not only the fraction (by value) of the goods we buy that was made in New Zealand, but also the fraction of all the intermediate goods that went into the production of those goods, the fraction of all the intermediate goods that went into the production of the intermediate goods, and so on.

If looking to buy New Zealand made pencils, this famous story might be a help in making that calculation.