Dinner! Credit, CC BY SA 3.0 derivative work

North Korea has a slightly odd method of asking that citizens contribute to the welfare of the State. Contribute there being used in its taxation, confiscatory, form. Given that dog meat is a regular enough portion of the diet they insist that dog skins are, or at least one is, handed over to said State. One implication of which is don’t sign any orders for mink hats from North Korea. Those who don’t have a skin can make a cash contribution instead.

North Korea has ordered its citizens to donate dog skins to the regime as part of celebrations marking the 73rd anniversary of the founding of the Workers’ Party of Korea on October 10. The government collects dog hides ahead of the anniversary each year “to raise funds for the party”,

OK, and this alternative version, the cash, has risen:

If a citizen cannot donate dog fur he or she must give a cash donation of 20,000 North Korean won, or the equivalent of 4 kilograms of rice.

It’s the Telegraph that adds the exchange rate to the story:

Until 2014, North Koreans who were not able to provide a dog skin were only required to make a mandatory donation of 10,000 North Korean won (£8.53). That figure has been rising in recent years, the report stated, and has now doubled to 20,000 won, a figure that imposes a major burden on most households and the equivalent of the cost of nearly 9 lb of rice, the staple for most North Koreans.

We could just say “Ah, inflation” and leave it at that. But think on it a moment, that 20,000 won is apparently some £17. Which sounds like a hell of a lot for 9 lbs, 4 kg or so, of rice. Umm, yes, Sainsbury’s has, retail, the stuff for 20 pence a lb, 45 p a kg. Rice seems to be near 10 times more expensive in N Korea than it is in the richer country, England.

Something is obviously wrong with this collection of facts then. Which is what gives us the concept of purchasing power parity, PPP, exchange rates. It may well be true that it costs us £17 to buy 20,000 won, that’s a price. But if we use that value for all our measurements then we’re at risk of misvaluing peoples’ actual lives. What we’d like to know there is, well, how much rice can they have? How much dogmeat? It is by comparing actual levels of consumption that we can compare standards of living.

For, yes, economists do not say it’s all about money, not at all. That conversion to cash is only so we can do sums. As this very concept of PPP shows, what we’re interested in is consumption – a reasonable guide to utility which is the thing itself.

So, to do our PPP conversion, rather than our market price of government price one, we take some item and then ponder, what does the money exchange rate have to be so that these things are the same price? After all, David Ricardo did point out that with trade things should be the same price plus transport costs everywhere.

Rice is 45 p a kg, rice is 2,000 won and change a kg, therefore the PPP exchange rate is 45 p is 2,000 won. Yes, of course it gets more sophisticated, a wider basket of goods, so on. But that’s the essence of it. When we want to measure how people are doing we really must use this PPP rate too. We convert wages at this level, all other prices, that then tells us what people can consume for how much work – that measure of truly how well off they are. Which is what we’re sometimes interested in, measuring how well off people truly are.

So, either the N Korean government is overvaluing its exchange rate by near 10 times – it’s most certainly not a market price – or the Telegraph has simply done the sums wrong. Sadly, given recent declines in both places either is as likely as the other. But the implication of this is that any measure using official exchange rates overestimate N Korean living standards by some 10 times. Or, obviously, that the Telegraph really needs to bring the subs desk back. This doesn’t matter all that much with N Korea as near all are agreed that it’s terrible. But it does when we start talking about places like Cuba, Venezuela and so on, where the use of government or PPP exchange rates changes much. It even matters when comparing the US to the EU. Depending on how you load that basket of comparison Americans are richer than you think (food, say) or poorer (health care).

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Quentin Vole
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Quentin Vole

The official exchange rate is £1 = 1200 won. The PPP rate (based on rice) is £1 = 4400 won. So out by a factor of 4(ish), not 10.