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Monday, June 27, 2005

JAPANESE PERSPECTIVES

Economists, remember to mind your Ps and Qs


Children are told to mind their Ps and Qs when they go visiting. They must be on their best behavior. They have to be able to speak like well-educated young people. They have to know P from Q. Well, so do economists, actually.

Opinion seems to be divided on what the Ps and Qs in question actually stand for. As for economists, there can be no difference of opinion about our Ps and Qs.

Where the economist is concerned, P stands for price and Q stands for quantity. Multiply Q by P and you get V, for value.

Yet the Ps and Qs of the economist's world can play tricks on people. Take the case of the manufacturer who is inundated with new orders. His sales volume is going up astronomically. He dreams of the riches to come.

Yet if the price of his goods is plummeting in the meantime, those perceived riches will not materialize. Indeed, he could even be worse off, after putting in all the work to meet those rapidly increasing orders. This is called deflation.

On the other hand, the same manufacturer may suddenly find the value of his sales swelling. That, too, would make him happy. But only until he realizes that his sales volume has remained unchanged.

What has happened is that he was able to raise the price of his merchandise, but was not at all successful in getting people to buy more of his goods.

He would get an even nastier shock if he found that his costs had gone up at the same rate as his prices, leaving him no better off than previously. Worse still, his costs may have gone up faster than his prices, in which case he is in bad trouble. This is called inflation.

P's and Qs are also important things to watch out for when you are looking at trade data. Take the preliminary figures for May released just last week by the Finance Ministry. Japan's total exports, measured in yen terms, were up 1.4 percent on the previous year. That does not look very spectacular. But at least the figure was not negative.

However, turn your eyes on what was happening to the quantity of goods we sold overseas, and you get a different picture. Measured in terms of volume, our export sales were actually down by 2.5 percent on May last year. It was a price increase of 4.0 percent that pushed up the number in value terms.

It may be good news that exporters were able to raise their prices somewhat in these deflationary times. But then again, their costs may have been going up faster, in which case they deserve our sympathy.

That people's costs may have been going up a lot faster is also something that shows up in the Ps and Qs of the May trade figures. For if one looks at the import figures, their volume, or quantity, was up 8.6 percent on May last year. That looks quite substantial, to put it mildly.

Yet look further and focus on V, the yen value of our global imports, and one finds that the figure has actually gone up by no less than 18.6 percent.

The difference between the volume and value figures lies, of course, in the P. Our import prices have gone up 9.2 percent on a year ago. The bulk of this hike comes from higher oil prices.

So we really cannot tell where we are if we do not pay attention to our Ps and Qs.

Economists, beware of both.

Noriko Hama is an economist and a professor at Doshisha University School of Management.


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