Globalization and Variety

One of the things that economists study is globalization or the interdependence of trade between different countries and regions. Within this broad area of research, there are many sub-areas like currency issues, tariffs, immigration, inequality, and poverty. Global economic issues are now important to almost everyone since jobs are being off-shored, raw materials come from all over the world, and the increasing investment foreign governments make in our country.

One aspect of globalization that has not gotten much research is the impact of variety on our economy. More and more products are being imported into the United States, giving us more choices in our automobiles, televisions, appliances, and even coffee. In a study published in the New York Federal Reserve Bank’s Current Events journal, Christian Broda, a leading economist and hedge fund manager, calculated that the impact of the increased variety in worth some $260 billions dollars to the US economy.

The impact of the increased variety is the result of two different mechanisms. More goods of a particular type tend to drive the price for all goods in that category down. The second mechanism, at least in the case of some commodity type items (for example, coffee) is as a wider variety is available, people tend to sample more products with some upward influence on total sales. In terms of social welfare, this increased variety, Broda argues, has been a positive force benefiting consumers.

While conceding some shortcomings in the methodology used in his study, Broda’s research could have implications for import bans and tariffs. Domestic producers argue for strong tariffs to protect their products from less expensive imported goods. By demonstrating that expanded variety has such a profound economic impact, some of those arguments lose ground. While some domestic producers may be hurt by allowing more imports and reducing tariffs, the overall economy and welfare increases. Tariffs are essentially taxes that importers must pay to bring their products into a country.

One of the underlying assumptions of macroeconomic theory is that as production is reduced by, in this example, foreign goods coming into the marketplace, then those resources would be re-employed producing other products, or the capital would be used in other investments. Continuing with the coffee example, if a domestic coffee roaster where to cut back on production because of the influx of foreign varieties, then the producer could engage in three strategies. The first would be to adjust pricing and production to maintain its current market share. A second option would be to leave the coffee market and enter into another beverage market, or another segment of the coffee business. Finally, the producer could close his factory and use the proceeds from selling the plant, property, and equipment and invest in other opportunities.

Broda earned his Ph.D. in Economics from the Massachusetts Institute of Technology. Originally from Argentina, he has been a professor at the University of Chicago, edited a number of peer-reviewed scholarly journals and was the chief international economist for Lehman Brothers. Mr. Broda is currently the managing direct for Duquesne Capital Management.

Leave a Reply