Chatting with my "French Sister"

I am currently hosting my so-called "French Sister". She is the youngest daughter in a family with whom I lived in France during my junior year of undergrad. It wasn't a pre-determined arrangement by some agency...just chance. I was studying and living in Avignon in my own apartment when I met a young man (through a mutual friend) at school who would become one of my best friends to this day. As the first semester wound down, this new friend's girlfriend (whose younger sister...a young teenager at the time...is the "French Sister" in the title of this diary), whose family had a large house in the countryside about 25 minutes outside of town, offered to have me move in since they came into Avignon every morning anyway for school. Not only would it save a lot of money but it would also be a much better experience. I accepted and two families (his and hers) basically became my life-long friends and the reason for many trans-Atlantic voyages in both directions between our families. We actually see each other quite often considering how far apart we all live. Some of the best things in life do indeed happen by chance. :)

Anyway, my "French Sister", now a young lady in her mid-late 20s, took six months leave from teaching (she's on half pay for "volunteer English study") and is staying with me and working at my business to work on her English.

Now that we got a brief backdrop story out of the way....

On several occasions, we have discussed how things are going back in my dear France. The stories sound similar. Wages have been stagnating for a while now, prices on basic goods are rising, people are grumbling at the squeeze on the pocket book and the seeming impotence of government etc. etc. Nothing different there. But from the outset, she was amazed at how much cheaper those basics were here. From the get-go, I told her to be careful how she measured price differences. Yes, thanks to our very weak dollar, the exchange rate is now about 1 euro for about $1.50 (roughly...I like round numbers for discussion purposes). But I told her to not think that way because for domestic purposes it was more accurate to simply think in terms of 1 to 1 because that's what they're "supposed to be". She didn't quite get my meaning at first. She would see a $10 item for which she expected to pay perhaps 12-13 euros and then instantly do the exchange rate of about 66 cents for 1 euro and think the product cost 6.66 euros. Wow! Cheap!. Not so fast. I explained that regardless of the fluctuating exchange rate, there was a local value based on local purchasing power and income and that regardless of fluctuations, most prices within the country based on domestic income levels do not fluctuate as greatly as exchange rates do.

This is all about Purchasing Power Parity or (PPP). What this basically answers is not the question of "what is a dollar worth in euros?", but rather "What's a dollar worth in America compared to what a Euro is worth in...[pick Eurozone country]?" To the un-careful eye, it doesn't sound like much of a distinction but it can be when exchange rates are out of whack. The idea is based on the simple, everyday idea that dollars are earned in America and spent in America...regardless of what the exchange rate is. Same for euros in Europe. If the dollar suddenly strengthened vs. the euro and exchanged at 1 to 1 again, it wouldn't make a real difference to Americans who are still earning dollars and spending dollars....even though Europeans would suddenly find everything "more expensive". But of course, this isn't a perfect measure either. A weak dollar means that tradable goods cost more since it takes more dollars to import goods when the dollar is weak. But overall, it's a far more accurate measure when comparing real life earning and spending between countries.

The differences can be startling:

Consider GDP per capita at PPP vs. GDP per capita (nominal) ....meaning based at current exchange rates.

At nominal rates, the per capita amounts are about $45,000 in the US and $41,000 in France (when we express euros in dollars). But when we account for PPP and "real domestic value exchange rate", the French per capita total plummets to about $31,000...which is roughly what France's euro-based GDP per capita would be if expressed at 1 dollar to 1 euro.

BTW, as it turns out, my 1 dollar for 1 euro assumption is pretty accurate. Consider this post by Brad Delong on the topic from last year:

The appreciation of the euro against the dollar has taken the currency close to its highest value ever around $1.35. By contrast, the rate estimated as Purchasing Power Parity by the Penn World Tables International Comparisons Project (ICP) is around $1.00 for most eurozone countries (It’s 1.10 for Italy, 1.05 for France and Germany, 0.96 for the Netherlands....

In the end, considering what she is doing for me and from the limited perspective of her pay and what it buys, which basically amounts to work paying between $8 and $10 per hour, she didn't realize rising costs of consumer goods were such a big issue here, like in France, until I told her. I assured her that they were. Everything is relative. Her answer was basically that she would have loved have seen what costs of goods were BEFORE the rises in commodity prices. Granted, it's a limited perspective but she has been very interested in WHY her income here seems to go further and comparing policies. A centrist herself in France...having moved there after getting sick of all the pathetic economic nonsense (her own words) from the French Left...she says she's now a little more sympathetic to market liberalization ideas than she was before. Just for fun, she took an American political test and came up as a mainstream Democrat with a decent economic score...which is what I expected her to be considering her murky centrism in France.

(And also for fun, I took Politest for France. Translated: I am "at the same time both Left and Right. No party corresponds to your views"...well, I already knew that ;))